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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 001-14625
HOST MARRIOTT CORPORATION
Maryland 53-0085950
(State of Incorporation) (I.R.S. Employer Identification
Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
----------------------------------------- ---------------------------
<S> <C>
Common Stock, $.01 par value (227,669,276
shares New York Stock Exchange
outstanding as of March 19, 1999) Chicago Stock Exchange
Purchase Share rights for Series A Junior
Participating Pacific Stock Exchange
Preferred Stock, $.01 par value Philadelphia Stock Exchange
</TABLE>
The aggregate market value of shares of common stock held by non-affiliates
at March 19, 1999 was $2,561,000,000.
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Document Incorporated by Reference
Notice of 1999 Annual Meeting and Proxy Statement
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FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. Certain,
but not necessarily all, of such forward-looking statements can be identified
by the use of forward-looking terminology, such as "believes," "expects,"
"may," "will," "should," "estimates" or "anticipates" or the negative thereof
or other variations thereof or comparable terminology. All forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual transactions, results, performance or achievements
to be materially different from any future transactions, results, performance
or achievements expressed or implied by such forward-looking statements.
Although we believe the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, we can give no assurance
that our expectations will be attained or that any deviations will not be
material. We undertake no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances. The following risk factors should be
considered by prospective investors who should carefully consider the material
risks described below.
We do not control our hotel operations and are dependent on the managers and
lessees of our hotels
Because federal income tax laws restrict real estate investment trusts and
"publicly traded" partnerships from deriving revenues directly from operating
a hotel, we operate virtually none of our hotels. Instead, we lease virtually
all of our hotels to subsidiaries of Crestline which, in turn, retain managers
to manage our hotels pursuant to management agreements. Thus, we are dependent
on the lessees but, under the hotel leases, we have little influence over how
the lessees operate our hotels. Similarly, we are dependent on the managers,
principally Marriott International, Inc., but we have virtually no influence
over how the managers manage our hotels. We have no recourse if we believe
that the hotel managers do not maximize the revenues from our hotels, which in
turn will maximize the rental payments we receive under the leases. We may
seek redress under most leases only if the lessee violates the terms of the
lease and then only to the extent of the remedies set forth in the lease.
Each lessee's ability to pay rent accrued under its lease depends to a large
extent on the ability of the hotel manager to operate the hotel effectively
and to generate gross sales in excess of its operating expenses. Our rental
income from the hotels may therefore be adversely affected if the managers
fail to provide quality services and amenities and competitive room rates at
our hotels or fail to maintain the quality of the hotel brand names. Although
the lessees have primary liability under the management agreements while the
leases are in effect, we remain liable under the leases for all obligations
that the lessees do not perform. We may terminate a lease if the lessee
defaults, but terminating the lease could, unless another suitable lessee is
found, impair our ability to qualify as a REIT for federal income tax purposes
and the ability of the operating partnership (as defined in the business and
properties section) to qualify as a partnership for federal income tax
purposes unless another suitable lessee is found. As described below, our
inability to qualify as a REIT or the operating partnership's inability to
qualify as a partnership for federal income tax purposes would have a material
adverse effect on us.
We do not control certain assets held by the non-controlled subsidiaries
We own economic interests in certain taxable corporations, which we refer to
as non-controlled subsidiaries. These non-controlled subsidiaries hold various
assets which, under our credit facility may not exceed, in the aggregate, 15%
of the value of our assets. These assets consist primarily of interests in
certain partnerships and hotels which are not leased, and certain FF&E (as
defined below) used in our hotels. Ownership of these assets by us could
jeopardize our REIT status and the operating partnership's status as a
partnership for federal income tax purposes. Although we own approximately 95%
of the total economic interests of the non-controlled subsidiaries, all of the
voting common stock, representing approximately 5% of the total economic
interests, is owned by Host Marriott Statutory Employee/Charitable Trust, the
beneficiaries of which are a trust formed for the benefit of a number of our
employees and the J. Willard and Alice S. Marriott Foundation. These voting
stockholders elect the directors who are responsible for overseeing the
operations of the non-controlled subsidiaries. The directors are currently
employees of the operating partnership, although this is not required. As a
result, we have no control over the operation or management of the hotels or
other assets owned by the non-
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controlled subsidiaries, even though we depend upon the non-controlled
subsidiaries for a significant portion of our revenues. Also, the activities
of non-controlled subsidiaries could cause us to be in default under our
principal debt facilities.
We are dependent on the ability of Crestline and the lessees to meet their
rent payment obligations
The lessees' rent payments are the primary source of our revenues. Crestline
guarantees the obligations of its subsidiaries under the hotel leases, but
Crestline's liability is limited to a relatively small portion of the
aggregate rent obligation of its subsidiaries. Crestline's and each of its
subsidiaries' ability to meet its obligations under the leases will determine
the amount of our revenue and, likewise, our ability to meet our obligations.
We have no control over Crestline or any of its subsidiaries and cannot assure
you that Crestline or any of its subsidiaries will have sufficient assets,
income and access to financing to enable them to satisfy their obligations
under the leases or to make payments of fees under the management agreements.
Although the lessees have primary liability under the management agreements
while the leases are in effect, we and our subsidiaries remain liable under
the management agreements for all obligations that the lessees do not perform.
Because of our dependence on Crestline, our credit rating will be affected by
its creditworthiness.
Our revenues and the value of our properties could be adversely affected by
conditions affecting the lodging industry
If our assets do not generate income sufficient to pay our expenses, service
our debt and maintain our properties, we will be unable to make expected
distributions to our stockholders. Factors that could adversely affect our
revenues and the economic performance and value of our properties include:
. changes in the national, regional and local economic climate,
. local conditions such as an oversupply of hotel properties or a reduction
in demand for hotel rooms,
. the attractiveness of our hotels to consumers and competition from
comparable hotels,
. the quality, philosophy and performance of the managers of our hotels,
primarily Marriott International, Inc.,
. the ability of any hotel lessee to maximize rental payments,
. changes in room rates and increases in operating costs due to inflation
and other factors and
. the need to periodically repair and renovate our hotels.
Our expenses may remain constant even if our revenues drop
The expenses of owning a property are not necessarily reduced when
circumstances such as market factors and competition cause a reduction in
income from the property. If a property is mortgaged and we are unable to meet
the mortgage payments, the lender could foreclose and take the property. Our
financial condition and ability to service debt and make distributions to our
stockholders could be adversely affected by:
.interest rate levels,
.the availability of financing,
.the cost of compliance with government regulation, including zoning and
tax laws and
.changes in laws and governmental regulations, including those governing
usage, zoning and taxes.
New acquisitions may fail to perform as expected or we may be unable to make
acquisitions on favorable terms
We intend to acquire additional full service hotels and other types of real
estate. Newly acquired properties may fail to perform as expected, which could
adversely affect our financial condition. We may underestimate the costs
necessary to bring an acquired property up to standards established for its
intended market position. We expect to acquire hotels and other types of real
estate with cash from secured or unsecured financings and
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proceeds from offerings of equity or debt, to the extent available. We may not
be in a position or have the opportunity in the future to make suitable
property acquisitions on favorable terms. Competition for attractive
investment opportunities may increase prices for hotel properties, thereby
decreasing the potential return on our investment. In addition, in order to
maintain our status as a REIT we must lease virtually all of the properties we
acquire. We cannot guarantee that the leases for newly acquired hotels will be
as favorable to us as the existing leases.
Competition for acquisitions may result in increased prices for hotels
Other major investors with significant capital compete with us for
attractive investment opportunities. These competitors include other REITs and
hotel companies, investment banking firms and private institutional investment
funds. This competition may increase prices for hotel properties, thereby
decreasing the potential return on our investment.
The seasonality of the hotel industry may affect the ability of the lessees to
make timely rent payments
The seasonality of the hotel industry may, from time to time, affect either
the amount of rent that accrues under the hotel leases or the ability of the
lessees to make timely rent payments under the leases. A lessee's or
Crestline's inability to make timely rent payments to us could adversely
affect our financial condition and ability to service debt and make
distributions to our stockholders.
We may be unable to sell properties when appropriate because real estate
investments are illiquid
Real estate investments generally cannot be sold quickly. We may not be able
to vary our portfolio promptly in response to economic or other conditions.
This inability to respond promptly to changes in the performance of our
investments could adversely affect our financial condition and ability to
service debt and make distributions to our stockholders. In addition, sales of
appreciated real property could generate material adverse tax consequences,
which may make it disadvantageous for us to sell hotels.
We may be unable to renew leases or find other lessees
Our current hotel leases have terms generally ranging from seven to ten
years. There can be no assurance that upon expiration of our leases, our
hotels will be relet to the current lessees, or if relet, will be relet on
terms favorable to us. If our hotels are not relet, we will be required to
find other lessees who meet certain requirements of the management agreements
and of the federal income tax rules that govern REITs. We cannot assure you
that we would be able to find satisfactory lessees or that the terms of any
new leases would be favorable. Failure to find satisfactory lessees could
cause us to lose our REIT status, and cause the operating partnership to be
considered a "publicly traded partnership" taxable as a "C" corporation. Under
these circumstances the operating partnership would have to pay substantial
federal income taxes as well as distribute more cash to us to enable us to
meet our tax burden. This would significantly impair, if not eliminate, our
ability to raise additional capital. Failure to enter leases on satisfactory
terms could also result in reduced cash available for servicing debt and for
distributions to stockholders.
A significant number of our hotels are subject to ground leases
As of December 31, 1998, we leased 54 of our hotels pursuant to ground
leases. These ground leases generally require increases in ground rent
payments every five years. Our ability to make cash distributions to our
stockholders could be adversely affected to the extent that the rents payable
by the lessees under the leases do not increase at the same or a greater rate
as the increases under the ground leases. In addition, if we were to sell a
hotel encumbered by a ground lease, the buyer would have to assume the ground
lease, which could result in a lower sales price.
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Some potential losses are not covered by insurance
We carry comprehensive liability, fire, flood, extended coverage and rental
loss (for rental losses extending up to 12 months) insurance with respect to
all of our hotels. We believe the policy specifications and insured limits of
these policies are of the type customarily carried for similar hotels. Certain
types of losses, such as from earthquakes and environmental hazards, however,
may be either uninsurable or too expensive to justify insuring against. Should
an uninsured loss or a loss in excess of insured limits occur, we could lose
all or a portion of the capital we have invested in a hotel, as well as the
anticipated future revenue from the hotel. In such an event, we might
nevertheless remain obligated for any mortgage debt or other financial
obligations related to the property.
Leases and management agreements could impair the sale or other disposition of
our hotels
Each lease with a subsidiary of Crestline generally requires us to make a
termination payment to the lessee if we terminate the lease prior to the
expiration of its term. A termination payment is required even if we terminate
a lease because of a change in the federal income tax laws that either would
make continuation of the lease jeopardize our REIT status or would enable us
to operate our hotels ourselves. The termination fee generally is equal to the
fair market value of the lessee's leasehold interest in the remaining term of
the lease, which could be a significant amount. In addition, if we decide to
sell a hotel, we may be required to terminate its lease, and the payment of
the termination fee under such circumstances could impair our ability to sell
the hotel and would reduce the net proceeds of any sale.
Under the terms of the management agreements, we generally may not sell,
lease or otherwise transfer the hotels unless the transferee assumes the
related management agreements and meets certain other conditions. Our ability
to finance, refinance or effect a sale of any of the properties managed by
Marriott International or another manager may, depending upon the structure of
such transactions, require the manager's consent. If Marriott International or
other manager did not consent, we would be prohibited from consummating the
financing, refinancing or sale without breaching the management agreement.
The acquisition contracts relating to certain hotels limit our ability to sell
or refinance such hotels
For reasons relating to federal income tax considerations of the former
owners of certain of our hotels, we have agreed to restrictions on selling
certain hotels or repaying or refinancing the mortgage debt thereon for lock-
out periods which vary depending on the hotel. We anticipate that, in certain
circumstances, we may agree to similar restrictions in connection with future
hotel acquisitions. As a result, even if it were in our best interests to sell
such hotels or refinance their mortgage debt, it may be difficult or
impossible to do so during their respective lock-out periods.
Marriott International's and Crestline's operation of their respective
businesses could result in decisions not in our best interest
Marriott International, a public company in the business of hotel
management, manages a significant number of our hotels. In addition, Marriott
International manages hotels owned by others that compete with our hotels. As
a result, Marriott International may make decisions regarding competing
lodging facilities which it manages that would not necessarily be in our best
interests. Further, J.W. Marriott, Jr., a member of our Board of Directors,
and Richard E. Marriott, our Chairman of the Board and J.W. Marriott, Jr.'s
brother, serve as directors, and, in the case of J.W. Marriott, Jr., also an
officer, of Marriott International. J.W. Marriott, Jr. and Richard E. Marriott
also beneficially owned approximately 10.6% and 10.4%, respectively, as of
January 1, 1999 of the outstanding shares of common stock of Marriott
International, and approximately 5.7% and 6.0%, respectively, as of March 24,
1999 of the outstanding shares of common stock of Crestline, but neither
serves as an officer or director of Crestline. As a result, J.W. Marriott, Jr.
and Richard E. Marriott have potential conflicts of interest as directors of
Host Marriott when making decisions regarding Marriott International,
including decisions relating to the management agreements involving the
hotels, Marriott International's management of competing lodging properties
and Crestline's leasing and other businesses.
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Our Board of Directors and Marriott International's Board of Directors
follow appropriate policies and procedures to limit the involvement of Messrs.
J.W. Marriott, Jr. and Richard E. Marriott in conflict situations, including
requiring them to abstain from voting as directors of either company or their
subsidiaries on certain matters which present a conflict between the
companies. If appropriate, these policies and procedures will apply to other
directors and officers.
Provisions of our charter and bylaws could inhibit changes in control that
could be beneficial to our stockholders
Certain provisions of our charter and bylaws may delay or prevent a change
in control or other transaction that could provide our stockholders with a
premium over the then-prevailing market price of their shares or which might
otherwise be in their best interests. These include a staggered Board of
Directors and the ownership limit described below. Also, any future class or
series of stock may have certain voting provisions that could delay or prevent
a change in control or other transaction that might involve a premium price or
otherwise be good for our stockholders.
The Marriott International purchase right may discourage a takeover that could
be beneficial to our stockholders
Marriott International has the right to purchase up to 20% of each class of
our outstanding voting shares at the then fair market value upon the
occurrence of specified certain change of control events. We refer to this
right as the Marriott International purchase right. The Marriott International
purchase right will continue in effect until June 2017, subject to certain
limitations intended to protect the our REIT status. The Marriott
International purchase right may have the effect of discouraging someone from
attempting to take us over, because any person considering acquiring a
substantial or controlling block of our common stock will face the possibility
that its ability to obtain or exercise control would be impaired or made more
expensive by the exercise of the Marriott International purchase right.
We have adopted Maryland law limitations on changes in control
Maryland corporate law prohibits certain "business combinations" between a
Maryland corporation and any person who owns 10% or more of the voting power
of the corporation's then outstanding shares of stock (an "Interested
Stockholder") or an affiliate of the Interested Stockholder unless a business
combination is approved by the board of directors any time before an
Interested Stockholder first becomes an Interested Stockholder. The
prohibition lasts for five years after the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination must be
approved by stockholders under certain special voting requirements. We will be
subject to such provisions although we may elect to "opt-out" in the future.
As a result, a change in control or other transaction that could provide our
stockholders with a premium over the then-prevailing market price of their
shares or which might otherwise be in their best interests may be prevented or
delayed. Our Board of Directors has exempted from this statute the acquisition
of shares by Marriott International pursuant to the terms of the Marriott
International purchase right as well as any other transactions involving us
and Marriott International or our respective subsidiaries, or J.W. Marriott,
Jr. or Richard E. Marriott, provided that, if any such transaction is not in
the ordinary course of business, it must be approved by a majority of our
directors present at a meeting at which a quorum is present, including a
majority of the disinterested directors, in addition to any vote of
stockholders required by other provisions of Maryland corporate law.
Maryland control share acquisition law could delay or prevent a change in
control
Under Maryland corporate law, unless a corporation elects not to be subject
thereto, "control shares" acquired in a "control share acquisition" have no
voting rights except to the extent approved by stockholders by a vote of two-
thirds of the votes entitled to be cast on the matter, excluding shares owned
by the acquiror and by officers or directors who are employees of the
corporation. "Control shares" are voting shares which would entitle the
acquiror to exercise voting power in electing directors within certain
specified ranges of voting power.
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A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions. We are subject to these control share provisions of
Maryland law and, as a result, a change in control or other transaction that
could provide our stockholders with a premium over the then-prevailing market
price of their shares or which might otherwise be in their best interests may
be delayed or prevented. Our bylaws contain an exemption from this statute for
any shares acquired by Marriott International, together with its successors
and permitted assignees, pursuant to the Marriott International purchase
right.
We have adopted a rights agreement which could delay or prevent a change in
control
Our rights agreement provides, among other things, that upon the occurrence
of certain events, stockholders will be entitled to purchase shares of our
stock, subject to the ownership limit. These purchase rights would cause
substantial dilution to a person or group that acquires or attempts to acquire
20% or more of our common stock on terms not approved by the Board of
Directors and, as a result, could delay or prevent a change in control or
other transaction that could provide our stockholders with a premium over the
then-prevailing market price of their shares or which might otherwise be in
their best interests.
We have a stock ownership limit primarily for REIT tax purposes
Primarily to facilitate maintenance of our REIT qualification, our charter
imposes an ownership limit on our common stock and preferred stock. The
attribution provisions of the federal tax laws that are used in applying the
ownership limit are complex. They may cause one stockholder to be considered
to own the stock of a number of related stockholders. As a result, these
provisions may cause a stockholder whose direct ownership of stock does not
exceed the ownership limit to, in fact, exceed the ownership limit.
The ownership limit could delay or prevent a change in control and,
therefore, could adversely affect stockholders' ability to realize a premium
over the then-prevailing market price for the common stock in connection with
such transaction.
The large number of shares available for future sale could adversely affect
the market price of our publicly traded securities
In connection with our REIT conversion at the end of 1998, we reserved
approximately 96.4 million shares of our common stock for future issuance of
which approximately 20 million shares were issued in February 1999. Such
common stock will be freely transferable upon receipt. The balance of the
reserved common stock may be issued upon the redemption of units of limited
partnership interest in our operating partnership. These limited partnership
units will become redeemable at various times over the next year, with
approximately 23.9 million limited partnership units becoming redeemable
beginning on July 1, 1999, pursuant to each holder's right under the operating
partnership's partnership agreement to redeem them for shares of our common
stock or, at our election, the cash equivalent thereof. In addition, we have
reserved a substantial number of shares of our common stock for issuance
pursuant to benefit plans or outstanding options, and such shares of our
common stock will be available for sale in the public markets from time to
time. Moreover, we may issue additional shares of our common stock in the
future. We cannot predict the effect that future sales of shares of our common
stock, or the perception that such sales could occur, will have on the market
prices of our equity securities.
Our FFO and cash distributions will affect the market price of our publicly
traded securities
We believe that the market value of a REIT's equity securities is based
primarily upon the market's perception of the REIT's growth potential,
including its prospects for accretive acquisitions and development, and its
current and potential future cash distributions, and is secondarily based upon
the real estate market value of the underlying assets. For that reason, our
common stock may trade at prices that are higher or lower than the net asset
value per share. To the extent we retain operating cash flow for investment
purposes, working capital reserves or other purposes, these retained funds,
while increasing the value of our underlying assets, may not correspondingly
increase the market price of our common stock. Our failure to meet the
market's expectations with regard to future FFO and cash distributions would
likely adversely affect the market price of our publicly traded securities.
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Market interest rates may have an effect on the value of our publicly traded
securities
One of the factors that investors consider important in deciding whether to
buy or sell shares of a REIT is the distribution rate on such shares, as a
percentage of the price of such shares relative to market interest rates. If
market interest rates go up, prospective purchasers of our equity securities
may expect a higher dividend yield. Higher interest rates would not, however,
result in more funds for us to distribute and, in fact, would likely increase
our borrowing costs and potentially decrease cash available for distribution
to the extent that our indebtedness has floating interest rates. Thus, higher
market interest rates could cause the market price of our publicly traded
securities to go down.
We are dependent on external sources of capital
To qualify as a REIT, we must distribute to our stockholders each year at
least 95% of our net taxable income, excluding any net capital gain. Because
of these distribution requirements, it is not likely that we will be able to
fund all future capital needs, including acquisitions, from income from
operations. We therefore will have to rely on third-party sources of capital,
which may or may not be available on favorable terms or at all. Our access to
third-party sources of capital depends upon a number of factors, including
general market conditions, the market's perception of our growth potential,
our current and potential future earnings and cash distributions and the
market price of our common stock. Moreover, additional equity offerings may
result in substantial dilution of stockholders' interests, and additional debt
financing may substantially increase our leverage.
Our degree of leverage could limit our ability to obtain additional financing
Our debt-to-total market capitalization ratio was approximately 59% as of
December 31, 1998. We have a policy of incurring debt only if, immediately
following such incurrence, our debt-to-total market capitalization ratio on a
pro forma basis would be 60% or less. Our degree of leverage could affect our
ability to obtain financing in the future for working capital, capital
expenditures, acquisitions, development or other general corporate purposes
and to refinancing borrowings on favorable terms. Our leveraged capital
structure also makes us more vulnerable to a downturn in our business or in
the economy generally. Moreover, there are no limitations in our
organizational documents that limit the amount of indebtedness that we may
incur, although our existing debt instruments contain certain restrictions on
the amount of indebtedness that we may incur. Accordingly, our Board of
Directors could alter or eliminate the 60% policy without stockholder approval
to the extent permitted by our debt agreements. If this policy were changed,
we could become more highly leveraged, resulting in an increase in debt
service payments that could adversely affect our cash flow and consequently
our ability to service our debt and make distributions to stockholders.
Rental revenues from hotels are subject to prior rights of lenders
The mortgages on certain of our hotels require that rent payments under the
leases on such hotels be used first to pay the debt service on such mortgage
loans. Consequently, only the cash flow remaining after debt service will be
available to satisfy other obligations, including property taxes and
insurance, FF&E reserves for the hotels and capital improvements, and debt
service on unsecured debt, and to make distributions to stockholders.
We depend on our key personnel
We depend on the efforts of our executive officers and other key personnel.
While we believe that we could find replacements for these key personnel, the
loss of their services could have a significant adverse effect on our
operations. We do not intend to obtain key-man life insurance with respect to
any of our personnel.
The REIT conversion could result in litigation
Over the last several years, business reorganizations involving the
combination of several partnerships into a single entity have occasionally
given rise to investor lawsuits. These lawsuits have involved claims against
the
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general partners of the participating partnerships, the partnerships
themselves and related persons involved in the structuring of, or benefiting
from, the conversion or reorganization, as well as claims against the
surviving entity and its directors and officers. If any lawsuits are filed in
connection with the partnership mergers or other transactions in connection
with our REIT Conversion, such lawsuits could result in substantial damage
claims against us, as successor to the liabilities of our predecessors. Such
lawsuits, if successful, could adversely affect our financial condition and
our ability to service our debt and make distributions to stockholders.
Joint venture investments have additional risks
Instead of purchasing hotel properties directly, we may invest as a co-
venturer. Joint venturers often share control over the operation of the joint
venture assets. Actions by a co-venturer could subject such assets to
additional risk. Our co-venturer in an investment might have economic or
business interests or goals that are inconsistent with our interests or goals,
or be in a position to take action contrary to our instructions or requests or
contrary to our policies or objectives. Although we generally will seek to
maintain sufficient control of any joint venture to permit our objectives to
be achieved, we might not be able to take action without the approval of our
joint venture partners. Also, our joint venture partners could take actions
binding on the joint venture without our consent. A joint venture partner
could go bankrupt, leaving us liable for its share of joint venture
liabilities. Also, the requirement that we lease our assets to qualify as a
REIT may make it more difficult for us to enter into joint ventures in the
future.
The year 2000 problem may adversely impact our business and financial
condition
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore do not properly recognize a year that begins with
"20" instead of the familiar "19." If not corrected, many computer
applications could fail or create erroneous results. Our potential year 2000
problems include issues relating to our in-house hardware and software
computer systems, as well as issues relating to third parties with which we
have a material relationship or whose systems are material to the operations
of our hotels.
In-House systems
Since October of 1993, we have invested in the implementation and
maintenance of accounting and reporting systems and equipment that are
intended to enable us to provide adequately for our information and
reporting needs and which are also year 2000 compliant. Substantially all
of our in-house systems have already been certified as year 2000 compliant
through testing and other mechanisms. We have not delayed any systems
projects due to the year 2000 issue. We have engaged a third party to
review our year 2000 in-house compliance.
Third-Party systems
We rely upon operational and accounting systems provided by third
parties, primarily the managers of our hotels, to provide the appropriate
property-specific operating systems, including reservation, phone,
elevator, security, HVAC and other systems, and to provide us with
financial information. We will continue to monitor the efforts of these
third parties to become year 2000 compliant and will take appropriate steps
to address any non-compliance issues.
Risks
We believe that future costs associated with year 2000 issues for its in-
house systems will be insignificant and therefore not impact our business,
financial condition and results of operations. However, the actual effect
that year 2000 issues will have on our business will depend significantly
on whether other companies and governmental entities properly and timely
address year 2000 issues and whether broad-based or systemic failures
occur. We cannot predict the severity or duration of any such failures,
which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or disruption of hotel reservations made on centralized
reservation systems and errors or failures in financial transactions or
payment processing systems such as credit cards.
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Moreover, we are dependent upon Crestline to interface with third parties
in addressing year 2000 issues at our hotels leased to its subsidiaries.
Due to the general uncertainty inherent with respect to year 2000 issues
and our dependence on third parties, including Crestline, we are unable to
determine at this time whether the consequences of year 2000 failures will
have a material impact on us. Although our joint year 2000 compliance
program with Crestline is expected to significantly reduce uncertainties
arising out of year 2000 issues and the possibility of significant
interruptions of normal operations, we cannot assure you that this will be
the case.
Environmental problems are possible and can be costly
We believe that our properties are in compliance in all material respects
with applicable environmental laws. Unidentified environmental liabilities
could arise, however, and could have a material adverse effect on our
financial condition and performance. Federal, state and local laws and
regulations relating to the protection of the environment may require a
current or previous owner or operator of real estate to investigate and clean
up hazardous or toxic substances or petroleum product releases at such
property. The owner or operator may have to pay a governmental entity or third
parties for property damage and for investigation and clean-up costs incurred
by such parties in connection with the contamination. These laws typically
impose clean-up responsibility and liability without regard to whether the
owner or operator knew of or caused the presence of the contaminants. Even if
more than one person may have been responsible for the contamination, each
person covered by the environmental laws may be held responsible for all of
the clean-up costs incurred. In addition, third parties may sue the owner or
operator of a site for damages and costs resulting from environmental
contamination emanating from that site. Environmental laws also govern the
presence, maintenance and removal of asbestos. These laws require that owners
or operators of buildings containing asbestos properly manage and maintain the
asbestos, that they notify and train those who may come into contact with
asbestos and that they undertake special precautions, including removal or
other abatement, if asbestos would be disturbed during renovation or
demolition of a building. These laws may impose fines and penalties on
building owners or operators who fail to comply with these requirements and
may allow third parties to seek recovery from owners or operators for personal
injury associated with exposure to asbestos fibers.
Compliance with other government regulations can also be costly.
Our hotels are subject to various forms of regulation, including Title III
of the Americans with Disabilities Act, building codes and regulations
pertaining to fire safety. Compliance with such laws and regulations could
require substantial capital expenditures. We do not believe, however, that
substantial non-budgeted capital expenditures will be required with respect to
our existing hotels based on existing laws and regulations. Such regulations
may be changed from time to time, or new regulations adopted, resulting in
additional or unexpected costs of compliance. Any such increased costs could
reduce the cash available for servicing of debt and distributions to
stockholders.
We intend to qualify as a REIT, but we cannot guarantee that we will qualify
We intend to operate to qualify as a REIT for tax purposes beginning in
1999. If we qualify as a REIT, we generally will not be taxed on income that
we distribute to our stockholders so long as we distribute currently at least
95% of our net taxable income, excluding net capital gain. We cannot
guarantee, however, that we will qualify as a REIT in 1999 or in any future
year. Many of the REIT requirements are highly technical and complex. The
determination that we are a REIT requires an analysis of various factual
matters and circumstances that may not be totally within our control. For
example, to qualify as a REIT, at least 95% of our gross income must be income
specified in the REIT tax laws, such as "rents from real property." We are
also required to distribute to shareholders at least 95% of our REIT taxable
income, excluding capital gains. The fact that we hold our assets through the
operating partnership and its subsidiaries further complicates the application
of the REIT requirements. Even a technical or inadvertent mistake could
jeopardize our REIT status. Furthermore, Congress and the IRS might make
changes to the tax laws and regulations, and the courts might issue new
rulings that make it more difficult, or impossible, for us to remain qualified
as a REIT. In addition, it is possible that
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<PAGE>
even if we do qualify as a REIT, new tax rules will change the way we are
taxed. If we fail to qualify as a REIT, we will be subject to federal income
tax at regular corporate rates. In this event, we may cause the operating
partnership to distribute adequate amounts to us and its other unitholders to
permit us to pay our tax liabilities and our ability to raise additional
capital could be impaired. This would significantly reduce the cash we would
have available to service debt. Furthermore, our failure to qualify as a REIT
could create a default under some of our debt instruments, including our
credit facility. If we fail to qualify as a REIT, then unless certain specific
statutory provisions apply, we will be disqualified from treatment as a REIT
for the next four taxable years.
If the operating partnership is treated as a corporation, we will fail to
qualify as a REIT
The operating partnership intends to qualify as a partnership for federal
income tax purposes. However, it will be treated as a corporation, instead of
a partnership, for federal income tax purposes if it is a "publicly traded
partnership" unless at least 90% of its income is qualifying income as defined
in the tax code. The income requirements applicable to REITs and the
definition of qualifying income for purposes of this 90% test are similar in
most, but not all, respects. Qualifying income for the 90% test generally
includes passive income, such as specified types of real property rents,
dividends and interest. However, real property rent will not be qualifying
income if the operating partnership or one or more actual or constructive
owners of 5% of the operating partnership actually or constructively own 10%
or more of the tenant. The partnership agreement of the operating partnership
contains ownership restrictions intended to prevent the disqualification of
income based on these ownership restrictions. We believe that it will meet
this qualifying income test, but we cannot guarantee that it will. If it were
to be taxed as a corporation, it would incur substantial tax liabilities, we
would fail to qualify as a REIT for tax purposes, we may require it to
distribute adequate amounts to us to permit us to pay our tax liabilities, and
our and its ability to raise additional capital could be impaired.
The operating partnership may need to borrow money or issue additional equity
in order for us to qualify as a REIT
A REIT must distribute to its shareholders at least 95% of its net taxable
income, excluding any net capital gain. The source of the distributions we
make to our stockholders will be money distributed to us by the operating
partnership. We intend to meet this 95% requirement, but there are a number of
reasons why the operating partnership's cash flow alone may be insufficient
for us to meet this requirement. First, as a result of some of the
transactions of certain of our predecessor entities, the operating partnership
and its subsidiaries, we expect to recognize large amounts of taxable income
in future years for which the operating partnership will have no corresponding
cash flow or earnings before interest, taxes, depreciation and other non cash
items which is referred to as EBITDA. This type of income is often referred to
as "phantom income." Second, in order to qualify as a REIT in 1999, we need to
distribute to our stockholders, prior to the end of 1999, all of the "earnings
and profits" that accumulated prior to 1999. If we do not meet this
requirement by virtue of the distributions declared in connection with the
REIT Conversion, we will be required to make further distributions prior to
the end of 1999. The operating partnership may not have cash flow that
corresponds to these distributions. Third, the seasonality of the hospitality
industry could cause a further mismatch of our income and cash flow.
In addition, even if a REIT meets the 95% requirement, it may still be
subject to a 4% nondeductible excise tax. This excise tax applies to the
amount by which certain of the REIT's distributions in a given calendar year
are less than the sum of 85% of its ordinary income, 95% of its capital gain
net income and any undistributed taxable income from prior years. We intend to
make distributions to our stockholders so that we will not be subject to this
excise tax, but for the reasons described above, the operating partnership's
cash flow alone may be insufficient for it to distribute to us the funds we
will need.
The operating partnership's partnership agreement requires it to distribute
enough cash to us for us to meet the 95% distribution requirement and avoid
the 4% excise tax, and the operating partnership has to make proportionate
distributions to its other equityholders. If its cash flow alone is
insufficient for it to distribute to us the money we need to meet the 95%
distribution requirement or to avoid the 4% excise tax, it may need to issue
additional equity or borrow money. We cannot guarantee that these sources of
funds will be available to it on favorable terms or even at all. Any problems
the operating partnership has in borrowing money could be
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exacerbated by two factors. First, it will need to distribute most if not all
of our earnings to us and other holders of its partnership units. Therefore,
it will be unable to retain these earnings. Accordingly, it generally will
need to refinance its maturing debt with additional debt or equity and rely on
third-party sources to fund future capital needs. Second, its borrowing needs
will be increased if we are required to pay taxes or liabilities attributable
to prior years. If the operating partnership is unable to raise the money
necessary to permit us to meet the 95% distribution requirement, we will fail
to qualify as a REIT. If the operating partnership is able to raise the money,
but only on unfavorable terms, then our financial performance may be damaged.
We are required to distribute all of our prior earnings and profits, but we
cannot guarantee that we will be able to do so
In order to qualify as a REIT for 1999, we are required to distribute to our
stockholders, prior to the end of 1999, all of our earnings and profits that
we accumulated prior to 1999. We believe that we will meet this requirement.
However, it is very hard to determine the exact level of our pre-1999 earnings
and profits because the determination depends on an extremely large number of
factors. The complexity of the determination is compounded by the fact that we
started accumulating earnings and profits in 1929. Also, it is difficult to
value our distributions which have not been cash, such as the distribution of
Crestline common stock we made in December 1998. Therefore, we cannot
guarantee that we will meet this requirement. If we do not meet this
requirement, then we will not qualify as a REIT at least for 1999.
We will qualify as a REIT only if the rent from the leases meets a number of
tests, but we cannot guarantee that it will
A REIT's income must meet certain tests relating to its source. If the
income meets the tests, it is called "good income." Almost all of our income
will be rent from the hotel leases. This rent will be good income only if the
leases are respected as true leases for federal income tax purposes. If the
leases are treated as service contracts, joint ventures or some other type of
arrangement, then this rent will not be good income and we will fail to
qualify as a REIT.
In addition, the rent from any particular hotel lease will be good income
only if we own less than 10% of the lessee of the hotel. For purposes of this
test, we are treated as owning both any interests that we hold directly and
the interests owned by a person who owns more than 10% of our stock. In
determining who owns more than 10% of our stock, a person may be treated as
owning the stock of another person who is either a relative or has common
financial interests. We will not directly own more than 10% of any of the
lessees. In addition, we intend to enforce the ownership limit in our charter,
which restricts the amount of our capital stock that any person can own. If
the ownership limit is effective, then no person will ever own more than 10%
of our capital stock and we should never own more than 10% of the lessees.
However, we cannot guarantee that the ownership limit will be effective. If
the ownership limit is not effective, our ownership in the lessees may exceed
the 10% limit. As a result, the rent from our leases would not be good income
and we would fail to qualify as a REIT.
Furthermore, rent from any particular hotel lease will be good income only
if no portion of the rent is based on the income or profits of the lessee of
the hotel. The rent, however, can be based on the gross revenues of the
lessees, unless the arrangement does not conform to normal business practice
or is being used as a device to base rent on the income or profits of the
lessees. The rent from the current leases, other than the Harbor Beach Resort
lease, is based on the gross revenues of the lessees. We believe that the
leases conform to normal business practice and, other than the Harbor Beach
Resort lease, are not being used as a device to base rent on the income or
profits of the lessees. We cannot guarantee that the IRS will agree with our
position. If rent from leases in addition to the Harbor Beach Resort lease is
found to be based on the income or profits of the lessees, the rent would not
be good income and we would fail to qualify as a REIT.
Host Marriott will qualify as a REIT and, if we are a "publicly traded
partnership," we would qualify as a partnership only if the personal property
arrangements are respected by the IRS
Rent that is attributable to personal property is not good income under the
REIT rules or the rules applicable to "publicly traded partnerships." Hotels
contain significant personal property. Therefore, in order to protect our
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<PAGE>
ability to qualify as a REIT and the operating partnership's ability to
qualify as a partnership, we sold an estimated $59 million of personal
property associated with some of our hotels to the non-controlled
subsidiaries. The non-controlled subsidiaries lease the personal property
associated with each hotel directly to the lessee that is leasing the hotel.
Under each personal property lease, the non-controlled subsidiary receives
rent payments directly from the applicable lessee. We believe the amount of
the rent represents the fair rental value of the personal property. If for any
reason these lease arrangements are not respected by the IRS for federal
income tax purposes and we were treated as the lessor, we would not qualify as
a REIT and, if the operating partnership is considered a "publicly traded
partnership," it likely would not qualify as a partnership.
We will be subject to taxes even if we qualify as a REIT
Even if we qualify as a REIT, we will be subject to some federal, state and
local taxes on our income and property. For example, we will have to pay tax
on income that we do not distribute. We also will be liable for any tax that
the IRS successfully asserts against our predecessors for corporate income
taxes for years prior to 1999. Furthermore, we will derive income from the
non-controlled subsidiaries and they will be subject to regular corporate
taxes.
In addition, we and our subsidiaries contributed a large number of assets to
the operating partnership with a value that was substantially greater than our
tax basis in the assets. We refer to these assets as assets with "built-in
gain." We will be subject to tax on the built-in gain if the operating
partnership sells these assets prior to the end of 2008. We also have
substantial deferred tax liabilities that we or one of the non-controlled
subsidiaries will recognize, without the receipt by us of any corresponding
cash. Even if the operating partnership does not sell the built-in gain assets
prior to the end of 2008, there are a number of other transactions that likely
would cause us to be subject to the tax on the built-in gain. In connection
with this gain, neither we nor the operating partnership will receive any
corresponding cash.
Proposed legislation, if enacted, could require us to restructure our
ownership of the non-controlled subsidiaries
The Clinton Administration's fiscal year 2000 budget proposal, announced
February 1, 1999, includes a proposal that would limit a REIT's ability to own
more than 10%, by vote or value, of the stock of another corporation.
Currently, a REIT cannot own more than 10% of the outstanding voting
securities of any one issuer. A REIT can, however, own more than 10% of the
value of the stock of a corporation provided no more than 25% of the value of
the REIT's assets consists of subsidiaries that conduct impermissible
activities and that the stock of any one single corporation does not account
for more than 5% of the total value of the REIT's assets. The budget proposal
would allow a REIT to own all of the voting stock and value of a "taxable REIT
subsidiary" provided all of a REIT's taxable subsidiaries do not represent
more that 15% of the REIT's total assets. In addition, under the budget
proposal, a "taxable REIT subsidiary" would not be entitled to deduct any
interest on debt funded directly or indirectly by the REIT. The budget
proposal, if enacted in its current form, may require that we restructure our
ownership of the non-controlled subsidiaries because we currently own more
than 10% of the value of the non-controlled subsidiaries. The budget proposal,
if enacted in its current form, would be effective after the date of its
enactment and would provide transition rules to allow corporations, like the
non-controlled subsidiaries, to convert into "taxable REIT subsidiaries" tax-
free. It is presently uncertain whether any proposal regarding REIT
subsidiaries, including the budget proposal, will be enacted, or if enacted,
what the terms of such proposal (including its effective date) will be.
Items 1 & 2. Business and Properties
We are a self-managed and self-administered real estate investment trust, or
"REIT," owning full service hotel properties. Through our subsidiaries, we
currently own 125 hotels, representing approximately 58,000 rooms located
throughout the United States and Canada. These hotels are generally operated
under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand
names, which are among the most respected and widely recognized brand names in
the lodging industry. As described more fully below, our hotels are held by
our
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subsidiaries and leased by our subsidiaries to lessees, principally
subsidiaries of Crestline Capital Corporation. The hotels are managed on
behalf of the lessees by subsidiaries of Marriott International and other
companies.
We were formed as a Maryland corporation in 1998, under the name HMC Merger
Corporation, as a wholly owned subsidiary of Host Marriott Corporation, a
Delaware corporation, in connection with Host Marriott's efforts to reorganize
its business operations to qualify as a REIT for federal income tax purposes.
As part of this reorganization, which we refer to as the REIT conversion, and
which is described below in more detail, on December 29, 1998, we merged with
Host Marriott and changed our name to Host Marriott Corporation. As a result,
we have succeeded to the hotel ownership business formerly conducted by Host
Marriott, which is described more fully below.
The REIT conversion
During 1998, Host Marriott and its subsidiaries and affiliates consummated a
series of transactions intended to enable us to qualify as a REIT for federal
income tax purposes. As a result of these transactions the hotel ownership
business formerly conducted by Host Marriott and its subsidiaries and other
affiliates is conducted as an umbrella partnership REIT, or UPREIT through
Host Marriott, L.P., a Delaware limited partnership in which we are the sole
general partner, and its subsidiaries. In this Form 10-K, we refer to Host
Marriott, L.P. as the operating partnership. We intend to elect to be treated
as a REIT for federal income tax purposes effective January 1, 1999.
Certain of the transactions comprising the REIT conversion are described
below.
Reorganization of lodging assets under the operating partnership. During
1998, Host Marriott reorganized its hotel ownership assets and certain other
assets so that they were owned by the operating partnership and its
subsidiaries. In exchange for the hotel ownership business, Host Marriott
received a number of units of limited partnership interests in the operating
partnership (which we refer to as "OP Units") equal to the number of then-
outstanding shares of Host Marriott common stock, and the operating
partnership and its subsidiaries assumed substantially all of the liabilities
of Host Marriott and its subsidiaries.
As a result of this reorganization, our merger with Host Marriott and
related transactions as described below, we are the sole general partner in
the operating partnership and hold approximately 78% of the outstanding OP
Units. Our hotel ownership business is conducted by the operating partnership
and its subsidiaries.
Host Marriott did not transfer to the operating partnership (and the
operating partnership therefore does not own) certain other assets formerly
held by Host Marriott and its subsidiaries (principally consisting of 31
retirement communities and controlling interests in the entities that lease
our hotels). Most of these assets are owned by Crestline, formerly a wholly
owned subsidiary of Host Marriott. Crestline became a separate publicly traded
company on December 29, 1998 as part of the shareholder distribution discussed
below.
Acquisitions by the operating partnership. Prior to the REIT conversion,
Host Marriott and several of its separate direct and indirect wholly owned
subsidiaries were the sole general partners of eight publicly traded limited
partnerships and four private partnerships in which Host Marriott or a
subsidiary owned or held a controlling interest in 28 full-service hotels
operating under the Marriott brand. The following table lists each of these
partnerships and the hotel properties owned by it or in which it holds a
controlling interest.
<TABLE>
<CAPTION>
Partnership Hotel Properties Rooms
----------- ----------------------------- ------
<S> <C> <C>
Public
Atlanta Marriott Marquis II Limited
Partnership (1) Atlanta Marriott Marquis 1,671
Desert Springs Marriott Limited
Partnership (1) Desert Springs Resort and Spa 884
Hanover Marriott Limited Partnership
(1) Hanover, New Jersey 353
</TABLE>
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<TABLE>
<CAPTION>
Partnership Hotel Properties Rooms
----------- -------------------------------------- ------
<S> <C> <C>
Public (continued)
Marriott Diversified American
Hotels Limited Partnership Dayton, Ohio 399
Fairview Park, Virginia 395
Livonia, Michigan 224
Fullerton, California 224
Research Triangle Park, North Carolina 224
Southfield, Michigan 226
Marriott Hotel Properties
Limited Partnership (1) Orlando World Center 1,503
Harbor Beach Resort, Florida 624
Marriott Hotel Properties II
Limited Partnership (1) San Antonio Rivercenter 999
New Orleans 1,292
San Ramon, California 368
Santa Clara, California 754
Mutual Benefit Chicago
Marriott Suite Hotel Limited
Partnership Chicago O'Hare Suites 256
Potomac Hotel Limited
Partnership Albuquerque, New Mexico 411
Greensboro/High Point, North Carolina 299
Houston Medical Center 386
Mountain Shadows Resort, Arizona 337
Miami Biscayne Bay 605
Raleigh Crabtree, North Carolina (2) 375
Seattle Sea-Tac Airport 459
Tampa Westshore (2) 309
Private
HMC BN Limited Partnership
(3) Ritz-Carlton, Buckhead, Georgia 553
Ritz-Carlton, Naples, Florida 463
Ivy Street Hotel Limited
Partnership (3) Atlanta Marriott Marquis 1,671
Times Square Marquis Hotel
Limited Partnership (3) New York Marriott Marquis 1,919
HMC/RGI Hartford Limited
Partnership (3) Hartford/Farmington 380
</TABLE>
- --------
(1) We owned or had a controlling interest in these partnerships prior to the
REIT conversion. These properties were previously consolidated by Host
Marriott.
(2) We consolidated these properties through our investments including the
ownership of mortgage notes prior to the REIT conversion.
(3) We acquired substantially all of the unaffiliated partnership interests
prior to the REIT conversion. These properties were previously
consolidated by Host Marriott.
In addition to the partnerships listed above, we own controlling interests
in certain private partnerships which we had previously consolidated. Certain
of the minority partners in these partnerships retain the right to exchange
their interests in these partnerships for OP Units subject to certain
conditions. We estimate that as many as approximately 7 million OP Units could
be issued at various points in time in the event that all such minority
partners were to elect to exchange their partnership interests.
As part of the REIT conversion, the operating partnership, directly and
through its subsidiaries, acquired all of the publicly-traded partnerships and
the four private partnerships identified on the table above in exchange for
approximately 25 million OP Units. Approximately 8.5 million of these OP Units
have been converted into shares of our common stock. Additionally, certain
limited partners of the publicly-traded partnerships elected to exchange OP
Units for approximately $3 million aggregate principal amount unsecured notes
due December 15, 2005 issued by the operating partnership.
The operating partnership also acquired on December 30, 1998 from the
Blackstone Group, a Delaware limited partnership, and a series of funds
controlled by affiliates of Blackstone Real Estate Partners (together, the
"Blackstone Entities"), ownership of or a controlling interest in 12 upscale
and luxury full-service hotels in the U.S. and a mortgage loan secured by a
thirteenth hotel and certain other assets. As part of the Blackstone
acquisition, the operating partnership also acquired a 25% interest in the
U.S. Swissotel management company
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which was sold in turn to Crestline at book value. In exchange for these
assets, the operating partnership issued to the Blackstone Entities
approximately 43.9 million OP Units, which OP Units are redeemable for cash
(or at our option, our common shares), assumed debt and made cash payments
totaling approximately $920 million and distributed approximately 1.4 million
shares of Crestline common stock and other consideration to the Blackstone
Entities. The actual number of OP Units to be issued to the Blackstone
Entities will fluctuate based upon certain adjustments to be determined at the
close of business on March 31, 1999. Based on current stock prices, the
operating partnership will be required to issue to the Blackstone Entities in
April 1999 approximately 3.7 million additional OP Units pursuant to such
adjustments. As a result of the consummation of the Blackstone Acquisition,
after all the adjustments the Blackstone Entities will own approximately 16.4%
of the outstanding OP Units. The Blackstone hotel portfolio consists of two
Ritz-Carlton, two Four Seasons, one Grand Hyatt, three Hyatt Regency and four
Swissotel properties. John G. Schreiber, co-chairman of Blackstone Real Estate
Partners' investment committee, is a member of our Board of Directors.
Contribution of assets to non-controlled subsidiaries. In connection with
the REIT conversion, two taxable corporations were formed in which the
operating partnership owns approximately 95% of the economic interest but none
of the voting interest--Rockledge Hotel Properties, Inc. and Fernwood Hotel
Assets, Inc. (we refer to these two subsidiaries as the non-controlled
subsidiaries). The non-controlled subsidiaries hold various assets which were
originally contributed by Host Marriott and its subsidiaries to the operating
partnership, the direct ownership of which by the operating partnership or its
other subsidiaries would jeopardize our status as a REIT and the operating
partnership's status as a partnership for federal income tax purposes. These
assets primarily consist of interests in certain partnerships or other
interests in hotels which are not leased, and certain furniture, fixtures and
equipment (also known as FF&E) used in the hotels and certain international
hotels. The operating partnership has no control over the operation or
management of the hotels or other assets owned by the non-controlled
subsidiaries. The Host Marriott Statutory Employee/Charitable Trust, the
beneficiaries of which are a trust formed for the benefit of certain employees
of the operating partnership and the J. Willard and Alice S. Marriott
Foundation, acquired all of the voting common stock of each non-controlled
subsidiary, representing, in each case, the remaining approximately 5% of the
total economic interests in each non-controlled subsidiary.
Leases of hotels. Under current federal income tax law, a REIT cannot derive
income from the operation of hotels but can derive rental income by leasing
hotels. Therefore, as part of the REIT conversion the operating partnership
and its subsidiaries have leased virtually all of their hotel properties to
certain subsidiaries of Crestline. Generally, there is a separate lessee for
each hotel property or there is a separate lessee for each group of hotel
properties that has separate mortgage financing or has owners in addition to
the operating partnership and its wholly owned subsidiaries. Each lessee is
generally a limited liability company whose purpose is limited to acting as
lessee under an applicable lease. The lessees under leases of hotels that are
managed by subsidiaries of Marriott International are owned 100% by a wholly
owned subsidiary of Crestline, although Marriott International or its
appropriate subsidiary has a non-economic voting interest on certain matters.
The LLC operating agreement or the limited partnership agreement, as
applicable, for such lessees provides that the Crestline subsidiary or general
partner of the lessee will have full control over the management of the
business of the lessee, except with respect to certain decisions for which the
consent of members or partners and the manager will be required.
The hotel management agreements to which Host Marriott or its subsidiaries
were parties were assigned to the lessees for the term of the applicable
leases. Although the lessees have primary liability under the management
agreements while the leases are in effect, the operating partnership retains
contingent liability under the management agreements for all obligations that
the lessees do not perform. The operating partnership also remains primarily
liable for certain obligations under the management agreements.
From time to time, legislation has been proposed that would have the effect
of enabling a REIT to lease hotels to a wholly owned subsidiary corporation
that could operate hotels directly, provided that the subsidiary contracts out
the management functions to independent third parties. In the event that
legislation is enacted that would have the effect of enabling the operating
partnership to lease its hotels to a wholly owned subsidiary, then
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<PAGE>
Host Marriott, at its discretion, may elect to terminate the leases of its
hotels with Crestline subsidiaries and pay certain termination fees.
The shareholder distributions. As part of the REIT conversion, Host Marriott
made certain taxable distributions to its shareholders in which they received,
for each share of common stock, (1) one-tenth of one share of common stock of
Crestline and, (2) either $1 cash or 0.087 share of Host Marriott common stock
at the election of the shareholder. The aggregate value of the Crestline
common stock, the common stock and cash distributed to shareholders of Host
Marriott was approximately $510 million.
Operations as a REIT
We are the sole general partner of the operating partnership and manage all
aspects of the business of the operating partnership. This includes decisions
with respect to, sales and purchases of hotels, the financing of the hotels,
the leasing of the hotels, and capital expenditures for the hotels (subject to
the terms of the leases and the management agreements described below).
Under current federal income tax law, REITs are restricted in their ability
to derive revenues directly from the operations of hotels. Therefore, the
operating partnership and its subsidiaries lease virtually all of their hotels
to certain entities we refer to as the "lessees." The lessees pay rent to the
operating partnership and its subsidiaries generally equal to a specified
minimum rent plus rent based on specified percentages of different categories
of aggregate sales at the relevant hotels to the extent such "percentage rent"
would exceed the minimum rent. The lessees operate the hotels pursuant to
management agreements with the managers. Each of the management agreements
provides for certain base and incentive management fees, plus reimbursement of
certain costs, as further described below. Such fee and cost reimbursements
are the primary obligation of the lessees and not the operating partnership or
its subsidiaries (although operating partnership or its subsidiaries remain
liable under the management agreements and the obligation of the lessees to
pay such fees could adversely affect the ability of the lessees to pay the
required rent to the operating partnership or its subsidiaries). A summary of
the material terms of these leases and management agreements is provided
below.
The leases, through the sales percentage rent provisions, are designed to
allow the operating partnership and its subsidiaries to participate in any
growth above specified levels in room sales at the hotels, which management
expects can be achieved through increases in room rates and occupancy levels.
Although the economic trends affecting the hotel industry will be the major
factor in generating growth in lease revenues, the abilities of the lessees
and the managers will also have a material impact on future sales growth.
In addition to external growth generated by new acquisitions, the operating
partnership intends to carefully and periodically review its portfolio to
identify opportunities to selectively enhance existing assets to improve
operating performance through major capital improvements. The leases of the
operating partnership and its subsidiaries provide the operating partnership
and its subsidiaries with the right to approve and finance major capital
improvements.
Business Strategy
Our primary objective is to acquire upscale and luxury full service hotel
lodging properties and achieve long-term sustainable growth in "Funds from
Operations" (i.e., net income computed in accordance with generally accepted
accounting principles, excluding gains or losses from debt restructuring and
sales of properties, plus real estate related depreciation and amortization,
and after adjustments for less than 100% owned partnerships and joint
ventures) per common share and cash flow. Since the beginning of 1994 through
the date hereof, we have grown our hotel portfolio, directly or through our
respective subsidiaries, by 105 full-service hotels representing more than
48,000 rooms for an aggregate purchase price of approximately $6.2 billion.
Based upon data provided by Smith Travel Research, we believe that our full-
service hotels outperform the industry's average occupancy rate by a
significant margin. Our full-service hotels averaged 78.8% occupancy for 1998,
for comparable properties, compared to a 71.1% average occupancy for our
competitive set. Our competitive set
16
<PAGE>
refers to hotels in the upscale and luxury full-service segment of the lodging
industry, the segment which is most representative of our full-service hotels,
and consists of Marriott Hotels, Resorts and Suites; Crowne Plaza; Doubletree;
Hyatt; Hilton; Radisson; Red Lion; Sheraton; Westin; and Wyndham.
One commonly used indicator of market performance for hotels is REVPAR,
which measures daily room revenues generated on a per room basis. This does
not include food and beverage or other ancillary revenues generated by the
property. REVPAR represents the product of the average daily room rate charged
and the average daily occupancy achieved. The relatively high occupancy rates
of our hotels, along with increased demand for full-service hotel rooms, have
allowed the managers of our hotels to increase average daily room rates by
selectively raising room rates and by replacing certain discounted group
business with higher-rate group and transient business. As a result, on a
comparable basis, REVPAR for our full-service properties increased
approximately 7.3% and 12.6% in 1998 and 1997, respectively.
Although competition for acquisitions has increased, we believe that the
upscale and luxury full-service segments of the market offer opportunities to
acquire assets at attractive multiples of cash flow and at discounts to
replacement value. We intend to increase our pool of potential acquisition
candidates by considering acquisitions of select non-Marriott and non-Ritz-
Carlton hotels that offer long-term growth potential and are consistent with
the overall quality of our current portfolio. We will focus on upscale and
luxury full-service properties in difficult to duplicate locations with high
barriers to entry, such as hotels located in downtown, airport and
resort/convention locations, which are operated by quality managers. We
believe this ability to acquire hotel properties operated by a variety of
quality managers under long-term contracts represents a strategic advantage
over a number of competitors. For example, in December 1998, we consummated
the Blackstone Acquisition for approximately $1.55 billion in a combination of
OP Units, assumed debt, and other consideration.
In certain circumstances, we have improved the results of under-performing
hotels by converting them to the Marriott brand. In general, based upon data
provided by Smith Travel Research, we believe that the Marriott brand has
consistently outperformed the industry. Demonstrating the strength of the
Marriott brand name, our comparable properties generated a 26% REVPAR premium
over our competitive set for 1998. Accordingly, management anticipates that
any additional full-service properties acquired in the future and converted
from other brands to the Marriott brand should achieve higher occupancy rates
and average room rates than has previously been the case for those properties
as the properties begin to benefit from Marriott's brand name recognition,
reservation system and group sales organization. Of our 105 full-service
hotels acquired from the beginning of 1994 through the date hereof, sixteen
were converted to the Marriott brand following their acquisition although such
opportunities have been more limited recently.
We also plan to selectively develop new upscale and luxury full-service
hotels in major urban markets and convention/resort locations with strong
growth prospects, unique or difficult to duplicate sites, high barriers to
entry for other new hotels and limited new supply. We intend to target only
development projects that show promise of providing financial returns that
represent a premium to acquisitions. In 1997, Host Marriott announced that it
would develop the 717-room Tampa Convention Center Marriott for $104 million,
including a $16 million subsidy provided by the City of Tampa.
We believe we are well qualified to pursue our acquisition and development
strategy. Management has extensive experience in acquiring and financing
lodging properties and believes its industry knowledge, relationships and
access to market information provide a competitive advantage with respect to
identifying, evaluating and acquiring hotel assets.
Recent Acquisitions, Dispositions and Developments
In January 1998, one of our subsidiaries acquired an additional interest in
Atlanta Marquis, which owns an interest in the 1,671-room Atlanta Marriott
Marquis Hotel, for approximately $239 million, including the assumption of
approximately $164 million of mortgage debt. It previously owned a 1.3%
general and limited partnership interest. As noted above, the remaining
limited partner interests in Atlanta Marquis were acquired as part of the REIT
conversion.
17
<PAGE>
In March 1998, one of our subsidiaries acquired a controlling interest in
the partnership that owns three hotels: the 359-room Albany Marriott, the 350-
room San Diego Marriott Mission Valley and the 320-room Minneapolis Marriott
Southwest for approximately $50 million. In the second quarter of 1998, one of
our subsidiaries acquired the partnership that owns the 289-room Park Ridge
Marriott in Park Ridge, New Jersey for $24 million. It previously owned a 1%
managing general partner interest and a note receivable interest in such
partnership. In addition, our subsidiary acquired the 281-room Ritz-Carlton,
Phoenix for $75 million, the 397-room Ritz-Carlton, Tysons Corner in Virginia
for $96 million and the 487-room Torrance Marriott near Los Angeles,
California for $52 million. In the third quarter of 1998, Host Marriott
acquired the 308-room Ritz-Carlton, Dearborn for approximately $65 million; a
subsidiary of Host Marriott also acquired the 336-room Ritz-Carlton, San
Francisco for approximately $161 million, and Host Marriott acquired the 404-
room Memphis Crowne Plaza (which was converted to the Marriott brand upon
acquisition) for approximately $16 million. These assets are currently held by
the operating partnership and its subsidiaries.
As noted above, in December 1998, we completed acquisitions of eight public
partnerships and interests in four private partnerships which own or control
28 properties and we consummated the Blackstone Acquisition. The Blackstone
hotel portfolio is one of the premier collections of hotel real estate
properties which includes: the 449-room Ritz-Carlton, Amelia Island; the 275-
room Ritz-Carlton, Boston; the 793-room Hyatt Regency Burlingame at San
Francisco Airport; the 469-room Hyatt Regency Cambridge, Boston; the 514-room
Hyatt Regency Reston, Virginia; the 439-room Grand Hyatt Atlanta; the 365-room
Four Seasons Philadelphia; the 246-room Four Seasons Atlanta; the 494-room
Drake (Swissotel) New York; the 630-room Swissotel Chicago; the 498-room
Swissotel Boston and the 348-room Swissotel Atlanta. Additionally, the
transaction included: a $65.6 million first mortgage loan on the 285-room Four
Seasons Beverly Hills; two office buildings in Atlanta--the offices at The
Grand (97,879 sq. ft.) and the offices at the Swissotel (67,110 sq. ft.); and
a 25% interest in the Swissotel U.S. management company (which was transferred
to Crestline).
During 1997, we or our subsidiaries acquired, or purchased controlling
interests in, 17 full-service hotels, containing 8,624 rooms, for an aggregate
purchase price of approximately $765 million (including the assumption of
approximately $418 million of debt). Our subsidiaries also completed the
acquisition of the 504-room New York Marriott Financial Center following the
acquisition of the mortgage on the hotel for $101 million in late 1996.
In 1997, we or our subsidiaries acquired, or obtained controlling interests
in, five affiliated partnerships, adding 10 hotels to our portfolio. In
January 1997, a subsidiary of Host Marriott acquired a controlling interest in
MHP. MHP owns the 1,503-room Marriott Orlando World Center and a 50.5%
interest in the 624-room Marriott Harbor Beach Resort. In April, a subsidiary
of Host Marriott acquired a controlling interest in the 353-room Hanover
Marriott. In the fourth quarter, a subsidiary of Host Marriott acquired the
Chesapeake Hotel Limited Partnership. This partnership owns the 430-room
Boston Marriott Newton; the 681-room Chicago Marriott O'Hare; the 595-room
Denver Marriott Southeast; the 588-room Key Bridge Marriott in Virginia; the
479-room Minneapolis Airport Marriott in Minnesota; and the 221-room Saddle
Brook Marriott in New Jersey. In December 1997, a subsidiary obtained a
controlling interest in the partnership that owns the 884-room Marriott's
Desert Springs Resort and Spa in California and acquired the remaining
interests in December 1998 as part of the REIT conversion.
In addition to investments in partnerships in which we already held minority
interests, we have been successful in adding properties to our portfolio
through partnership arrangements with either the seller of the property or the
incoming managers (typically Marriott International or a Marriott franchisee).
We have the financial flexibility and, due to our existing private partnership
investment portfolio, the administrative infrastructure in place to
accommodate such arrangements. We view this ability as a competitive advantage
and expect to enter into similar arrangements to acquire additional properties
in the future.
Through subsidiaries, we currently own four Canadian properties, with 1,636
rooms, and will continue to evaluate other attractive acquisition
opportunities in Canada. In addition, the overbuilding and economic stress
currently being experienced in some European and Pacific Rim countries may
eventually lead to additional
18
<PAGE>
international acquisition opportunities. We will acquire international
properties only when such acquisitions achieve satisfactory returns after
adjustments for currency and country risks and tax consequences.
We may also expand certain existing hotel properties where strong
performance and market demand exists. Expansions to existing properties create
a lower risk to us as the success of the market is generally known and
development time is significantly shorter than new construction. We recently
began construction on a 500-room expansion and an additional 15,000 square
feet of meeting space to the 1,503-room Marriott Orlando World Center, which
is due to be completed in early 2000. In July 1998, a subsidiary purchased a
13-acre parcel of land for the development of a 295-room Ritz-Carlton that
will serve as an extension of the 463-room Ritz-Carlton, Naples, which was
purchased in September 1996. The existing hotel just completed room,
restaurant and public space refurbishment and is in the process of adding a
world-class spa. In addition, a subsidiary of one of the non-controlled
subsidiaries has entered into a joint venture through which it owns 49% of the
surrounding newly developed 27-hole world-class Greg Norman designed golf
course development. The golf course joint venture was transferred to a non-
controlled subsidiary in connection with the REIT conversion. The total
investment by the operating partnership in expansions and improvements of the
Ritz-Carlton, Naples property is expected to be approximately $97 million.
In February 1999, we sold the Minneapolis/Bloomington Marriott for $35
million and recorded a gain on the sale of approximately $13 million. We also
may selectively dispose of other hotel assets where we believe we can earn
higher returns on our invested capital.
Hotel Lodging Industry
The lodging industry posted strong gains in 1998 as higher average daily
rates drove increases in revenue per available room, or REVPAR. Over the last
five years, the lodging industry has benefited from a favorable supply/demand
imbalance, driven in part by low construction levels in our submarkets
combined with high gross domestic product (GDP) growth. Recently, however,
supply has begun to moderately outpace demand, causing slight declines in
occupancy rates in the upscale and luxury full-service segments in which we
operate. According to Smith Travel Research, supply in our competitive set
increased 1.2% for the year ended December 31, 1998 versus the same period one
year ago while demand in our competitive set decreased 0.3% for the same
period. At the same time, occupancy declined 1.5% in our competitive set for
the year ended December 31, 1998 versus the same period one year ago.
These declines in occupancy, however, were more than offset by increases in
average daily rates which generated higher REVPAR. According to Smith Travel
Research, for the year ended December 31, 1998, average daily rate and REVPAR
for our competitive set increased 6.5% and 5.0%, respectively, versus the same
period one year ago. The current amount of excess supply in the lodging
industry is relatively moderate and much less severe than that experienced in
the lodging industry beginning in 1989, in part because of the greater
financial discipline and lending practices imposed by financial institutions
and public markets today relative to those during the late 1980's.
Within the upscale and luxury full-service segment, our hotels have
outperformed the overall sector. The attractive locations of our hotels, the
limited availability of new building sites for new construction of competing
full-service hotels, and the lack of availability of financing for new full-
service hotels has allowed us to maintain REVPAR and average daily rate
premiums over our competitors in these service segments. On a comparable
basis, average daily rates for our full service hotels increased 6.9% during
1998 compared with 1997. The increase in average daily rate helped generate a
strong increase in comparable hotel REVPAR of 7.3% for the same period.
Furthermore, because our lodging operations have a high fixed-cost component,
increases in REVPAR generally yield greater percentage increases in EBITDA.
While we do not benefit directly from increases in EBITDA levels at our
properties due to the structure of our leases, we should benefit from such
increases due to expected higher market valuations of our properties based on
such elevated EBITDA levels.
19
<PAGE>
We believe that the current environment of excess supply will most likely
continue over the next twelve to eighteen months, although any excess supply
is expected to be moderate given the fact that demand is expected to grow at
the same 1% to 2% rate as projected GDP and new construction has been limited
by capital constraints. Given the relatively long lead time to develop urban,
convention and resort hotels, we believe that growth in room supply in upscale
and luxury full-service sub-markets in which we operate will remain moderate
through the year 2000. However, there can be no assurance that growth in
supply will remain moderate or that REVPAR and EBITDA will continue to
improve.
Hotel Lodging Properties
Our lodging portfolio currently consists of 125 upscale and luxury full
service hotels with approximately 58,000 rooms. Our hotel lodging properties
represent quality assets in the upscale and luxury full-service lodging
segments. All but thirteen of our hotel properties are currently operated
under the Marriott or Ritz-Carlton brand names.
To maintain the overall quality of our lodging properties, each property
undergoes refurbishments and capital improvements on a regularly scheduled
basis. Typically, refurbishing has been provided at intervals of five years,
based on an annual review of the condition of each property. For the fiscal
years 1998, 1997 and 1996, we spent $165 million, $129 million and $87
million, respectively, on capital improvements to existing properties. As a
result of these expenditures, we will be able to maintain high quality rooms
at our properties.
Our hotels average nearly 465 rooms. Thirteen of our hotels have more than
750 rooms. Hotel facilities typically include meeting and banquet facilities,
a variety of restaurants and lounges, swimming pools, gift shops and parking
facilities. Our hotels primarily serve business and pleasure travelers and
group meetings at locations in downtown and suburban areas, near airports and
at resort convention locations throughout the United States. The properties
are generally well situated in locations where there are significant barriers
to entry by competitors including downtown areas of major metropolitan cities
at airports and resort/convention locations where there are limited or no
development sites. Marriott International serves as the manager for 99 of our
125 hotels and all but 13 are part of Marriott International's full-service
hotel system. The Marriott brand name has consistently delivered occupancy and
REVPAR premiums over other brands. Based upon data provided by Smith Travel
Research, our comparable properties have an eight percentage point occupancy
premium and a 26% REVPAR premium over the competitive set for 1998.
The average age of our properties is sixteen years, although several of the
properties have had substantial, more recent renovations or major additions.
In 1998, a subsidiary substantially completed a two-year $25 million dollar
capital improvement program at the New Orleans Marriott which included
renovations to all guest rooms, refurbishment of ballrooms and restaurant
updates. In early 1998, a subsidiary of Host Marriott completed a $15 million
capital improvement program at the Denver Marriott Tech Center. The program
included replacement of guestroom interiors, remodeling of the lobby,
ballroom, meeting rooms and corridors, as well as renovations to the exterior
of the building.
A number of our full-service hotel acquisitions such as the Memphis Marriott
which was acquired in 1998 were converted to the Marriott brand upon
acquisition. The conversion of these properties to the Marriott brand is
intended to increase occupancy and room rates as a result of Marriott
International's nationwide marketing and reservation systems, its Marriott
Rewards program, group sales force, as well as customer recognition of the
Marriott brand name. The invested capital with respect to these properties is
primarily used for the improvement of common areas, as well as upgrading soft
and hard goods (i.e., carpets, drapes, paint, furniture and additional
amenities). The conversion process typically causes periods of disruption to
these properties as selected rooms and common areas are temporarily taken out
of service. Historically, the conversion properties have shown improvements as
the benefits of Marriott International's marketing and reservation programs,
group sales force and customer service initiatives take hold. In addition,
these properties have generally been integrated into Marriott International's
systems covering purchasing and distribution, insurance, telecommunications
and payroll processing.
20
<PAGE>
The chart below sets forth performance information for our comparable
hotels:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Comparable Full-Service Hotels(1)
Number of properties.......................................... 78 78
Number of rooms............................................... 38,589 38,589
Average daily rate............................................ $142.67 $133.45
Occupancy percentage.......................................... 78.8% 78.5%
REVPAR........................................................ $112.39 $104.79
REVPAR % change............................................... 7.3% --
</TABLE>
- --------
(1) Consists of the 78 properties owned directly or indirectly by us for the
entire 1998 and 1997 fiscal years, respectively. These properties, for the
respective periods, represent the "comparable properties". Properties held
for less than all of the periods discussed above, respectively, are not
considered comparable.
The chart below sets forth certain performance information for our hotels:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Number of properties............................... 126(1) 95 79
Number of rooms.................................... 58,445(1) 45,718 37,210
Average daily rate................................. $140.35 $133.74 $119.94
Occupancy percentage............................... 77.7% 78.4% 77.3%
REVPAR............................................. $109.06 $104.84 $ 92.71
</TABLE>
- --------
(1) Number of properties and rooms as of December 31, 1998 and includes 25
properties (9,965 rooms) acquired in the public partnerships merger and
the Blackstone Acquisition.
The following table presents full service hotel information by geographic
region for 1998:
<TABLE>
<CAPTION>
Number Average Number Average Average
Geographic Region of Hotels of Guest Rooms Occupancy(1) Daily Rate(1) REVPAR(1)
- ----------------- --------- -------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Atlanta................. 11 486 72.3% $139.25 $100.67
Florida................. 13 513 78.9% 141.22 111.45
Mid-Atlantic............ 17 364 76.5% 122.56 93.75
Midwest................. 17 369 74.5% 114.71 85.41
New York................ 12 631 85.2% 183.21 156.18
Northeast............... 11 379 78.9% 107.93 85.13
South Central........... 18 497 77.0% 123.94 95.46
Western................. 27 491 78.1% 150.80 117.76
Average--All regions.... 126 463 78.0% 140.38 109.44
</TABLE>
- --------
(1) The operating results of the 25 properties acquired through the Blackstone
Acquisition and the merger of the public partnerships are not included.
During 1995 and 1996, we divested virtually all of our limited-service hotel
properties through the sale and leaseback of 53 Courtyard properties and 18
Residence Inn properties. During 1998, limited-service properties represented
less than 2% of our EBITDA from hotel properties and we expect this percentage
to continue to decrease as we continue to acquire full service properties.
These 71 properties that we lease continue to be reflected in our revenues.
The Courtyard and Residence Inn properties are subleased to subsidiaries of
Crestline under sublease agreements and are managed by Marriott International
under long-term management agreements. The owners of the 71 limited-services
properties that we lease have not yet consented to the subleases but have
agreed to waive any defaults under the related leases until April 23, 1999, to
provide us with additional time to obtain such consents (which could require
modifications in the terms of the sublease and structural or other changes
related thereto). If such consents are not obtained, we may be required to
terminate the subleases and
21
<PAGE>
contribute to a non-controlled subsidiary our equity interests in the
subsidiaries leasing the properties. This change would have the effect of
reducing our revenues by $297 million and $282 million for 1998 and 1997,
respectively, and increasing our net income by approximately $5 million and $4
million for 1998 and 1997, respectively.
The following table sets forth as of March 1, 1999, the location and number
of rooms relating to each of our 125 hotels. All of the properties are leased
to a subsidiary of Crestline and operated under Marriott brands by Marriott
International, unless otherwise indicated.
<TABLE>
<CAPTION>
Location Rooms
- -------- ------
<S> <C>
Alabama
Grand Hotel Resort and Golf
Club.......................................................... 306
Arizona
Mountain Shadows Resort........................................ 337
Scottsdale Suites.............................................. 251
The Ritz-Carlton, Phoenix...................................... 281
California
Coronado Island Resort(1)(2)................................... 300
Costa Mesa Suites.............................................. 253
Desert Springs Resort and Spa.................................. 884
Fullerton(2)................................................... 224
Hyatt Regency, Burlingame(3)................................... 793
Manhattan Beach(1)(2)(4)....................................... 380
Marina Beach(1)(2)............................................. 368
Newport Beach.................................................. 570
Newport Beach Suites........................................... 250
Ontario Airport(4)............................................. 299
Sacramento Airport(2)(3)(7).................................... 85
San Diego Marriott Hotel and
Marina(2)(6).................................................. 1,355
San Diego Mission Valley(4)(7)................................. 350
San Francisco Airport.......................................... 684
San Francisco Fisherman's
Wharf(4)...................................................... 285
San Francisco Moscone Center(2)................................ 1,498
San Ramon(2)................................................... 368
Santa Clara(2)................................................. 754
The Ritz-Carlton, Marina del
Rey(2)........................................................ 306
The Ritz-Carlton, San Francisco................................ 336
Torrance....................................................... 487
Colorado
Denver Southeast(2)............................................ 595
Denver Tech Center(1).......................................... 625
Denver West(2)................................................. 307
Marriott's Mountain Resort at
Vail(1)....................................................... 349
Connecticut
Hartford/Farmington............................................ 380
Hartford/Rocky Hill(2)......................................... 251
Florida
Fort Lauderdale Marina(2)...................................... 580
Harbor Beach Resort(2)(5)(6)(7)................................ 624
Jacksonville(2)(4)............................................. 256
Miami Airport(2)............................................... 782
Miami Biscayne Bay(2).......................................... 605
Orlando World Center........................................... 1,503
Palm Beach Gardens(4).......................................... 279
Singer Island Holiday Inn(3)................................... 222
Tampa Airport(2)............................................... 295
Tampa Westshore(2)............................................. 309
The Ritz-Carlton, Amelia Island................................ 449
The Ritz-Carlton, Naples....................................... 463
Georgia
Atlanta Marriott Marquis(6).................................... 1,671
Atlanta Midtown Suites(2)...................................... 254
Georgia (Continued)
Atlanta Norcross............................................... 222
Atlanta Northwest.............................................. 400
Atlanta Perimeter(2)........................................... 400
Four Seasons, Atlanta(3)....................................... 246
Grand Hyatt, Atlanta(3)........................................ 439
JW Marriott Hotel at Lenox(2).................................. 371
Swissotel, Atlanta(3).......................................... 348
The Ritz-Carlton, Atlanta(2)................................... 447
The Ritz-Carlton, Buckhead..................................... 553
Illinois
Chicago/Deerfield Suites....................................... 248
Chicago/Downers Grove Suites................................... 254
Chicago/Downtown Courtyard..................................... 334
Chicago O'Hare(2).............................................. 681
Chicago O'Hare Suites(2)....................................... 256
Swissotel, Chicago(3).......................................... 630
Indiana
South Bend(2).................................................. 300
Louisiana
New Orleans.................................................... 1,290
Maryland
Bethesda(2).................................................... 407
Gaithersburg/Washingtonian
Center........................................................ 284
Massachusetts
Boston/Newton.................................................. 430
Hyatt Regency, Cambridge(3).................................... 469
Swissotel, Boston(3)........................................... 498
The Ritz-Carlton, Boston....................................... 275
Michigan
The Ritz-Carlton, Dearborn..................................... 308
Detroit Livonia................................................ 224
Detroit Romulus................................................ 245
Detroit Southfield............................................. 226
Minnesota
Minneapolis City Center(2)..................................... 583
Minneapolis Southwest(4)(7).................................... 320
Missouri
Kansas City Airport(2)......................................... 382
New Hampshire
Nashua......................................................... 251
New Jersey
Hanover........................................................ 353
Newark Airport(2).............................................. 590
Park Ridge(2).................................................. 289
Saddle Brook................................................... 221
New Mexico
Albuquerque(2)................................................. 411
New York
Albany(4)(7)................................................... 359
New York Marriott Financial
Center........................................................ 504
New York Marriott Marquis(2)(6)................................ 1,919
Marriott World Trade
Center(1)(2).................................................. 820
Swissotel, The Drake(3)........................................ 494
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
North Carolina
Charlotte Executive Park(4).......................................... 298
Greensboro/Highpoint(2).............................................. 299
Raleigh Crabtree Valley.............................................. 375
Research Triangle Park............................................... 224
Ohio
Dayton............................................................... 399
Oklahoma
Oklahoma City........................................................ 354
Oklahoma City Waterford(1)(4)........................................ 197
Oregon
Portland............................................................. 503
Pennsylvania
Four Seasons, Philadelphia(3)........................................ 365
Philadelphia Convention
Center(2)........................................................... 1,200
Philadelphia Airport(2).............................................. 419
Pittsburgh City Center(1)(2)(4)...................................... 400
Tennessee
Memphis(1)(2)........................................................ 404
Texas
Dallas/Fort Worth Airport............................................ 492
Dallas Quorum(2)..................................................... 547
El Paso(2)........................................................... 296
Houston Airport(2)................................................... 566
Houston Medical Center(2)............................................ 386
JW Marriott Houston.................................................. 503
Plaza San Antonio(1)(2)(4)........................................... 252
San Antonio Rivercenter(2)........................................... 999
San Antonio Riverwalk(2)............................................. 500
Utah
Salt Lake City(2).................................................... 510
Virginia
Dulles Airport(2).................................................... 370
Fairview Park(2)..................................................... 395
Hyatt Regency, Reston(3)............................................. 514
Key Bridge(2)........................................................ 588
Norfolk Waterside(2)(4).............................................. 404
Pentagon City Residence Inn.......................................... 300
The Ritz-Carlton, Tysons
Corner(2)........................................................... 397
Washington Dulles Suites............................................. 254
Westfields(1)........................................................ 335
Williamsburg(1)...................................................... 295
Washington
Seattle SeaTac Airport............................................... 459
Washington, DC
Washington Metro Center(1)........................................... 456
Canada
Calgary(1)........................................................... 380
Toronto Airport...................................................... 423
Toronto Eaton Center(2).............................................. 459
Toronto Delta Meadowvale(3).......................................... 374
------
TOTAL................................................................. 57,975
======
</TABLE>
- --------
(1) This property was converted to the Marriott brand after acquisition.
(2) The land on which this hotel is built is leased under one or more long-
term lease agreements.
(3) This property is not operated under the Marriott brand and is not managed
by Marriott International.
(4) This property is operated as a Marriott franchised property.
(5) This property is leased to Marriott International.
(6) This property is not wholly owned by the operating partnership.
(7) This property is not leased to Crestline.
Investments in Affiliated Partnerships
The operating partnership and certain of its subsidiaries also manage our
partnership investments and conduct the partnership services business. As
previously discussed, in connection with the REIT conversion, the non-
controlled subsidiaries were formed to hold various assets. The direct
ownership of those assets by us or the operating partnership could jeopardize
our status as a REIT or the operating partnership's treatment as a partnership
for federal income tax purposes. Substantially all our general and limited
partner interests in partnerships owning 220 limited-service hotels were held
by the non-controlled subsidiaries at year end. Additionally, of the 20 full-
service hotels in which we had general and limited partner interests 13 were
acquired by the operating partnership, two were sold, four were transferred to
the non-controlled subsidiary and one was retained.
The managing general partner of the partnership retained is responsible for
the day-to-day management of the partnership operations, which generally
includes payment of partnership obligations from partnership funds,
preparation of financial reports and tax returns and communications with
lenders, limited partners and regulatory bodies. As the general partner, we
are reimbursed for the cost of providing these services subject to limitations
in certain cases.
The partnership hotel is currently operated under a management agreement
with Marriott International or its subsidiaries. As the general partner, we
oversee and monitor Marriott International and its subsidiaries' performance
pursuant to these agreements.
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Cash distributions provided from these partnerships including distributions
related to partnerships sold, transferred or acquired in 1998 are tied to the
overall performance of the underlying properties and the overall level of
debt. Distributions from these partnerships to us were $2 million in 1998 and
$5 million in each of 1997 and 1996. All debt of these partnerships is
nonrecourse to us and our subsidiaries, except that we are contingently liable
under various guarantees of debt obligations of certain of the limited-service
partnerships.
Marketing
As of March 1, 1999, 99 of our 125 hotel properties were managed by Marriott
International as Marriott or Ritz-Carlton brand hotels. Thirteen of the 26
remaining hotels are operated as Marriott brand hotels under franchise
agreements with Marriott International. We believe that these Marriott-managed
and franchised properties will continue to enjoy competitive advantages
arising from their participation in the Marriott International hotel system.
Marriott International's nationwide marketing programs and reservation systems
as well as the advantage of the strong customer preference for Marriott brands
should also help these properties to maintain or increase their premium over
competitors in both occupancy and room rates. Repeat guest business in the
Marriott hotel system is enhanced by the Marriott Rewards program, which
expanded the previous Marriott Honored Guest Awards program. Marriott Rewards
membership includes more than 7.5 million members.
The Marriott reservation system provides Marriott reservation agents
complete descriptions of the rooms available for sale and up-to-date rate
information from the properties. The reservation system also features
connectivity to airline reservation systems, providing travel agents with
access to available rooms inventory for all Marriott and Ritz-Carlton lodging
properties. In addition, software at Marriott's centralized reservations
centers enables agents to immediately identify the nearest Marriott or Ritz-
Carlton brand property with available rooms when a caller's first choice is
fully occupied. Our website (www.hostmarriott.com) currently permits users to
connect to the Marriott reservation system to reserve rooms in its hotels.
Competition
Our hotels compete with several other major lodging brands in each segment
in which they operate. Competition in the industry is based primarily on the
level of service, quality of accommodations, convenience of locations and room
rates. Although the competitive position of each of our hotel properties
differs from market to market, we believe that our properties compare
favorably to their competitive set in the markets in which they operate on the
basis of these factors. The following table presents key participants in
segments of the lodging industry in which we compete:
<TABLE>
<CAPTION>
Segment Representative Participants
------- ---------------------------
<C> <S>
Luxury Full-Service Ritz-Carlton; Four Seasons
Upscale Full-Service Crown Plaza; Doubletree; Hyatt; Hilton; Marriott Hotels,
Resort and Suites; Radisson; Red Lion; Sheraton;
Swissotel; Westin; Wyndham
</TABLE>
Other Real Estate Investments
We have lease and sublease activity relating primarily to Host Marriott's
former restaurant operations. Additionally, as part of the Blackstone
Acquisition, we acquired 165,000 square feet of office space in two buildings
in Atlanta. Prior to the REIT conversion, we owned 12 undeveloped parcels of
vacant land, totaling approximately 83 acres, originally purchased primarily
for the development of hotels or senior living communities, which are now
owned by one of the non-controlled subsidiaries.
Employees
We are managed by our Board of Directors and we have no employees who are
not employees of the operating partnership.
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Currently, the operating partnership has approximately 175 management
employees, and approximately 16 other employees which are covered by a
collective bargaining agreement that are subject to review and renewal on a
regular basis. We believe that we and our managers have good relations with
labor unions and have not experienced any material business interruptions as a
result of labor disputes.
Environmental and Regulatory Matters
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials, and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released asbestos-containing materials.
Environmental laws also may impose restrictions on the manner in which
property may be used or business may be operated, and these restrictions may
require expenditures. In connection with our current or prior ownership or
operation of hotels, we may be potentially liable for any such costs or
liabilities. Although we are currently not aware of any material environmental
claims pending or threatened against us, no assurance can be given that a
material environmental claim will not be asserted against us.
The Leases
In order for us to qualify as a REIT and for the operating partnership to be
treated as a partnership for federal income tax purposes, neither we nor the
operating partnership may operate our hotels or related properties.
Accordingly, we lease the hotels to the lessees, which are primarily wholly
owned, indirect subsidiaries of Crestline.
Lessees. There generally is a separate lessee for each hotel or group of
hotels that is owned by a separate subsidiary of the operating partnership.
Each lessee is generally a Delaware limited liability company, whose purpose
is limited to acting as lessee under the applicable lease(s).
For those hotels where it is the manager, Marriott International or a
subsidiary has a non-economic membership interest in the lessee entitling it
to certain voting rights but no economic rights. The operating agreements for
such lessees provide that the Crestline member of the lessee has full control
over the management of the business of the lessee, except with respect to
certain decisions for which the consent of the members or partners and the
manager are required. These decisions are:
. dissolving, liquidating, consolidating, merging, selling or leasing all
or substantially all of the assets of the lessee;
. engaging in any other business or acquiring any assets or incurring any
liabilities not reasonably related to the conduct of the lessee's
business;
. instituting voluntary bankruptcy or similar proceedings or consenting to
involuntary bankruptcy or similar proceedings;
. terminating the management agreement relating to the lessee's hotel,
other than by reason of a breach by the manager or upon exercise of
express termination rights in the management agreement;
. challenging the status or rights of the manager or the enforceability of
the manager's consent rights; or
. incurring debt in excess of certain limits.
Upon any termination of the applicable management agreement, these special
voting rights of Marriott International (or its subsidiary) will cease.
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Lease terms. Each lease has a fixed term ranging generally from seven to ten
years, depending upon the lease, subject to earlier termination upon the
occurrence of certain contingencies described in the lease, including,
particularly, the provisions described below under "--Damage or Destruction,"
"--Termination of the Leases upon Disposition of Full-Service Hotels" and "--
Termination of the Leases upon Changes in Tax Laws".
Minimum rent; percentage rent; additional charges. Each lease requires the
lessee to pay (1) minimum rent in a fixed dollar amount per annum plus (2) to
the extent it exceeds minimum rent, percentage rent based upon specified
percentages of aggregate sales from the applicable hotel, including room
sales, food and beverage sales and other income ("Gross Revenues"), in excess
of specified thresholds.
Minimum rent is a fixed dollar amount specified in each lease less the FF&E
adjustment (which is described under "--Personal Property Limitation" below).
Any amounts other than minimum rent and percentage rent due to the lessor
under the leases are referred to as "additional charges".
The amount of minimum rent and the percentage rent thresholds are to be
adjusted each year. The annual adjustment with respect to minimum rent equals
a percentage of any increase in the Consumer Price Index, or CPI, during the
previous twelve months. The annual adjustment with respect to percentage rent
thresholds is a specified percentage equal to the weighted average of a
percentage of any increase in CPI plus a specified percentage of any increase
in a regional labor cost index agreed upon by the lessor and the lessee during
the previous twelve months. Neither minimum rent nor percentage rent
thresholds will be decreased because of the annual adjustment.
Rental payments will be made on a fiscal year basis. The "fiscal year" means
the fiscal year used by the manager. Payments of rent are to be made within
two business days after the required payment date under the management
agreement for each accounting period. "Accounting period" means, for those
hotels where Marriott International is the manager, any of the thirteen four-
week accounting periods which are used in the manager's accounting system.
Rent payable for each accounting period will be the sum of (1) the excess (if
any) of (x) the greater of cumulative minimum rent year-to-date or cumulative
percentage rent year-to-date over (y) the total amount of minimum rent and
percentage rent paid year-to-date plus (2) any additional charges due. If the
total amount of minimum rent and percentage rent paid year-to-date, as of any
rent payment date, is greater than both cumulative minimum rent year-to-date
and cumulative percentage rent year-to-date, then the lessor must remit the
difference to the lessee.
The leases generally provide for a rent adjustment in the event of damage,
destruction, partial taking, certain capital expenditures or an FF&E
adjustment.
Lessee expenses. Each lessee is responsible for paying all of the expenses
of operating the applicable hotel(s), including all personnel costs, utility
costs and general repair and maintenance of the hotel(s). The lessee also is
responsible for all fees payable to the applicable manager, including base and
incentive management fees, chain services payments and franchise or system
fees, with respect to periods covered by the term of the lease. The lessee is
not obligated to bear the cost of any capital improvements or capital repairs
to the hotels or the other expenses to be borne by the lessor, as described
below.
Lessor expenses. The lessor (typically, the operating partnership or its
subsidiary) is responsible for the following expenses: real estate taxes,
personal property taxes (to the extent the lessor owns the personal property),
casualty insurance on the structures, ground lease rent payments, required
expenditures for FF&E (including maintaining the FF&E reserve, to the extent
such is required by the applicable management agreement) and capital
expenditures.
The consent of the lessor is required for any capital expenditures (except
in an emergency or where the owner's consent is not required under the
management agreement) or a change in the amount of the FF&E reserve payment.
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Crestline guarantee. Crestline and certain of its subsidiaries have entered
into a limited guarantee of the lease and management agreement obligations of
each lessee. For each of four identified "pools" of hotels, the cumulative
limit of the guarantee at any time is 10% of the aggregate rents under all
leases in such pool paid with respect to the preceding thirteen full
accounting periods (with an annualized amount based upon the minimum rent for
those leases that have not been in effect for thirteen full accounting
periods). In the event of a payment default under any lease or failure of
Crestline to maintain certain minimum net worth or debt service coverage
ratios, the obligations under the guarantees of leases in each pool are
secured by excess cash flow of each lessee in such pool. Such excess cash flow
will be collected, held in a cash collateral account, and disbursed in
accordance with agreed cash management procedures.
Security. The obligations of the lessee are secured by a pledge of all
personal property (tangible and intangible) of the lessee related to or used
in connection with the operation of the hotels (including any cash and
receivables from the manager or others held by the lessee as part of working
capital).
Working capital. Each lessor sold the existing working capital, including
inventory and fixed asset supplies (as defined in the Uniform System of
Accounts for Hotels) and receivables due from the manager, net of accounts
payable and accrued expenses to the applicable lessee upon the commencement of
the lease at a price equal to the fair market value of such assets. The
purchase price is represented by a note evidencing a loan that bears interest
at a rate per annum equal to the long-term applicable federal rate in effect
on the commencement of the lease. Interest owed on the working capital loan is
due simultaneously with each periodic rent payment and the amount of each
payment of interest will be credited against such rent payment. The principal
amount of the working capital loan will be payable upon termination of the
lease. At the termination or expiration of the lease, the lessee will sell to
the lessor the then existing working capital at a price equal to the value of
such assets at that time. The lessor will pay the purchase price of the
working capital by offsetting the purchase price against the outstanding
principal balance of the working capital loan. To the extent that the value of
the working capital delivered to the lessor exceeds the value of the working
capital delivered by the lessor to the lessee at the commencement of the
lease, the lessor will pay to the lessee an amount equal to the difference in
cash. To the extent that the value of the working capital delivered to the
lessor is less than the value of the working capital delivered by the lessor
to the lessee at the commencement of the lease, the lessee will pay to the
lessor an amount equal to the difference in cash.
Termination of leases upon disposition of full-service hotels. In the event
the applicable lessor enters into an agreement to sell or otherwise transfer
any full-service hotel free and clear of the applicable lease, the lessor must
pay the lessee a termination fee equal to the fair market value of the
lessee's leasehold interest for the remaining term of the lease. For purposes
of determining the fair market value, a discount rate of 12% will be used, and
the annual income for each remaining year of the lease will be assumed to be
the average annual income generated by the lessee during the three fiscal
years preceding the termination date or if the hotel has not been in operation
for at least three fiscal years, then the average during the preceding fiscal
years that have elapsed, and if the hotel has not been in operation for at
least twelve months, then the assumed annual income shall be determined on a
pro forma basis. Alternatively, the lessor would be entitled to (1) substitute
a comparable hotel or hotels (in terms of economics and quality for the lessor
and the lessee as agreed to by the lessee) for any hotel that is sold or (2)
sell the hotel subject to the lease (subject to the lessee's reasonable
approval if the sale is to an entity that does not have sufficient financial
resources and liquidity to fulfill the "owner's" obligations under the
management agreement and the lessor's obligations under the lease, or does not
satisfy specified character standards) without being required to pay a
termination fee. In addition, the lessors collectively and the lessees
collectively each have the right to terminate up to twelve leases without
being required to pay any fee or other compensation as a result of such
termination, but the lessors are permitted to exercise such right only in
connection with sales of hotels to an unrelated third party or the transfer of
a hotel to a joint venture in which the operating partnership does not have a
two-thirds or greater interest.
Termination of the leases upon changes in tax laws. In the event that
changes in the federal income tax laws allow the lessors, or subsidiaries or
affiliates of the lessors, to directly operate the hotels without jeopardizing
our status as a REIT, the lessors have the right to terminate all, but not
less than all, of the leases
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(excluding leases of hotels that must still be leased following the tax law
change) in return for paying the lessees the fair market value of the
remaining terms of the leases, valued in the same manner as provided above
under "--Termination of Leases upon Disposition of Hotels". The payments are
payable in cash or, subject to certain conditions, shares of our common stock,
at the election of the lessor and us.
Damage or Destruction. If a hotel is partially or totally destroyed and is
no longer suitable for use as a hotel (as reasonably determined by the
lessor), the lease of such hotel will automatically terminate and the
insurance proceeds will be retained by the lessor, except for any proceeds
attributable to personal property owned by the lessee or business interruption
insurance. In this event, no termination fee will be owed to the lessee. If a
hotel is partially destroyed but is still suitable for use as a hotel (as
reasonably determined by the lessor), the lessee, subject to the lessor
agreeing to release the insurance proceeds to fund the cost of repair and
restoration, must apply the insurance proceeds to restore the hotel to its
preexisting condition. The lessor must fund any shortfall in insurance
proceeds less than or equal to five percent of the estimated cost of repair.
The lessor may fund such deficiency, in its sole discretion, in the event the
sum of (a) the insurance proceeds and (b) that portion of the insurance
deductible, if any, which is greater than 5% of the cost of repair, is less
than 95% of the cost of the repair, provided that if the lessor elects not to
fund such shortfall, the lessee may terminate the lease and the lessor must
pay to the lessee a termination fee equal to the lessee's operating profit for
the immediately preceding fiscal year. The term "lessee's operating profit"
shall mean for any fiscal year an amount equal to revenues due to the lessee
from the leased property after the payment of all expenses relating to the
operation or leasing of the leased property less rent paid to the lessor. If
and to the extent any damage or destruction results in a reduction of gross
revenues which would otherwise be realizable from the operation of the hotel,
the lessor will receive all loss of income insurance and the lessee will have
no obligation to pay rent, for any accounting period until the effects of the
damage are restored, in excess of the greater of (1) one-thirteenth of the
total rent paid in the fiscal year prior to the casualty or (2) percentage
rent calculated for the current accounting period.
Events of default. Except as otherwise provided below, and subject to the
notice and, in some cases, cure periods in the lease, the lease may be
terminated without penalty by the applicable lessor if any of the following
events of default (among others) occur:
. Failure to pay rent within ten days after the due date;
. Failure to comply with, or observe any of, the terms of the lease (other
than the failure to pay rent) for 30 days after notice from the lessor,
including failure to properly maintain the hotel (other than by reason of
the failure of the lessor to perform its obligations under the lease),
such period to be extended for up to an additional 90 days if such
default cannot be cured with due diligence within 30 days;
. Acceleration of maturity of certain indebtedness of the lessee with a
principal amount in excess of $1,000,000;
. Failure of Crestline to maintain minimum net worth or debt service
coverage ratio requirements;
. Filing of any petition for relief, bankruptcy or liquidation by or
against the lessee;
. The lessee voluntarily ceases to operate the hotel for 30 consecutive
days, except as a result of a casualty, condemnation or emergency
situation;
. A change in control of Crestline, the lessee or any subsidiary of
Crestline that is a direct or indirect parent of the lessee. Unless the
change in control involves an adverse party which would include a
competitor in the hotel business, a party without adequate financial
resources, a party that has been convicted of a felony (or controlled by
such a person), or a party who would jeopardize our qualification as a
REIT, the lessor must pay a termination fee equal to the lessee's
operating profit from the hotel for the immediately preceding fiscal
year; or
. The lessee, the lessee's direct parent or Crestline defaults under the
assignment of management agreement, the guarantees described above, the
non-competition agreement described below or certain other related
agreements between the parties or their affiliates.
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Assignment of lease. A lessee is permitted to sublet all or part of the
hotel or assign its interest under its lease, without the consent of the
lessor, to any wholly owned and controlled single purpose subsidiary of
Crestline, provided that Crestline continues to meet the minimum net worth
test and all other requirements of the lease. Transfers to other parties are
permitted if approved by the lessor.
Subordination to qualifying mortgage debt. The rights of each lessee are
expressly subordinate to qualifying mortgage debt and any refinancing thereof.
A default under the loan documents may result in the termination of the lease
by the lender. The lender is not required to provide a non-disturbance
agreement to the lessee.
The lessor is obligated to compensate the lessee, on a basis equal to the
lease termination provision described in "--Termination of Leases upon
Disposition of Hotels" above, if the lease is terminated because of a non-
monetary default under the terms of a loan that occurs because of an action or
omission by the lessor (or its affiliates) or a monetary default where there
is not an uncured monetary event of default of the lessee. In addition, if any
loan is not refinanced in a timely manner, and the loan amortization schedule
is converted to a cash flow sweep structure, the lessee has the right to
terminate the lease after a twelve-month cure period and the lessor would owe
a termination fee as provided above. During any period of time that a cash
flow sweep structure is in effect, the lessor must compensate the lessee for
any lost revenue resulting from such cash flow sweep. The operating
partnership has guaranteed these obligations.
Personal property limitation. If a lessor reasonably anticipates that the
average tax basis of the items of the lessor's FF&E and other personal
property that are leased to the applicable lessee will exceed 15% of the
aggregate average tax basis of the real and personal property subject to the
applicable lease, the following procedures would apply, subject to obtaining
lender consent where required:
. The lessor would acquire any replacement FF&E that would cause the
applicable limits to be exceeded, and immediately thereafter the lessee
would be obligated either to acquire such excess FF&E from the lessor or
to cause a third party to purchase such FF&E.
. The lessee would agree to give a right of first opportunity to a non-
controlled subsidiary of the operating partnership to acquire the excess
FF&E and to lease the excess FF&E to the lessee at an annual rental equal
to the market leasing factor times the cost of the excess FF&E. If such
non-controlled subsidiary does not agree to acquire the excess FF&E and
to enter into such lease, then the Lessee may either acquire the excess
FF&E itself or arrange for another third party to acquire such excess
FF&E and to lease the same to the lessee.
. The annual rent under the applicable lease would be reduced in accordance
with a formula based on market leasing rates for the excess FF&E.
Certain actions under the leases. The leases prohibit the lessee from taking
the following actions with respect to the management agreement without notice
to the lessor and, if the action would have a material adverse effect on the
lessor, the consent of the lessor:
. terminate the management agreement prior to the expiration of the term
thereof;
. amend, modify or assign the management agreement;
. waive (or fail to enforce) any right of the "owner" under the management
agreement;
. waive any breach or default by the manager under the management agreement
(or fail to enforce any right of the "owner" in connection therewith);
. agree to any change in the manager or consent to any assignment by the
manager; or
. take any other action which reasonably would be expected to materially
adversely affect the lessor's rights or obligations under the management
agreement for periods following the termination of the lease (whether
upon the expiration of its term or upon earlier termination as provided
for therein).
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Change in manager. A lessee is permitted to change the manager or the brand
affiliation of a hotel only with the approval of the applicable lessor, which
approval may not be unreasonably withheld. Any replacement manager must be a
nationally recognized manager with substantial experience in managing hotels
of comparable quality. No such replacement can extend beyond the term of the
lease without the consent of the lessor, which consent may be withheld in the
lessor's sole discretion.
The Management Agreements
General
The lessees lease the hotels from the operating partnership or its
subsidiaries. Upon leasing the hotels, the lessees assumed substantially all
of the obligations of such subsidiaries under the management agreements
between those entities and the subsidiaries of Marriott International and
other companies that currently manage the hotels. As a result of their
assumptions of obligations under the management agreements, the lessees have
substantially all of the rights and obligations of the "owners" of the hotels
under the management agreements for the period during which the leases are in
effect (including the obligation to pay the management and other certain fees
thereunder) and hold the operating partnership harmless with respect thereto.
The subsidiaries of the operating partnership remain liable for all
obligations under the management agreements. See "--Management Services
Provided by Marriott International and Affiliates," "--Assignment of
Management Agreements".
Management services provided by Marriott International and affiliates
General. Under each management agreement related to a Marriott
International-managed hotel, the manager provides complete management services
to the applicable lessees in connection with its management of such lessee's
hotels.
Operational services. The managers have sole responsibility and exclusive
authority for all activities necessary for the day-to-day operation of the
hotels, including establishment of all room rates, the processing of
reservations, procurement of inventories, supplies and services, periodic
inspection and consultation visits to the hotels by the managers' technical
and operational experts and promotion and publicity of the hotels. The manager
receives compensation from the lessee in the form of a base management fee and
an incentive management fee, which are normally calculated as percentages of
gross revenues and operating profits, respectively.
Executive supervision and management services. The managers provide all
managerial and other employees for the hotels; review the operation and
maintenance of the hotels; prepare reports, budgets and projections; provide
other administrative and accounting support services, such as planning and
policy services, financial planning, divisional financial services, risk
planning services, product planning and development, employee planning,
corporate executive management, legislative and governmental representation
and certain in-house legal services; and protect the "Marriott" trademark and
other tradenames and service marks. The manager also provides a national
reservations system.
Chain services. The management agreements require the manager to furnish
chain services that are furnished generally on a central or regional basis to
hotels in the Marriott hotel system. Such services include: (1) the
development and operation of computer systems and reservation services, (2)
regional management and administrative services, regional marketing and sales
services, regional training services, manpower development and relocation
costs of regional personnel and (3) such additional central or regional
services as may from time to time be more efficiently performed on a regional
or group level. Costs and expenses incurred in providing such services are
allocated among all hotels in the Marriott hotel system managed by the manager
or its affiliates and each applicable lessee is required to reimburse the
manager for its allocable share of such costs and expenses.
Working capital and fixed asset supplies. The lessee is required to maintain
working capital for each hotel and fund the cost of fixed asset supplies,
which principally consist of linen and similar items. The applicable lessee
also is responsible for providing funds to meet the cash needs for the
operations of the hotels if at any time the funds available from operations
are insufficient to meet the financial requirements of the hotels.
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Use of affiliates. The manager employs the services of its affiliates to
provide certain services under the management agreements. Certain of the
management agreements provide that the terms of any such employment must be no
less favorable to the applicable lessee, in the reasonable judgment of the
manager, than those that would be available from the manager.
FF&E replacements. The management agreements generally provide that once
each year the manager will prepare a list of FF&E to be acquired and certain
routine repairs that are normally capitalized to be performed in the next year
and an estimate of the funds necessary therefor. Under the terms of the
leases, the lessor is required to provide to the applicable lessee all
necessary FF&E for the operation of the hotels (including funding any required
FF&E replacements). For purposes of funding the FF&E replacements, a specified
percentage (generally 5%) of the gross revenues of the hotel is deposited by
the manager into a book entry account. These amounts are treated under the
leases as paid by the lessees to the lessor and will be credited against their
rental obligations. If the manager determines that more than 5% of the gross
revenues of the hotel is required to fund repairs for a certain period, the
manager may increase the percentage of gross revenues to be deposited into the
FF&E reserve account for such periods. In such event, the lessor may elect to
fund such increases through annual increases in the amount deposited by the
manager in the FF&E reserve account or to make a lump-sum contribution to the
FF&E reserve account of the additional amounts required. If the lessor adopts
the first election, the deductions are credited against the rental obligations
of the lessee. If the lessor fails to elect either option within thirty days
of the request for additional funds or fails to pay the lump-sum within 60
days of its election to do so, the manager may terminate the management
agreement. Under certain circumstances, the manager may make repairs in
addition to those set forth on its list, but in no event may it expend more
than the amount in the FF&E reserve account without the consent of the
operating partnership and the lessee.
Under certain of the management agreements, the lessor must approve the FF&E
replacements, including any FF&E replacements proposed by the manager that are
not contained on the annual list which was approved by the lessor and the
lessee. If the manager and the lessor agree, the lessor would acquire or
otherwise provide the FF&E replacements set forth on the approved list. If the
lessor and the manager are unable to agree on the list within 60 days of its
submission, the lessor would be required to make only those FF&E replacements
specified on such list that are no more extensive than the system standards
for FF&E replacements that the manager requires for Marriott hotels. For
purposes of funding the FF&E replacements required to be paid for by the
operating partnership, each management agreement and the lessor's loan
agreements require the lessor to deposit a designated amount into the FF&E
reserve account periodically. The lessees have no obligation to fund the FF&E
reserve accounts (and any amounts deposited therein by the manager from funds
otherwise due the lessee under the management agreement will be credited
against the lessee's rental obligation).
Under each lease, the lessor is responsible for the costs of FF&E
replacements and for decisions with respect thereto (subject to its
obligations to the lessee under the lease).
Building alterations, improvements and renewals. The management agreements
require the manager to prepare an annual estimate of the expenditures
necessary for major repairs, alterations, improvements, renewals and
replacements to the structural, mechanical, electrical, heating, ventilating,
air conditioning, plumbing and vertical transportation elements of each hotel.
Such estimate must be submitted to the lessor and the lessee for their
approval. In addition to the foregoing, the management agreements generally
provide that the manager may propose such changes, alterations and
improvements to the hotel as are required, in the manager's reasonable
judgment, to keep the hotel in a competitive, efficient and economical
operating condition or in accordance with Marriott standards. The cost of the
foregoing is paid from the FF&E reserve account; to the extent that there are
insufficient funds in such account, the operating partnership is required to
pay any shortfall. Under the management agreements (and the leases), neither
the lessor nor the lessee may unreasonably withhold consent to repairs and
other changes which are required under applicable law or any of the manager's
"life-safety" standards and, if the lessor and the lessee fail to approve any
of the other proposed repairs or other changes within 75 days of the request
therefor, the manager may terminate the management agreement. Under certain of
the other management agreements, if the lessor and the manager are unable to
agree on the estimate within 60 days of its submission, the lessor is required
to make only those expenditures that are no more extensive than the
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<PAGE>
manager requires for Marriott hotels generally, as the case may be. Under the
terms of the leases, the lessor is responsible for the costs of the foregoing
items and for decisions with respect thereto (subject to its obligations to
the lessees under the leases).
Service marks. During the term of the management agreements, the service
mark "Marriott" and other symbols, logos and service marks currently used by
the manager and its affiliates may be used in the operation of the hotels.
Marriott International (or its applicable affiliates) intends to retain its
legal ownership of these marks. Any right to use the service marks, logo and
symbols and related trademarks at a hotel will terminate with respect to that
hotel upon termination of the management agreement with respect to such hotel.
Termination fee. Certain of the management agreements provide that if the
management agreement is terminated prior to its full term due to casualty,
condemnation or the sale of the hotel, the manager would receive a termination
fee as specified in the specific management agreement. Under the leases, the
responsibility for the payment of any such termination fee as between the
lessee and the lessor depends upon the cause for such termination.
Termination for failure to perform. Most of the management agreements may be
terminated based upon a failure to meet certain financial performance
criteria, subject to the manager's right to prevent such termination by making
certain payments to the lessee based upon the shortfall in such criteria.
Events of default. Events of default under the management agreements
include, among others, the following:
. the failure of either party to make payments pursuant to the management
agreement within ten days after written notice of such nonpayment has
been made;
. the failure of either party to perform, keep or fulfill any of the
covenants, undertakings, obligations or conditions set forth in the
management agreement and the continuance of such default for a period of
30 days after notice of said failure or, if such default is not
susceptible of being cured within 30 days, the failure to commence said
cure within 30 days or the failure thereafter diligently to pursue such
efforts to completion;
. if either party files a voluntary petition in bankruptcy or insolvency or
a petition for reorganization under any bankruptcy law or admits that it
is unable to pay its debts as they become due;
. if either party consents to an involuntary petition in bankruptcy or
fails to vacate, within 90 days from the date of entry thereof, any order
approving an involuntary petition by such party; or
. if an order, judgment or decree by any court of competent jurisdiction,
on the application of a creditor, adjudicating either party as bankrupt
or insolvent or approving a petition seeking reorganization or appointing
a receiver, trustee, or liquidator of all or a substantial part of such
party's assets is entered, and such order, judgment or decree continues
unstayed and in effect for any period of 90 days.
As described above, all fees payable under the management agreements are
obligations of the lessees, to be paid by the lessees for so long as the
leases remain in effect. The lessees' obligations to pay these fees, however,
could adversely affect the ability of one or more lessees to pay base rent or
percentage rent payable under the leases, even though such amounts otherwise
are due and owing to the lessor. Moreover, the operating partnership remains
obligated to the manager to the extent the lessee fails to pay these fees.
Assignment of management agreements. The management agreements applicable to
each hotel have been assigned to the applicable lessee for the term of the
lease of such hotel. The lessee is obligated to perform all of the obligations
of the lessor under the management agreement during the term of its lease,
other than certain retained obligations including, without limitation, payment
of real property taxes, property casualty insurance and ground rent, and
maintaining a reserve fund for FF&E replacements and capital expenditures, for
which the lessor retains responsibility. Although the lessee has assumed
obligations of the lessor under the management agreement, the lessor is not
released from its obligations and, if the lessee fails to perform any
obligations, the
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manager will be entitled to seek performance by or damages from the lessor. If
the lease is terminated for any reason, any new or successor lessee must meet
certain requirements for an "approved lessee" or otherwise be acceptable to
Marriott International. The requirements for an "approved lessee" include that
the entity:
. has sufficient financial resources and liquidity to fill the obligations
under the management agreement;
. is not in control of or controlled by persons who have been convicted of
felonies;
. is not engaged, or affiliated with any person or entity engaged in the
business of operating a branded hotel chain having 5,000 or more guest
rooms in competition with Marriott International; and
. must be a single purpose entity in which Marriott International has a
non-economic membership interest with the same rights as it has in the
current lessee.
Any new lease must be in substantially the same form as the current lease or
otherwise be acceptable to Marriott International.
Non-competition agreements
Pursuant to a non-competition agreement entered into in connection with the
leases, Crestline has agreed, among other things, that until the earlier of
December 31, 2008 and the date on which it is no longer a lessee for more than
25% of the number of the hotels owned by us on December 29, 1998, it will not
(1) own, operate or otherwise control (as owner or franchisor) any full-
service hotel brand or franchise, or purchase, finance or otherwise invest in
full-service hotels, or act as an agent or consultant with respect to any of
the foregoing activities, or lease or manage full-service hotels (other than
hotels owned by the operating partnership) if its economic return therefrom
would be more similar to returns derived from ownership interests in such
hotels except for acquisitions of property used in hotels as to which a
subsidiary of Crestline is the lessee, investments in full-service hotels
which represent an immaterial portion of a merger or similar transaction or a
minimal portfolio investment in another entity, limited investments (whether
debt or equity) in full-service hotels as to which a subsidiary of Crestline
is the lessee or activities undertaken with respect to its business of
providing asset management services to hotel owners, or (2) without our
consent, manage any of the hotels owned by the operating partnership, other
than to provide asset management services.
We have agreed with Crestline, among other things, that, (1) until December
31, 2003, we will not purchase, finance or otherwise invest in senior living
communities, or act as an agent or consultant with respect to any of the
foregoing activities (except for acquisitions of communities which represent
an immaterial portion of a merger or similar transaction or for minimal
portfolio investments in other entities) and (2) until the earlier of December
31, 2008 and the date on which subsidiaries of Crestline are no longer lessees
for more than 25% of the number of the hotels owned by Host Marriott on
December 29, 1998, we will not lease, as tenant or subtenant, limited- or
full-service hotel properties from any "real estate investment trust" within
the meaning of Sections 856 through 859 of the Internal Revenue Code where it
will not be the operator or manager of the hotel (other than through a
contractual arrangement with a non-affiliated party) and where its rental
payments qualify as "rents from real property" within the meaning of Section
856(d) of the Internal Revenue Code, or purchase, finance or otherwise invest
in persons or entities which engage in any of the foregoing activities, or act
as an agent or consultant with respect to any of the foregoing activities
(except for acquisitions of entities which engage in any of the foregoing
activities where the prohibited activities represent an immaterial portion of
a merger or similar transaction, or minimal portfolio investments in other
entities which engage in any of the foregoing activities, or certain leasing
arrangements existing on December 29, 1998 or entered into in the future
between us and certain other related parties, or by our management of any
hotels in which it has an equity interest). In addition, both Crestline and we
have agreed not to hire or attempt to hire any of the other company's senior
employees at any time prior to December 31, 2000.
We entered into a noncompetition agreement with Marriott International that
defines our rights and obligations with respect to certain businesses operated
by each of us. Crestline became an additional party to this agreement at the
time its shares were distributed to our stockholders. At that time, we also
entered into an
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agreement with Crestline under which we agreed with Crestline about the
allocation between us of the rights to engage in certain activities permitted
under the agreement with Marriott International. In general, until October 8,
2000, we and our subsidiaries are prohibited from entering into or acquiring
any business that competes with the hotel management business (i.e., managing,
operating or franchising full-service or limited-service hotels) as conducted
by Marriott International. Pursuant to this agreement, we cannot (1) operate
any hotel under a common name with any other hotel we operate or with any
hotel operated by Crestline, (2) have a manager (other than Marriott
International or one of its affiliates) manage any limited-service hotel for
us under a common name with any other limited-service hotel managed by such
manager for use or for Crestline, (3) have a manager (other than Marriott
International or one of its affiliates) manage more than the greater of (a) 10
full-service hotels under a common name which is a brand other than "Delta,"
"Four Seasons," "Holiday Inn," "Hyatt" and "Swissotel" (the "Existing Brands")
or (b) 25% of any system operated by such manager under a common name which is
not an Existing Brand, (4) have a manager (other than Marriott International
or one of its affiliates) manage more than the greater of (a) 5 full-service
hotels under a common name which is an Existing Brand or (b) 12.5% of any
system operated by such manager under a common name which is an Existing
Brand, (5) franchise as franchisor any limited-service hotel under a common
name with any other limited-service hotel for which we or Crestline is a
franchisor or (6) franchise as franchisor more than 10 full-service hotels
under a common name.
Item 3. Legal Proceedings
In connection with the REIT Conversion, the operating partnership assumed
all liability arising under legal proceedings filed against us and will
indemnify us as to all such matters. We believe all of the lawsuits in which
we are a defendant, including the following lawsuits, are without merit and we
intend to defend vigorously against such claims; however, no assurance can be
given as to the outcome of any of the lawsuits.
Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in
several limited partnerships sponsored by us filed a lawsuit, Robert M. Haas,
Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott International, Inc.,
et al., Case No. 98-CI-04092, in the 57th Judicial District Court of Bexar
County, Texas, alleging that the defendants conspired to sell hotels to the
partnerships for inflated prices and that they charged the partnerships
excessive management fees to operate the partnerships' hotels. The plaintiffs
further allege that the defendants committed fraud, breached fiduciary duties
and violated the provisions of various contracts. The plaintiffs are seeking
unspecified damages. On March 18, 1999, two limited partners in Courtyard by
Marriott Limited Partnership filed a class action petition in intervention
seeking to convert the lawsuit into a class action. The court has not yet
ruled on this petition.
Atlanta Marquis. Certain limited partners of Atlanta Marriott Marquis
Limited Partnership ("AMMLP") filed a putative class action lawsuit, Hiram and
Ruth Sturm v. Marriott Marquis Corporation, et al., Case No. 97-CV-3706, in
the U.S. District Court for the Northern District of Georgia, on December 12,
1997 against AMMLP's general partner, its directors and us, regarding the
merger of AMMLP into a new partnership as part of the refinancing of AMMLP's
debt. The plaintiffs allege that the defendants misled the limited partners in
order to induce them to approve the AMMLP merger, violated securities
regulations and federal roll-up regulations and breached their fiduciary
duties to the partners. The plaintiffs sought to enjoin, or in the
alternative, rescind the AMMLP merger and damages. The partnership agreement
includes provisions which require AMMLP to indemnify the general partners
against losses, expenses and fees. On November 13, 1998, the court dismissed
all of the federal securities law claims and retained jurisdiction over the
state law claims for breach of fiduciary duty and breach of contract.
Another limited partner of AMMLP sought similar relief and filed a separate
lawsuit, styled Poorvu v. Marriott Marquis Corporation, et al., Civil Action
No. 16095-NC, on December 19, 1997, in Delaware State Chancery Court. The
defendants have filed an answer to the complaint.
Courtyard II. A group of partners in Courtyard by Marriott II Limited
Partnership ("CBM II") filed a lawsuit, Whitey Ford, et al. v. Host Marriott
Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in the
34
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285th Judicial District Court of Bexar County, Texas, against us, Marriott
International and others alleging breach of fiduciary duty, breach of
contract, fraud, negligent misrepresentation, tortious interference, violation
of the Texas Free Enterprise and Antitrust Act of 1983 and conspiracy in
connection with the formation, operation and management of CBM II and its
hotels. The plaintiffs are seeking unspecified damages. On January 29, 1998,
two other limited partners filed a petition in intervention seeking to convert
the lawsuit into a class action. The defendants have filed an answer, the
class has been certified, class counsel has been appointed, and discovery is
underway. On March 11, 1999, Palm Investors, L.L.C., the assignee of a number
of limited partnership units acquired through various tender offers, filed a
plea in intervention to bring additional claims relating to the 1993 split of
Marriott Corporation and to the 1995 refinancing of CBM II's indebtedness.
This plea also seeks the addition of Ernst & Young, L.L.P. and E&Y Kenneth
Leventhal Real Estate Services Co. as additional defendants for their
appraisal role in the 1995 refinancing. The original plaintiffs subsequently
filed a second amended complaint on March 19, 1999.
MHP II. Limited partners of Marriott Hotel Properties II Limited Partnership
("MHP II") are asserting putative class claims in lawsuits filed in Palm Beach
County Circuit Court on May 10, 1996, Leonard Rosenblum, as Trustee of the
Sylvia Bernice Rosenblum Trust, et al. v. Marriott MHP Two Corporation, et
al., Case No. CL-96-4087-AD, and, in Delaware State Chancery Court on April
24, 1996, Cary W. Salter, Jr., et al. v. MHP II Acquisition Corp., et al.,
respectively, against us and certain of our affiliates alleging that the
defendants violated their fiduciary duties and engaged in fraud and coercion
in connection with the tender offer for MHP II units.
The defendants removed the Florida action to the United States District
Court for the Southern District of Florida and, after hearings on various
procedural motions, the District Court remanded the case to state court on
July 25, 1998. The defendants then filed motions to dismiss Rosenblum's fifth
amended complaint or, in the alternative, to deny class certification in the
state court case. The state court held a hearing on these motions on October
27, 1998 but did not issue a ruling at that time. Thereafter, and prior to any
ruling on the defendants' motions, Rosenblum filed a motion seeking leave to
file a sixth amended complaint adding allegations relating to the partnership
merger of MHP II and adding additional plaintiffs. On February 2, 1999, the
court granted Rosenblum's motion to file an amended complaint and denied as
moot the defendants' motion to dismiss the earlier complaint.
On June 12, 1996, the Delaware Chancery Court entered an order denying the
Delaware plaintiffs' application to enjoin the tender offer for MHP II units.
The Delaware plaintiffs subsequently moved to voluntarily dismiss the Delaware
action. The Chancery Court granted this motion, but with the proviso that the
plaintiffs could only refile in the Florida federal action. After the District
Court's remand of the Rosenblum case to Florida state court, two of the three
original Delaware plaintiffs asked the Chancery Court to reconsider its order
granting their voluntary dismissal. The Chancery Court refused to allow the
plaintiffs to join the Rosenblum action in Florida and, instead, reinstated
the Delaware case, now styled In Re Marriott Hotel Properties II Limited
Partnership Unitholders Litigation, Consolidated Civil Action No. 14961. On
January 29, 1999, Cary W. Slater alone filed an Amended Consolidated Class
Action Complaint in the Delaware action, adding allegations relating to the
partnership merger of MHP II. As a result of these recent developments in the
Delaware case, the defendants filed a motion to stay the Florida action. The
Florida court denied this motion, and the defendants have appealed to the
Fourth District Court of Appeal of Florida.
Potomac Hotel Limited Partnership. On July 15, 1998, one limited partner in
Potomac Hotel Limited Partnership, or PHLP, filed a class action lawsuit
styled Michael C. deBerardinis v. Host Marriott Corporation, Civil Action No
WMN 98-2263, in the United States District Court for the District of Maryland.
The plaintiff alleged that we misled PHLP's limited partners in order to
induce them into approving the sale of one of PHLP's hotels, violated the
securities regulations by issuing a false and misleading consent solicitation
and breached fiduciary duties and the partnership agreement. The complaint
sought unspecified damages. On February 16, 1999, the District Court dismissed
the federal securities claims with prejudice and the state law claims without
prejudice. On March 9, 1999, the plaintiff filed a class action complaint in
Montgomery County, Maryland
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Circuit Court in a case styled Michael C. deBerardinis v. Host Marriott
Corporation, Civil No. 197694-V, to further pursue the state law claims.
Item 4. Submission of matters to a vote of security holders
On December 15, 1998, a special meeting of the stockholders of our
predecessor, Host Marriott Corporation (a Delaware corporation) was held. At
this meeting, the stockholders approved an agreement and plan of merger which
included, among other things, the re-incorporation from Delaware to Maryland
by means of a merger of Host Marriott Corporation with and into us. The
stockholders present, either in person or by proxy, voted as follows:
168,147,578 for the agreement and plan of merger; 587,073 against the
agreement and plan of merger; and 952,151 abstained.
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PART II
Item 5. Market for our common stock and related stockholder matters
Our common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange and
is traded under the symbol "HMT." The following table sets forth, for the
fiscal periods indicated, the high and low sales prices per share of the
common stock as reported on the New York Stock Exchange Composite Tape. We did
not declare any cash dividends on the common stock during the two fiscal years
ended January 2, 1998. Host Marriott declared a special stock and cash
dividend on December 18, 1998, in conjunction with the REIT conversion, and
payable in February 1999 to stockholders of record on December 28, 1998. (See
Note 2 to the consolidated financial statements for further discussion). The
common stock prices listed below have not been adjusted for the special stock
dividend as the effect is immaterial. On December 29, 1998, we spun off to our
shareholders one share of Crestline for every ten shares of our common stock
held. Crestline primarily represented the assets and liabilities of our senior
living communities. (See Note 2) As a result of the REIT conversion, we are
required to use available funds to pay dividends to the extent of 95% of
taxable income in order to maintain our REIT qualification. We have indicated
an intent to pay dividends equal to 100% of taxable income for each year.
Payment of these dividends is expected to be funded by distributions from the
operating partnership. To the extent that the operating partnership's cash
flow is not sufficient to make distributions to holders of OP Units in an
amount sufficient so that we can pay such dividends, the operating partnership
may be required to borrow money to pay such dividends. As of March 19, 1999,
there were approximately 53,000 holders of record of common stock and
approximately 2,900 holders of record of OP Units (each of which is
convertible into common stock on a one-for-one basis or the cash equivalent
thereof, at our option, beginning at various times in the future, but no later
than January 2000).
<TABLE>
<CAPTION>
High Low
--------- --------
<S> <C> <C>
1997
1st Quarter............................................. $18 3/4 $15 3/4
2nd Quarter............................................. 18 1/8 15 1/4
3rd Quarter............................................. 20 13/16 17 1/2
4th Quarter............................................. 23 3/4 18 1/16
1998
1st Quarter............................................. $20 9/16 $17 1/2
2nd Quarter............................................. 22 1/8 17
3rd Quarter............................................. 19 12 9/16
4th Quarter............................................. 15 7/16 10
</TABLE>
For several technical reasons relating to the federal income tax law, our
ability to qualify as a REIT under the Internal Revenue Code is facilitated by
limiting the number of shares of our stock that a person may own. Primarily
because the Board of Directors believes it is desirable for us to qualify as a
REIT, our Articles of Incorporation provide that, subject to certain limited
exceptions, no person or persons acting as a group may own, or be deemed to
own by virtue of the attribution provisions of the Internal Revenue Code, more
than
. 9.8% of the lesser of the number or value of shares of common stock
outstanding; or
. 9.8% of the lesser of the number or value of the issued and outstanding
preferred or other shares of any class or series of our stock.
The Board of Directors has the authority to increase the ownership limit
from time to time, but does not have the authority to do so to the extent that
after giving effect to such increase, five beneficial owners of capital stock
could beneficially own in the aggregate more than 49.5% of the outstanding
capital stock. These limitations on the ownership of our stock could have the
effect of delaying, deferring or preventing a takeover or other transaction in
which holders of some, or a majority, of the common stock might receive a
premium for their common stock over the then prevailing market price or which
such holders might believe to be otherwise in their best interest.
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Item 6. Selected Financial Data
The following table presents certain selected historical financial data
which has been derived from our audited consolidated financial statements for
the five most recent fiscal years ended December 31, 1998. The 1998 and 1997
financial information reflects the discontinued operations related to the
spin-off of Crestline in conjunction with the REIT conversion.
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------
1998(3) 1997(3) 1996(1) 1995(2) 1994(3)
------- ------- ------- ------- -------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues............................. $3,513 $2,823 $1,957 $1,362 $1,011
Operating profit before minority
interest, corporate expenses and
interest............................ 661 432 233 114 152
Income (loss) from continuing
operations.......................... 194 47 (13) (62) (13)
Income (loss) before extraordinary
items............................... 195 47 (13) (123) (19)
Net income (loss)(4)................. 47 50 (13) (143) (25)
Basic earnings (loss) per common
share:(5)
Income (loss) from continuing
operations........................ .90 .22 (.06) (.36) (.08)
Income (loss) before extraordinary
items............................. .91 .22 (.06) (.72) (.12)
Net income (loss)(4)............... .22 .23 (.06) (.84) (.15)
Diluted earnings (loss) per common
share:(5)
Income (loss) from continuing
operations........................ .84 .22 (.06) (.36) (.08)
Income (loss) before extraordinary
items............................. .85 .22 (.06) (.72) (.12)
Net income (loss)(4)............... .27 .23 (.06) (.84) (.15)
Cash dividends declared per common
share............................... 1.00 -- -- -- --
Balance Sheet Data:
Total assets(6)...................... $8,268 $6,141 $5,152 $3,557 $3,366
Debt................................. 5,131 3,466 2,647 2,178 1,871
</TABLE>
- --------
(1) Fiscal year 1996 includes 53 weeks.
(2) Operating results for 1995 include a $10 million pre-tax charge to write
down the carrying value of five limited service properties to their net
realizable value and a $60 million pre-tax charge to write down an
undeveloped land parcel to its estimated sales value. In 1995, we
recognized a $20 million extraordinary loss, net of taxes, on the
extinguishment of debt.
(3) In 1998, we recognized a $148 million extraordinary loss, net of taxes, on
the extinguishment of debt. In 1997, we recognized a $3 million
extraordinary gain, net of taxes, on the extinguishment of certain debt.
In 1994, we recognized a $6 million extraordinary loss, net of taxes, on
the required redemption of senior notes.
(4) We recorded income from discontinued operations, net of taxes, of $6
million in 1998, as a result of the Distribution. We also recorded a loss
from discontinued operations, net of taxes, of $61 million in 1995 and $6
million in 1994, as a result of the spin-off of Host Marriott Services
Corporation. The 1995 loss from discontinued operations includes a pre-tax
charge of $47 million for the adoption of SFAS No. 121, "Accounting For
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of," a pre-tax $15 million restructuring charge and an extraordinary loss
of $10 million, net of taxes, on the extinguishment of debt.
(5) Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding. Diluted earnings (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding plus other dilutive securities. Diluted earnings (loss) per
share has not been adjusted for the impact of the Convertible Preferred
Securities for 1997 and 1996 and for the comprehensive stock plan and
warrants for 1994 through 1996, as they are anti-dilutive.
(6) Total assets includes $236 million related to Net Investment in
Discontinued Operations for 1997.
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Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Lack of Comparability Following the REIT Conversion
Because substantially all of our hotels are leased due to the REIT
conversion, we do not believe that the historical results of operations are
comparable to what our results of operations following the REIT conversion.
Therefore, in addition to the historical presentation, we have presented a
discussion of the results of operation on a pro forma basis as if the REIT
conversion had occurred on the first day of each respective year.
Results of Operations
Our historic revenues primarily represent gross property-level sales from
our hotels, net gains (losses) on property transactions and equity in the
earnings of affiliates.
On November 20, 1997, the Emerging Issues Task Force (or EITF) of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
We considered the impact of EITF 97-2 on our financial statements and
determined that EITF 97-2 required us to include property-level sales and
operating expenses of our hotels in the statements of operations. We have
given retroactive effect to the adoption of EITF 97-2 in the accompanying
consolidated statements of operations. Application of EITF 97-2 to the
consolidated financial statements for the fiscal years ended December 31,
1998, January 2, 1998 and January 3, 1997 increased both revenues and
operating expenses by approximately $2.1 billion, $1.7 billion and $1.2
billion, respectively, and had no impact on operating profit, net income or
earnings per share.
Our hotel operating costs and expenses have been, to a great extent, fixed.
Therefore, we have derived substantial operating leverage from increases in
revenue. This operating leverage was somewhat diluted, however, by the impact
of base management fees which were calculated as a percentage of sales,
variable ground lease payments and incentive management fees tied to operating
performance above certain established levels. Successful hotel performance
resulted in certain of our properties reaching levels which allowed the
manager to share in the growth of profits in the form of higher management
fees.
For the periods discussed below, our hotel properties experienced
substantial increases in REVPAR. REVPAR is a commonly used indicator of market
performance for hotels which represents the combination of the average daily
room rate charged and the average occupancy achieved. REVPAR does not include
food and beverage or other ancillary revenues generated by the property. The
REVPAR increase primarily reflects strong percentage increases in room rates,
while occupancy increases have been more moderate. Increases in average room
rates have generally been achieved by the managers through shifting
occupancies away from discounted group business to higher-rated group and
transient business and by selectively increasing room rates. This has been
made possible by increased travel due to improved economic conditions and by
the favorable supply/demand characteristics existing in the upscale and luxury
full-service segments of the lodging industry.
1998 Compared to 1997 (Historical)
Revenues. Revenues increased $0.7 billion, or 24%, to $3.5 billion for 1998
from $2.8 billion for 1997. Our revenue and operating profit were impacted by
improved results for comparable full-service hotel properties, the addition of
18 full-service hotel properties during 1997 and 36 full-service hotel
properties during 1998 and the gain on the sale of two hotel properties in
1998.
Hotel sales, which are gross hotel sales, including room sales, food and
beverage sales, and other ancillary sales such as telephone sales, increased
$0.6 billion, or 23%, to over $3.4 billion in 1998, reflecting the REVPAR
39
<PAGE>
increases for comparable units and the addition of full-service hotels in 1997
and 1998. Improved results for our full-service hotels were driven by strong
increases in REVPAR for our 78 comparable units of 7.3% to $112.39 for 1998.
Results were further enhanced by approximately one percentage point increase
in the house profit margin for comparable full-service properties. Average
room rates increased nearly 6.9% for our comparable full-service hotels.
As discussed in Note 2 to the financial statements, we spun off our senior
living communities. We have accounted for these revenues and expenses as
discontinued operations and has shown the amount, net of taxes, below income
from continuing operations. Revenues generated from our 31 senior living
communities totaled $241 million for 1998 compared to $111 million for 1997,
as the assets were purchased in the third quarter of 1997.
Revenues were also impacted by the gains on the sales of two hotels. The New
York East Side Marriott was sold for $191 million resulting in a pre-tax gain
of approximately $40 million. The Napa Valley Marriott was sold for $21
million resulting in a pre-tax gain of approximately $10 million.
Operating Costs and Expenses. Operating costs and expenses principally
consisted of property-level operating costs, depreciation, management fees,
real and personal property taxes, ground, building and equipment rent,
insurance and certain other costs. Operating costs and expenses increased $0.5
billion to $2.9 billion, primarily representing increased hotel operating
costs. Hotel operating costs increased $0.5 billion to $2.8 billion for 1998,
primarily due to the addition of 54 full-service hotel properties during 1997
and 1998 and increased management fees and rentals tied to improved property
results. As a percentage of hotel revenues, hotel operating costs and expenses
decreased slightly to 82% for 1998 from 84% of revenues for 1997, due to the
significant increases in REVPAR discussed above, offset by increases in
management fees and property-level operating costs, including higher labor
costs in certain markets.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, our operating profit increased $0.2 billion, or
53%, to $0.7 billion for 1998. For 1998, property-level operating profit
increased $0.2 billion, or 39%, to $0.6 billion, or 18% of hotel revenues, for
1998 compared to $0.4 billion, or 16% of hotel revenues, for 1997.
Specifically, hotels in New York City, San Francisco, Toronto and Mexico City
reported significant improvements for 1998 over 1997. Properties in Florida
reported some temporary declines in operating results due to exceptionally
poor weather in 1998.
Minority Interest. Minority interest expense increased $21 million to $52
million for 1998, primarily reflecting the impact of the consolidation of
affiliated partnerships and the acquisition of controlling interests in newly-
formed partnerships during 1997 and 1998.
Corporate Expenses. Corporate expenses increased $5 million to $50 million
for 1998. As a percentage of revenues, corporate expenses decreased to 1.4% of
revenues for 1998 from 1.6% in 1997, reflecting our efforts to control
corporate expenses in spite of the substantial growth in revenues.
REIT Conversion Expenses. REIT conversion expenses reflect the professional
fees, consent fees, and other expenses associated with our conversion to a
REIT and totaled $64 million for 1998. There were no REIT conversion expenses
prior to 1998.
Interest Expense. Interest expense increased 16% to $335 million in 1998,
primarily due to additional debt assumed in connection with the 1997 and 1998
full-service hotel additions as well as the issuance of the senior notes and
establishment of a new credit facility in 1998.
40
<PAGE>
Dividends on Convertible Preferred Securities of Subsidiary Trust. The
dividends on the convertible preferred securities reflect the dividends on the
$550 million in 6.75% Convertible Preferred Securities issued by a subsidiary
trust of Host Marriott in December 1996.
Interest Income. Interest income decreased $1 million to $51 million for
1998, primarily reflecting the lower level of cash and marketable securities
held in 1998 compared to 1997.
Discontinued Operations. Income from discontinued operations of $6 million
for 1998 represents the senior living communities' business results of
operations for the entire year. The provision for loss on disposal of $5
million for 1998 includes organizational and formation costs related to
Crestline Capital Corporation.
Income before Extraordinary Item. Income before extraordinary item for 1998
was $195 million, compared to $47 million for 1997.
Extraordinary Gain (Loss). In connection with the purchase in August 1998 of
our old senior notes, we recognized an extraordinary loss of $148 million,
which represents the bond premium and consent payments totaling approximately
$175 million and the write-off of deferred financing fees of approximately $52
million related to the old senior notes, net of taxes. In March 1997, we
purchased 100% of the outstanding bonds secured by a first mortgage on the San
Francisco Marriott Hotel. We purchased the bonds for $219 million, which was
an $11 million discount to the face value of $230 million. In connection with
the redemption and defeasance of the bonds, we recognized an extraordinary
gain of $5 million, which represents the $11 million discount and the write-
off of deferred financing fees, net of taxes. In December 1997, we refinanced
the mortgage debt secured by Marriott's Orlando World Center. In connection
with the refinancing, we recognized an extraordinary loss of $2 million, which
represents payment of a prepayment penalty and the write-off of unamortized
deferred financing fees, net of taxes.
Net Income (Loss). Net income for 1998 was $47 million compared to net
income of $50 million for 1997. Basic earnings (loss) per common share was
$.22 and $.23 for 1998 and 1997, respectively. Diluted earnings (loss) per
common share was $.27 and $.23 for 1998 and 1997, respectively.
1997 Compared to 1996 (Historical)
Revenues. Revenues increased $866 million, or 44%, to $2,823 million for
1997. Our revenues and operating profit were impacted by:
--improved lodging results for comparable full-service hotels;
--the addition of 23 full-service hotels during 1996 and 18 full-service
hotels during 1997;
--the 1996 sale and leaseback of 16 Courtyard properties and 18 Residence
Inns; and
--the 1997 results including 52 weeks versus 53 weeks in 1996.
Hotel sales increased $864 million, or 44%, to over $2,806 million in 1997,
reflecting the REVPAR increases for comparable units and the addition of full-
service properties during 1996 and 1997. Improved results for our full-service
hotels were driven by strong increases in REVPAR for comparable units of 12.6%
in 1997. Results were further enhanced by a more than two percentage point
increase in the house profit margin for comparable full-service properties. On
a comparable basis for our full-service properties, average room rates
increased almost 11%, while average occupancy increased over one percentage
point.
Operating Costs and Expenses. Operating costs and expenses increased $667
million to $2,391 million for 1997, primarily representing increased hotel
operating costs, including depreciation and management fees. Hotel operating
costs increased $676 million to $2,362 million, primarily due to the addition
of 41 full-service properties during 1996 and 1997, and increased management
fees and rentals tied to improved property results. As a percentage of hotel
revenues, hotel operating costs and expenses decreased to 84% of revenues for
1997, from 87% of revenues for 1996, reflecting the impact of increased 1997
revenues spread over relatively fixed operating costs and expenses.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, our operating profit increased $199 million, or
85%, to $432 million in 1997. Hotel operating profit increased
41
<PAGE>
$188 million, or 73%, to $444 million, or 16% of hotel revenues, for 1997
compared to $256 million, or 13% of hotel revenues, for 1996. In nearly all
markets, our hotels recorded improvements in comparable operating results. In
particular, our hotels in the Northeast, Mid-Atlantic and Pacific coast
regions benefited from the upscale and luxury full-service room supply and
demand imbalance. Hotels in New York City, Philadelphia, San Francisco/Silicon
Valley and Southern California performed particularly well. In 1997, our
suburban Atlanta properties (three properties totaling 1,022 rooms) generally
reported decreased results due to higher activity in 1996 related to the
Summer Olympics and the impact of the additional supply added to the suburban
areas. However, the majority of our hotel rooms in Atlanta are in the core
business districts in downtown and Buckhead where they realized strong year-
over-year results and were only marginally impacted by the additional supply.
Minority Interest. Minority interest expense increased $25 million to $31
million for 1997, primarily reflecting the impact of the consolidation of
affiliated partnerships and the acquisition of controlling interests in newly-
formed partnerships during 1996 and 1997.
Corporate Expenses. Corporate expenses increased $2 million to $45 million
in 1997. As a percentage of revenues, corporate expenses decreased to 1.6% of
hotel sales in 1997 from 2.2% of hotel sales in 1996. This reflects our
efforts to control corporate expenses in spite of the substantial growth in
revenues.
Interest Expense. Interest expense increased $51 million to $288 million in
1997, primarily due to the additional mortgage debt of approximately $1.1
billion assumed in connection with the 1996 and 1997 full-service hotel
additions, approximately $315 million in debt incurred in conjunction with the
acquisition of senior living communities, as well as the issuance of $600
million of 8 7/8% senior notes in July 1997.
Dividends on Convertible Preferred Securities of Subsidiary Trust. The
dividends on the convertible preferred securities reflect the dividends on the
$550 million in 6.75% Convertible Preferred Securities issued by a subsidiary
trust of Host Marriott in December 1996.
Interest Income. Interest income increased $4 million to $52 million for
1997, primarily reflecting the interest income on the available proceeds
generated by the December 1996 offering of convertible preferred securities
and the proceeds generated by the issuance of our 8 7/8% senior notes in July
1997.
Discontinued Operations. Income from discontinued operations was breakeven
in 1997. There were no discontinued operations in 1996.
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $47 million, compared to a $13 million loss before extraordinary
items for 1996, as a result of the items discussed above.
Extraordinary Gain (Loss). In March 1997, we purchased 100% of the
outstanding bonds secured by a first mortgage on the San Francisco Marriott
Hotel. We purchased the bonds for $219 million, which was an $11 million
discount to the face value of $230 million. In connection with the redemption
and defeasance of the bonds, we recognized an extraordinary gain of $5
million, which represents the $11 million discount less the write-off of
unamortized deferred financing fees, net of taxes. In December 1997, we
refinanced the mortgage debt secured by Marriott's Orlando World Center. In
connection with the refinancing, we recognized an extraordinary loss of $2
million, which represents payment of a prepayment penalty and the write-off of
unamortized deferred financing fees, net of taxes.
Net Income (Loss). Our net income in 1997 was $50 million, compared to a net
loss of $13 million in 1996. Basic and diluted earnings per common share was
$.23 for 1997, compared to a basic and diluted loss per common share of $.06
in 1996.
42
<PAGE>
1998 Compared to 1997 (Pro Forma)
<TABLE>
<CAPTION>
Pro Forma
--------------
1998 1997
------ ------
(in millions,
except
per share
amounts)
<S> <C> <C>
Revenues
Hotels...................................................... $1,264 $1,167
Other....................................................... 15 6
------ ------
Total revenues............................................ 1,279 1,173
------ ------
Operating costs and expenses
Hotels...................................................... 599 626
Other....................................................... 26 23
------ ------
Total operating costs and expenses........................ 625 649
------ ------
Operating profit.............................................. 654 524
Minority interest............................................. (23) (12)
Corporate expenses............................................ (50) (44)
Interest expense.............................................. (449) (446)
Dividends on Convertible Preferred Securities of subsidiary
trust........................................................ (37) (37)
Interest income............................................... 27 12
------ ------
Income (loss) from continuing operations before income taxes.. 122 (3)
Provision for income taxes.................................... (6) --
------ ------
Income (loss) from continuing operations...................... $ 116 $ (3)
====== ======
Basic earnings (loss) per common share from continuing
operations................................................... $ .51 $ (.01)
====== ======
Weighted average shares outstanding........................... 225.6 225.6
</TABLE>
Revenues. Revenues primarily represent lease revenues and net gains (losses)
on property transactions. Revenues increased $106 million, or 9%, to $1.3
billion for 1998 from $1.2 billion for 1997.
Improved results for our hotels were driven by strong increases in REVPAR of
7.4% to $110.93 for 1998, while average occupancy remained unchanged year over
year.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation, property taxes, ground rent, insurance and certain
other costs. Operating costs and expenses decreased $24 million to $625
million in 1998. As a percentage of rental revenues, hotel operating costs and
expenses decreased to 47% of rental revenues in 1998 from 54% of rental
revenues in 1997 due to the increase in minimum rent under our leases.
Operating Profit. As a result of the changes in rental revenues and
operating costs and expenses discussed above, our operating profit increased
$130 million, or 25%, to $654 million for 1998. Hotel operating profit
increased $124 million to $665 million, or 53% of rental revenues, for 1998
from $541 million, or 46% of rental revenues, for 1997. Our hotels recorded
significant improvements in comparable operating results. Specifically, hotels
in New York City, Boston, Toronto and Mexico reported significant improvements
for 1998. Properties in Florida reported some temporary declines in operating
results due to exceptionally poor weather in 1998.
Minority Interest. Minority interest expense increased $11 million to $23
million for 1998, primarily reflecting improved hotel operations.
Corporate Expenses. Corporate expenses increased $6 million to $50 million
for 1998 due to increased staffing levels and the impact of inflation.
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Interest Expense. Interest expense increased $3 million to $449 million in
1998, primarily due to amortization related to certain leases.
Dividends on Convertible Preferred Securities of Subsidiary Trust. The
dividends on convertible preferred securities reflect the dividends accrued on
the $550 million in 6.75% Convertible Preferred Securities issued by a
subsidiary trust in December 1996.
Interest Income. Interest income increased $15 million to $27 million for
1998, primarily due to interest income from excess cash and marketable
securities.
Income (Loss) from Continuing Operations. The income from continuing
operations for 1998 was $116 million, compared to a loss of $(3 million) for
1997.
Liquidity and Capital Resources
We fund our capital requirements with a combination of operating cash flow,
debt and equity financing and proceeds from sales of selected properties and
other assets. We utilize these sources of capital to acquire new properties,
fund capital additions and improvements and make principal payments on debt.
As a result of the REIT conversion, we are required to use available funds to
pay dividends to the extent of 95% of taxable income in order to maintain our
REIT qualification, and we have indicated an intent to pay dividends
equivalent to 100% of taxable income for each year. Payment of these dividends
is expected to be funded by the operating partnership. To the extent that the
operating partnership's cash flow is not sufficient for this purpose, it may
be required to borrow money to pay such dividends.
Capital Transactions. We substantially changed our debt financing through
the following series of transactions which were intended to facilitate the
consummation of the REIT conversion.
On April 20, 1998, we and certain of our subsidiaries filed a shelf
registration statement on Form S-3 with the Securities and Exchange Commission
for $2.5 billion in securities, including debt, equity or any combination
thereof. HMH Properties, Inc., then our wholly-owned subsidiary utilized $2.2
billion of the capacity under this shelf registration to issue the new senior
notes described further below.
On August 5, 1998, HMH Properties, which was merged into the operating
partnership as part of the REIT conversion, purchased substantially all of its
(i) $600 million of 9 1/2% senior notes due 2005, (ii) $350 million of 9%
senior notes due 2007 and (iii) $600 million of 8 7/8% senior notes due 2007.
Concurrently with each offer to purchase, HMH Properties solicited consents
from registered holders of these old senior notes to certain amendments to
eliminate or modify substantially all of the restrictive covenants and certain
other provisions contained in the indentures pursuant to which the old senior
notes were issued. HMH Properties simultaneously utilized the shelf
registration to issue an aggregate of $1.7 billion in new senior notes, in two
series: $500 million of 7 7/8% Series A notes due in 2005 and $1.2 billion of
7 7/8% Series B notes due in 2008.
The August 1998 consent solicitations facilitated the merger of HMC Capital
Resources Holdings Corporation, then our wholly-owned subsidiary, with and
into HMH Properties. HMC Capital Resources, the owner of eight of our hotel
properties, was the obligor under our old $500 million revolving credit
facility. In August 1998, HMH Properties entered into a new $1.25 billion
credit facility with a group of commercial banks, which replaced the old
credit facility. The credit facility provides (i) a $350 million term loan
facility, subject to certain increases, and (ii) a $900 million revolving
credit facility. The new credit facility has an initial three-year term with
two one-year extension options. Borrowings under the new credit facility
generally bear interest at the Eurodollar rate plus 1.75% (7.5% at December
31, 1998) and the interest rate and commitment fee on the unused portion of
the facility fluctuate based on certain financial ratios. As of December 31,
1998, $350 million was outstanding under the credit facility. The net proceeds
from the offering of the $1.7 billion senior notes and borrowings under the
credit facility were used to purchase substantially all of HMH Properties' old
senior notes, to repay amounts outstanding under the old credit facility and
to make bond premium and consent payments totaling $175 million. These costs,
along with the write-off of deferred financing fees of approximately $52
million related to the old senior notes and the old credit facility, were
recorded as a pre-tax extraordinary loss on the extinguishment of debt in
1998.
44
<PAGE>
In December 1998, HMH Properties issued $500 million of 8.45% Series C
senior notes due in 2008 under the same indenture and with the same covenants
as the Series A and Series B senior notes previously issued. The proceeds were
used to pay down other debt and pay expenses of the REIT conversion. HMH
Properties had a total of $2.2 billion in senior notes outstanding as of its
merger with the operating partnership on December 16, 1998. These senior
notes, and obligations under the new credit facility, became obligations of
the operating partnership at that time. In February 1999, the operating
partnership issued $300 million of 8 3/8% Series D senior notes due in 2006
under the same indenture and with the same covenants as the new senior notes
and Series C senior notes. The debt was used to refinance, or purchase,
approximately $299 million of debt acquired in the partnership mergers,
including approximately $40 million of other mortgage debt.
In July 1997, HMH Properties and HMC Acquisition Properties, Inc. each of
which is our wholly-owned subsidiary, completed consent solicitations with
holders of their senior notes to amend certain provisions of their senior
notes indentures. The 1997 consent solicitations facilitated the merger of
Acquisitions with and into HMH Properties. Concurrent with the 1997 consent
solicitations and the HMH Properties and Acquisitions merger, HMH Properties
issued an aggregate of $600 million of 8 7/8% senior notes at par with a
maturity of July 2007. HMH Properties received net proceeds of approximately
$570 million, net of the costs of the 1997 consent solicitations and the
offering. HMH Properties paid dividends to Host Marriott of $54 million and
$29 million in 1997 and 1996, respectively, as permitted under the indentures.
No dividends were paid in 1998.
In addition to the capital resources provided by its debt financings, in
December 1996 Host Marriott Financial Trust, one of our wholly-owned
subsidiary trusts, issued 11 million shares of 6 3/4% Convertible Quarterly
Income Preferred Securities, with a liquidation preference of $50 per share
for a total liquidation amount of $550 million. The convertible preferred
securities represent an undivided beneficial interest in the assets of the
trust and, pursuant to various agreements entered into in connection with the
transaction, are fully, irrevocably and unconditionally guaranteed by us.
Proceeds from the issuance of the convertible preferred securities were
invested in 6 3/4% Convertible Subordinated Debentures due December 2, 2026
issued by us, which are the trust's sole assets. Each of the convertible
preferred securities is convertible at the option of the holder into shares of
our common stock at the rate of 3.2537 shares per convertible preferred
security equivalent to a conversion price of $15.367 per share of our common
stock. This conversion ratio includes adjustments to reflect distributions
made to our common stockholders in connection with the REIT conversion. During
1998, 1997 and 1996, no shares were converted into common stock. Holders of
the convertible preferred securities are entitled to receive preferential
cumulative cash distributions at an annual rate of 6 3/4% accruing from the
original issue date, commencing March 1, 1997, and payable quarterly in
arrears thereafter. The distribution rate and the distribution and other
payment dates for the convertible preferred securities correspond to the
interest rate and interest and other payment dates on the convertible
subordinated debentures. We may defer interest payments on the convertible
subordinated debentures for a period not to exceed 20 consecutive quarters. If
interest payments on the convertible subordinated debentures are deferred, so
too are payments on the convertible preferred securities. Under this
circumstance, we would not be permitted to declare or pay any cash
distributions with respect to our capital stock or debt securities that rank
equal in right of payment with or junior to the convertible subordinated
debentures. Subject to certain restrictions, the convertible preferred
securities are redeemable at our option upon any redemption of the convertible
subordinated debentures after December 2, 1999. Upon repayment at maturity or
as a result of the acceleration of the convertible subordinated debentures
upon the occurrence of a default, the convertible preferred securities are
subject to mandatory redemption. We may, from time to time, make market
repurchases of these securities as conditions permit.
In connection with consummation of the REIT conversion, the operating
partnership assumed primary liability for repayment of the convertible
subordinated debentures, although we also retain liability. Upon conversion by
a convertible preferred securities holder, we will issue shares of our common
stock, which will be delivered to such holder. Upon the issuance of such
shares by Host Marriott, the operating partnership will issue to us a number
of OP Units equal to the number of shares of our common stock issued in
exchange for the debentures.
45
<PAGE>
In March 1996, we completed the issuance of 31.6 million shares of common
stock for net proceeds of nearly $400 million.
Capital Acquisitions, Additions and Improvements. We seek to grow primarily
through opportunistic acquisitions of full-service hotels. We believe that the
upscale and luxury full-service hotel segments of the market offer
opportunities to acquire assets at attractive multiples of cash flow and at
discounts to replacement value, including under-performing hotels which may be
improved by conversion to the Marriott or Ritz-Carlton brands. In the first
quarter of 1998, we acquired a controlling interest in the partnership that
owns the 1,671-room Atlanta Marriott Marquis Hotel for $239 million, including
the assumption of $164 million of mortgage debt. We also acquired a
controlling interest in the partnership that owns the 359-room Albany
Marriott, the 350-room San Diego Marriott Mission Valley and the 320-room
Minneapolis Marriott Southwest for approximately $50 million. In the second
quarter of 1998, we acquired the 289-room Park Ridge Marriott for $24 million
and acquired the 281-room Ritz-Carlton, Phoenix for $75 million. In addition,
we acquired the 397-room Ritz-Carlton, Tysons Corner, Virginia for $96 million
and the 487-room Torrance Marriott near Los Angeles, California, for $52
million. In the third quarter of 1998, we acquired the 308-room Ritz-Carlton,
Dearborn for approximately $65 million, the 336-room Ritz-Carlton, San
Francisco for approximately $161 million and the 404-room Memphis Crowne Plaza
(which was converted to the Marriott brand upon acquisition) for approximately
$16 million. We are regularly engaged in discussions with respect to other
potential acquisition properties.
In December 1998, we completed the acquisition of, or controlling interests
in, twelve world-class luxury hotels and certain other assets, including a
mortgage note on a thirteenth hotel property from affiliates of the Blackstone
Group. The operating partnership paid approximately $920 million in cash and
assumed debt and issued approximately 43.9 million OP Units, along with other
consideration for a total value of approximately $1.55 billion. The number of
OP Units issued in the Blackstone acquisition will fluctuate based upon
certain closing adjustments to be determined on March 31, 1999. Based on
current stock prices, the operating partnership will be required to issue the
Blackstone Entities approximately 3.7 million additional OP Units pursuant to
such adjustments in April 1999.
In December 1998, subsidiaries of the operating partnership merged with
eight public partnerships and acquired limited partnership interests in four
private partnerships, which collectively own or control 28 properties 15 of
which were controlled by us and consolidated on our financial statements prior
to December 1998. The operating partnership issued approximately 25 million OP
Units, 8.5 million of which were subsequently converted to our common stock,
for interests in these partnerships valued at approximately $333 million. As a
result of these transactions, the operating partnership increased its
ownership of most of the 28 properties to 100% while consolidating 13
additional hotels (4,445 rooms).
In connection with our conversion to a REIT, we formed two non-controlled
subsidiaries, which own approximately $264 million in assets. The ownership of
most of these assets by us and the operating partnership could jeopardize our
status as a REIT and the operating partnership's status as a partnership for
federal income tax purposes. These assets primarily consist of partnership or
other interests in hotels which are not leased and certain furniture, fixtures
and equipment used in the hotels. In exchange for the operating partnership's
contribution of these assets to the non-controlled subsidiaries, the operating
partnership received only nonvoting common stock representing 95% of the total
economic interests of the non-controlled subsidiaries. The Host Marriott
Statutory Employee/Charitable Trust, the beneficiaries of which are 1) a trust
formed for the benefit of certain employees of the operating partnership and
2) the J. Willard Marriott Foundation, acquired all of the voting common stock
representing the remaining 5% of the total economic interests, and reflecting
100% of the control of each non-controlled subsidiary. As a result, as of
December 31, 1998, we did not control the non-controlled subsidiaries.
During 1997, we acquired eight full-service hotels (3,600 rooms) and
controlling interests in nine additional full-service hotels (5,024 rooms) for
an aggregate purchase price of approximately $766 million (including the
assumption of approximately $418 million of debt). We also completed the
acquisition of the 504-room New
46
<PAGE>
York Marriott Financial Center, after acquiring the mortgage on the hotel for
$101 million in late 1996. During 1996, we acquired six full-service hotels
(1,964 rooms) for an aggregate purchase price of $189 million and controlling
interests in 17 additional full-service properties (8,917 rooms) for an
aggregate purchase price of approximately $1.1 billion (including the
assumption of $696 million of debt).
In November 1997, we announced a committment to develop and construct the
717-room Tampa Convention Center Marriott for a cost estimated at
approximately $88 million, net of an approximate $16 million subsidy provided
by the City of Tampa.
We may also expand existing hotel properties where strong performance and
market demand exists. Expansions to existing properties create a lower risk to
us as the success of the market is generally known and development time is
significantly shorter than new construction. We recently committed to add
approximately 500 rooms and an additional 15,000 square feet of meeting space
to the 1,503-room Marriott's Orlando World Center. In July 1998, we announced
the purchase of a 13-acre parcel of land for the development of a 295-room
Ritz-Carlton that will serve as an extension of the 463-room Ritz-Carlton
Naples, which was purchased in September 1996. The existing hotel just
completed a restaurant and public space refurbishment and is in the process of
adding a world-class spa. In addition, a subsidiary of one of the non-
controlled subsidiaries entered into a joint venture through which a non-
controlled subsidiary owns 49% of the surrounding 27-hole world-class Greg
Norman designed golf course development. The golf course joint venture was
transferred to a non-controlled subsidiary in connection with the REIT
conversion. The total investment by us in expansion and investments in the
Ritz-Carlton, Naples property is expected to be approximately $97 million.
In 1997, we acquired the outstanding common stock of the Forum Group from
Marriott Senior Living Services, Inc., a subsidiary of Marriott International.
We purchased the Forum Group portfolio of 29 senior living communities for
approximately $460 million, including approximately $270 million in debt.
Additionally, during 1997 and 1998, we completed certain expansions and
acquired two additional senior living properties for $100 million, including
$48 million of debt. The properties, which continued to be operated by
Marriott International were owned by a subsidiary of Crestline and distributed
to our shareholders in connection with the REIT conversion and are reflected
as discontinued operations in our financial statements. In December 1998, we
discontinued the senior living business as a result of the distribution of the
Crestline common stock to our shareholders.
Asset Dispositions. We historically have disposed of, and may from time to
time in the future consider opportunities to sell or exchange, real estate
properties at attractive valuations when the proceeds could be redeployed into
investments with more favorable returns. During the second quarter of 1998, we
disposed of the 662-room New York Marriott East Side for proceeds of $191
million and recorded a pre-tax gain of approximately $40 million and the Napa
Valley Marriott for proceeds of $21 million and recorded a pre-tax gain of
approximately $10 million. During 1997, we disposed of the 255-room Sheraton
Elk Grove Suites for proceeds of approximately $16 million. We also sold 90%
of an 174-acre parcel of undeveloped land in Germantown, Maryland for
approximately $11 million, which approximated its carrying value. During the
first and second quarters of 1996, 16 of our Courtyard properties and 18 of
our Residence Inn properties were sold, subject to a leaseback, to Hospitality
Properties Trust for approximately $314 million, with approximately $35
million to be received upon expiration of the leases. A gain on the
transactions of approximately $45 million was deferred and is being amortized
over the initial term of the leases. In February 1999, we disposed of the
Minneapolis/Bloomington Marriott for $35 million and recorded a pre-tax gain
on sale of approximately $13 million.
In cases where we have made a decision to dispose of particular properties,
we assess impairment of each individual property to be sold on the basis of
expected sales price less estimated costs of disposal. Otherwise, we assess
impairment of our real estate properties based on whether it is probable that
undiscounted future cash flows from such properties will be less than their
net book value. If a property is impaired, its basis is adjusted to its fair
market value.
47
<PAGE>
Cash Flows. Our cash flow from continuing operations in 1998, 1997 and 1996
totaled $312 million, $432 million and $205 million, respectively. Cash flow
from (used in) discontinued operations totaled $29 million, $32 million and
($4 million) in 1998, 1997 and 1996, respectively.
Our cash used in investing activities from continuing operations in 1998,
1997 and 1996 totaled $655 million, $807 million and $504 million,
respectively. Cash from investing activities primarily consists of net
proceeds from the sales of assets, offset by the acquisition of hotels and
other capital expenditures previously discussed, as well as the purchases and
sales of short-term marketable securities. Cash used in investing activities
from continuing operations was significantly impacted by the purchase of $354
million of short-term marketable securities in 1997 and the net sale of $354
million of short-term marketable securities in 1998. Cash flow from investing
activities from discontinued operations totaled $50 million and $239 million
in 1998 and 1997, respectively. There was no cash flow from (used in)
investing activities from discontinued operations in 1996.
Our cash from financing activities from continuing operations was $265
million for 1998, $392 million for 1997 and $806 million for 1996. Our cash
from financing activities from continuing operations primarily consists of the
proceeds from debt and equity offerings, mortgage financing on certain
acquired hotels and borrowings under our credit facilities offset by
redemptions and payments on senior notes, prepayments on hotel mortgages and
other scheduled principal payments. Cash flow from (used in) financing
activities from discontinued operations totaled $24 million and ($3 million)
in 1998 and 1997, respectively. There was no cash flow from (used in)
financing activities from discontinued operations in 1996.
EBITDA. Our consolidated earnings before interest, taxes, depreciation,
amortization and other non-cash items, which is referred to as EBITDA,
increased $180 million, or 25%, to $888 million in 1998 from $708 million in
1997.
Hotel EBITDA increased $180 million, or 26%, to $870 million in 1998 from
$690 million in 1997, reflecting comparable full-service hotel EBITDA growth,
as well as incremental EBITDA from 1997 and 1998 acquisitions. Full-service
hotel EBITDA from comparable hotel properties increased 9.6% on a REVPAR
increase of 7.3%. Our senior living communities contributed $61 million of
EBITDA in 1998.
The following is a reconciliation of EBITDA to our income before
extraordinary items (in millions):
<TABLE>
<CAPTION>
Fifty-two Fifty-two
Weeks Ended Weeks Ended
December 31, 1998 January 2, 1998
----------------- ---------------
<S> <C> <C>
EBITDA................................... $ 888 $ 708
REIT conversion expense.................. (64) --
Interest expense......................... (335) (302)
Dividends on convertible preferred
securities.............................. (37) (37)
Depreciation and amortization............ (243) (240)
Minority interest expense................ (52) (32)
Income taxes............................. 20 (36)
Gain (loss) on disposition of assets and
other non-cash charges, net............. 18 (14)
----- -----
Income before extraordinary items...... $ 195 $ 47
===== =====
</TABLE>
The ratio of earnings to fixed charges was 1.5 to 1.0, 1.3 to 1.0 and 1.0 to
1.0 in 1998, 1997 and 1996, respectively.
Comparative FFO. Management believes that Comparative Funds From Operations
or "Comparative FFO," which represents Funds From Operations, as defined by
NAREIT, plus deferred tax expense, is a meaningful disclosure that will help
the investment community to better understand our financial performance. FFO
is meaningful due to the significance of our long-lived assets and because
such data is considered useful by
48
<PAGE>
the investment community to better understand our results, and can be used to
measure our ability to service debt, fund capital expenditures and expand its
business. FFO is defined by NAREIT as net income computed in accordance with
GAAP, excluding gains or losses from debt restructurings and sales of
properties, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. FFO should not
be considered as an alternative to net income, operating profit, cash flows
from operations or any other operating or liquidity performance measure
prescribed by GAAP. FFO is also not an indicator of funds available for our
cash needs, including distributions. Our method of calculating FFO may be
different from methods used by other REITs and, accordingly, is not comparable
to such other REITs.
Comparative FFO from total operations increased $107 million, or 36%, to
$402 million in 1998. Comparative FFO from total operations increased $131
million, or 80%, to $295 million in 1997. The following is a reconciliation of
our income before extraordinary items to Comparative FFO (in millions):
<TABLE>
<CAPTION>
Fiscal
Year
----------
1998 1997
---- ----
<S> <C> <C>
Income before extraordinary items................................ $195 $ 47
Depreciation and amortization.................................... 265 240
Other real estate activities..................................... (53) 6
Partnership adjustments.......................................... (11) (13)
Deferred taxes................................................... 46 15
Other non-recurring adjustments:
REIT conversion expenses....................................... (37) --
Change in reporting period(a).................................. (3) --
---- ----
Comparative FFO from total operations........................ 402 295
Discontinued operations.......................................... (28) (10)
---- ----
Comparative FFO from continuing operations....................... $374 $285
==== ====
</TABLE>
- --------
(a) We changed our method of recording operations for certain non-Marriott
owned properties in 1998, resulting in the recognition of 13 months of
operations in 1998. This amount represents the incremental operations
recognized.
Cash expenditures for various long-term assets and income taxes have been, and
will be, incurred which are not reflected in the Comparative FFO presentation.
We consider EBITDA and Comparative FFO to be indicative measures of our
operating performance due to the significance of our long-lived assets and
because such data is considered useful by the investment community to better
understand our results, and can be used to measure our ability to service
debt, fund capital expenditures and expand its business, however, such
information should not be considered as an alternative to net income,
operating profit, cash from operations, or any other operating or liquidity
performance measure prescribed by generally accepted accounting principles.
Cash expenditures for various long-term assets, interest expense (for EBITDA
purposes only) and income taxes have been, and will be, incurred which are not
reflected in the EBITDA and Comparative FFO presentation.
Partnership Activities. Prior to the REIT conversion, we had general and
limited partner interests in numerous limited partnerships which owned 240
hotels including 20 full-service hotels, managed by Marriott International.
Debt of the hotel limited partnerships was typically secured by first
mortgages on the properties and was generally nonrecourse to the limited
partnerships and their partners. However, we committed to advance amounts to
certain affiliated limited partnerships, if necessary, to cover certain future
debt service requirements; these commitments now have been assumed by the
operating partnership. These commitments are limited, in the aggregate, to $22
million. Amounts repaid to us under these guarantees totaled $14 million and
$2 million in 1998 and 1997, respectively. Fundings by us under these
guarantees amounted to $10 million in 1997. There were no fundings in 1998 or
1996. As a result of the REIT conversion, our interests in the 220 limited-
service hotels were transferred to the non-controlled subsidiaries.
Additionally, as part of the REIT conversion, 13 of the 20 full-service hotels
were acquired by the operating partnership, two were sold, four were
transferred to one of the non-controlled subsidiaries and one was retained by
us.
Leases. We lease certain property and equipment under noncancelable
operating leases, including the long-term ground leases for certain hotels,
generally with multiple renewal options. The leases related to the 53
Courtyard properties and 18 Residence Inn properties sold during 1995 and
1996, are nonrecourse to us and contain provisions for the payment of
contingent rentals based on a percentage of sales in excess of stipulated
amounts. We remain contingently liable on certain leases related to divested
non-lodging properties. Such
49
<PAGE>
contingent liabilities aggregated $93 million at December 31, 1998. However,
management considers the likelihood of any substantial funding related to
these divested properties' leases to be remote.
Inflation. Our hotel lodging properties have been impacted by inflation
through its effect on increasing costs and on the managers' ability to
increase room rates. Unlike other real estate, hotels have the ability to
change room rates on a daily basis, so the impact of higher inflation
generally can be passed on to customers. Our exposure to inflation is less now
that substantially all of our hotels are leased to others.
A substantial portion of our debt bears interest at fixed rates. This debt
structure largely mitigates the impact of changes in the rate of inflation on
future interest costs. However, we are currently exposed to some variable
interest rate debt, whose market risk is hedged through interest rate exchange
agreements with financial institutions with an aggregate notional amount of
$365 million. Under the agreements, we collect interest based on one-month
LIBOR (rate of 5.06% at December 31, 1998) and pay interest at fixed rates
ranging from 5.72% to 6.60%. The agreements expire between August 2000 and
August 2002. Accordingly, the amount of our interest expense under the
interest rate exchange agreements and the floating rate debt for a particular
year will be affected by changes in short-term interest rates.
Year 2000 Issue
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore do not properly recognize a year that begins with
"20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results. The following disclosure
provides information regarding the current status of our Year 2000 compliance
program.
We have adopted the compliance program because we recognize the importance
of minimizing the number and seriousness of any disruptions that may occur as
a result of the Year 2000 issue. Our compliance program includes an assessment
of our hardware and software computer systems and embedded systems, as well as
an assessment of the Year 2000 issues relating to third parties with which we
have a material relationship or whose systems are material to the operations
of our hotel properties. Our efforts to ensure that our computer systems are
Year 2000 compliant have been segregated into two separate phases: in-house
systems and third-party systems. Following the REIT conversion, Crestline, as
the lessee of most of our hotels, will deal directly with Year 2000 matters
material to the operation of the hotels, and Crestline has agreed to adopt and
implement the program outlined below with respect to third-party systems for
all hotels for which it is the lessee.
In-House Systems. Since the distribution of Marriott International on
October 8, 1993, we have invested in the implementation and maintenance of
accounting and reporting systems and equipment that are intended to enable us
to provide adequately for our information and reporting needs and which are
also Year 2000 compliant. Substantially all of our in-house systems have
already been certified as Year 2000 compliant through testing and other
mechanisms and we have not delayed any systems projects due to the Year 2000
issue. We are in the process of engaging a third party to review our Year 2000
in-house compliance. Management believes that future costs associated with
Year 2000 issues for our in-house systems will be insignificant and therefore
not impact our business, financial condition and results of operations. We
have not developed, and do not plan to develop, a separate contingency plan
for our in-house systems due to their current Year 2000 compliance.
Third-Party Systems. We rely upon operational and accounting systems
provided by third parties, primarily the managers and operators of our hotel
properties, to provide the appropriate property-specific operating systems,
including reservation, phone, elevator, security, HVAC and other systems, and
to provide us with financial information. Based on discussion with the third
parties that are critical to our business, including the managers and
operators of our hotels, we believe that these parties are in the process of
studying their systems and the systems of their respective vendors and service
providers and, in many cases, have begun to implement changes, to ensure that
they are Year 2000 compliant. However, we have not received any oral or
written assurances that these third parties will be Year 2000 compliant on
time. To the extent these changes impact
50
<PAGE>
property-level systems, we may be required to fund capital expenditures for
upgraded equipment and software. We do not expect these charges to be
material, but we are committed to making these investments as required. To the
extent that these changes relate to a third party manager's centralized
systems, including reservations, accounting, purchasing, inventory, personnel
and other systems, management agreements generally provide for these costs to
be charged to our properties subject to annual limitations, which costs will
be borne by Crestline under the leases. We expect that the third party
managers will incur Year 2000 costs in lieu of costs for their centralized
systems related to systems projects that otherwise would have been pursued
and, therefore, the overall level of centralized systems charges allocated to
the properties will not materially increase as a result of the Year 2000
compliance effort. We believe that this deferral of certain systems projects
will not have a material impact on our future results of operations, although
it may delay certain productivity enhancements at our properties. We and
Crestline will continue to monitor the efforts of these third parties to
become Year 2000 compliant and will take appropriate steps to address any non-
compliance issues. We believe that, in the event of material Year 2000 non-
compliance, we will have the right to seek recourse against the manager under
our third party management agreements. The management agreements, however,
generally do not specifically address the Year 2000 compliance issue.
Therefore, the amount of any recovery in the event of Year 2000 non-compliance
at a property, if any, is not determinable at this time, and only a portion of
such recovery would accrue to us through increased lease rental payments from
Crestline.
We and Crestline will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely
worst case Year 2000 scenarios, which may not have been identified fully. In
particular, we and Crestline have had extensive discussions regarding the Year
2000 problem with Marriott International, the manager of a substantial
majority of our hotel properties. Due to the significance of Marriott
International to our business, a detailed description of Marriott
International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (1) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (2) Inventory:
identifying and locating systems and technology components that may be
affected; (3) Assessment: reviewing these components for Year 2000 compliance,
and assessing the scope of Year 2000 issues; (4) Planning: defining the
technical solutions and labor and work plans necessary for each affected
system; (5) Remediation/Replacement: completing the programming to renovate or
replace the problem software or hardware; (6) Testing and Compliance
Validation: conducting testing, followed by independent validation by a
separate internal verification team; (7) Implementation: placing the corrected
systems and technology back into the business environment; and (8) Quality
Assurance: utilizing an internal audit team to review significant projects for
adherence to quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications)--enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS")--systems that
have been initiated by an individual business unit, and that are not supported
by Marriott International's IR organization; and (iii) Building Systems--non-
IT equipment at properties that use embedded computer chips, such as
elevators, automated room key systems and HVAC equipment. Marriott
International is prioritizing its efforts based on how severe an effect
noncompliance would have on customer service, core business processes or
revenues, and whether there are viable, non-automated fallback procedures
(System Criticality).
Marriott International measures the completion of each phase based on
documented and quantified results, weighted for System Criticality. As of
January 1, 1999, the Awareness and Inventory phases were complete for IT
Applications and substantially complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning Remediation/Replacement and Testing
phases were each over 95 percent complete, and Compliance Validation had been
completed for nearly half of key systems, with most of the remaining work in
its final stage. BIS and Building Systems, Assessment and Planning are nearly
complete. Remediation/Replacement and Testing is 20 percent complete for BIS,
and Marriott International is on track for completion of initial Testing of
Building
51
<PAGE>
Systems by the end of the first quarter of 1999. Compliance Validation is in
progress for both BIS and Building Systems. Marriott International remains on
target for substantial completion of Remediation/Replacement and Testing for
System Critical BIS and Building Systems by June 1999 and September 1999,
respectively. Quality Assurance is in progress for IT Applications, BIS and
Building Systems.
Year 2000 compliance communications with Marriott International's
significant third party suppliers, vendors and business partners, including
its franchisees are ongoing. Marriott International's efforts are focused on
the connections most critical to customer service, core business processes and
revenues, including those third parties that support the most critical
enterprise-wide IT Applications, franchisees generating the most revenues,
suppliers of the most widely used Building Systems and BIS, the top 100
suppliers, by dollar volume, of non-IT products, and financial institutions
providing the most critical payment processing functions. Responses have been
received from a majority of the firms in this group. A majority of these
respondents have either given assurances of timely Year 2000 compliance or
have identified the necessary actions to be taken by them or Marriott
International to achieve timely Year 2000 compliance for their products.
Marriott International has established a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-
practices sharing system.
Risks. There can be no assurances that Year 2000 remediation by us or third
parties will be properly and timely completed, and failure to do so could have
a material adverse effect on us, our business and our financial condition. We
cannot predict the actual effects to us of the Year 2000 problem, which depend
on numerous uncertainties such as: whether significant third parties properly
and timely address the Year 2000 issue and whether broad-based or systemic
economic failures occur. Moreover, we are reliant upon Crestline to interface
with third parties in addressing the Year 2000 issue at the hotels leased by
Crestline. We are also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or disruption of hotel reservations made on centralized
reservation systems and errors or failures in financial transactions or
payment processing systems such as credit cards. Due to the general
uncertainty inherent in the Year 2000 problem and our dependence on third
parties, including Crestline, we are unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on us. Our
Year 2000 compliance program, and Crestline's adoption thereof, are expected
to significantly reduce the level of uncertainty about the Year 2000 problem
and management believes that the possibility of significant interruptions of
normal operations should be reduced.
Accounting Standards. In the fourth quarter of 1996, we adopted SFAS No.
123, "Accounting for Stock Based Compensation." The adoption of SFAS No. 123
did not have a material effect on our financial statements. During 1997, we
adopted SFAS No. 128, "Earnings Per Share," SFAS No. 129, "Disclosure of
Information About Capital Structure" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The adoption of these
statements did not have a material effect on our consolidated financial
statements and the appropriate disclosures required by these statements have
been incorporated herein.
As of January 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive
Income" which establishes new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses on our right to receive Host Marriott Services Corporation stock and
foreign currency translation adjustments, to be included in other
comprehensive income. For 1998 and 1997, our other comprehensive income (loss)
was ($16 million) and $7 million, respectively. As of December 31, 1998 and
January 2, 1998, our accumulated other comprehensive income (loss) was
approximately ($4 million) and $12 million, respectively.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring
52
<PAGE>
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. We have not determined the impact of SFAS No.
133, but we do not believe it will be material.
On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus of EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
As discussed in Note 1 to the financial statements, we have adopted EITF 97-
2 in the fourth quarter of 1998 with retroactive effect in prior periods to
conform to the new presentation. Application of EITF 97-2 to the consolidated
financial statements for the fiscal years 1998, 1997 and 1996 increased both
revenues and operating expenses by approximately $2.1 billion, $1.7 billion
and $1.2 billion, respectively, and had no impact on operating profit, net
income or earnings per share.
53
<PAGE>
Item 7.a Quantitative and Qualitative Disclosures About Market Risk
The table below provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, including interest rate swaps and debt obligations. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For interest rate swaps,
the table presents notional amounts and weighted average interest rates by
expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date. As of December 31, 1998, the change in current yields between
one-year and five-year U.S. Treasury bonds is three basis points, thus,
minimal fluctuations in the average interest rates are anticipated over the
maturity periods.
<TABLE>
<CAPTION>
Expected Maturity Date
--------------------------------------------- Fair
1999 2000 2001 2002 2003 Thereafter Total Value
----- ----- ----- ----- ----- ---------- ----- -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-term Debt--
variable(5):
Potomac Hotel Limited
Partnership(1)........ $ 163 $ -- $ -- $ -- $ -- $ -- $ 163 $163
Marriott Diversified
American Hotels,
LP(1)................. 96 -- -- -- -- -- 96 96
New York Marriott
Marquis............... 145 -- -- -- -- -- 145 145
San Diego Marriott..... 5 5 6 6 7 167 196 190
Grand Hyatt,
Atlanta(2)............ -- -- -- 40 -- -- 40 40
Hyatt Regency,
Cambridge............. -- 45 -- -- -- -- 45 45
Hyatt Regency, Reston.. -- -- 49 -- -- -- 49 49
Hyatt Regency,
Burlingame............ -- 54 -- -- -- -- 54 54
The Ritz-Carlton,
Amelia Island......... -- -- -- -- 90 -- 90 90
Swissotel.............. -- -- -- 200 -- -- 200 200
Credit Facility........ -- -- 350 -- -- -- 350 350
Average Interest
Rate(3)............... 7.42% 6.71% 7.47% 7.63% 7.73% 7.73% 7.32%
Other:
Convertible preferred
securities at 6 3/4%.. -- -- -- -- -- -- 550 449
</TABLE>
<TABLE>
<CAPTION>
Expected Expiration Date
------------------------------------------- Notional
1999 2000 2001 2002 2003 Thereafter Amount
----- ----- ----- ----- ---- ---------- --------
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
Derivatives(6)
Receivables:
Grand Hyatt,
Atlanta(2)............ $ -- $ -- $ -- $ 37 $-- $-- $ 37
Hyatt Regency,
Cambridge............. -- 20 -- -- -- -- 20
Hyatt Regency,
Cambridge............. -- 20 -- -- -- -- 20
Hyatt Regency, Reston.. -- -- 24 -- -- -- 24
Hyatt Regency, Reston.. -- -- 24 -- -- -- 24
Hyatt Regency,
Burlingame............ -- 42 -- -- -- -- 42
Hyatt Regency,
Burlingame............ -- 10 -- -- -- -- 10
Swissotel.............. -- -- -- 188 -- -- 188
Payables:
Grand Hyatt,
Atlanta(2)............ -- -- -- 37 -- -- 37
Hyatt Regency,
Cambridge............. -- 20 -- -- -- -- 20
Hyatt Regency,
Cambridge............. -- 20 -- -- -- -- 20
Hyatt Regency, Reston.. -- -- 24 -- -- -- 24
Hyatt Regency, Reston.. -- -- 24 -- -- -- 24
Hyatt Regency,
Burlingame............ -- 42 -- -- -- -- 42
Hyatt Regency,
Burlingame............ -- 10 -- -- -- -- 10
Swissotel.............. -- -- -- 188 -- -- 188
Average Interest Rate
Receivables(3)......... 5.55% 5.55% 5.55% 5.55% -- -- 5.55%
Payables(4)............ 6.16% 6.15% 6.17% 6.17% -- -- 6.20%
</TABLE>
- --------
(1)Subsequent to year-end, the long-term debt amounts were refinanced with
fixed interest rate obligations.
(2) Subsequent to year-end, the long-term debt amounts were refinanced with
fixed interest rate obligations and the related interest rate derivative
was terminated.
(3) Interest rates are based on one-month LIBOR plus certain basis points
which range from zero to 275 basis points. The one-month LIBOR rate at
December 31, 1998 was 5.06%. As noted above, the current yield curve is
flat over the expected maturity dates and, therefore, we have calculated
the average interest rates using the one-month LIBOR rate at December 31,
1998.
(4)Interest rates are at fixed rates ranging from 5.72% to 6.60%.
(5) Our fixed rate debt of $3.7 billion has a fair value which exceeds its
carrying value by $20 million. Substantially all of our fixed rate debt
matures in years subsequent to 2003.
(6) The fair value of the interest rate swaps is $14 million as of December
31, 1998. See Note 5 to the consolidated financial statement.
54
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following financial information is included on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. 45
Consolidated Balance Sheets as of December 31, 1998 and January 2, 1998.. 46
Consolidated Statements of Operations for the Fiscal Years Ended December
31, 1998 January 2, 1998 and January 3, 1997............................ 47
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended December 31, 1998, January 2, 1998 and January 3, 1997............ 48
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
31, 1998, January 2, 1998 and January 3, 1997........................... 49
Notes to Consolidated Financial Statements............................... 50
</TABLE>
55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheets of Host
Marriott Corporation and subsidiaries as of December 31, 1998 and January 2,
1998, and the related consolidated statements of operations, shareholders'
equity and comprehensive income and cash flows for each of the three fiscal
years in the period ended December 31, 1998. These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Corporation and subsidiaries as of December 31, 1998 and January 2,
1998, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
has given retroactive effect to the change to include property-level sales and
operating expenses of its hotels in the consolidated statements of operations.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at
Item 14(a)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
March 5, 1999
56
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and January 2, 1998
<TABLE>
<CAPTION>
1998 1997
------ ------
(in millions)
<S> <C> <C>
ASSETS
Property and equipment, net..................................... $7,201 $4,634
Notes and other receivables, net (including amounts due from
affiliates of $134 million and $23 million, respectively)...... 203 52
Due from managers............................................... 19 87
Investments in affiliates....................................... 33 13
Other assets.................................................... 376 272
Short-term marketable securities................................ -- 354
Cash and cash equivalents....................................... 436 493
Net investment in discontinued operations....................... -- 236
------ ------
$8,268 $6,141
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Senior notes issued by the Company or its subsidiaries........ $2,246 $1,585
Mortgage debt................................................. 2,438 1,784
Other......................................................... 447 97
------ ------
5,131 3,466
Accounts payable and accrued expenses........................... 204 84
Deferred income taxes........................................... 97 487
Other liabilities............................................... 460 296
------ ------
Total liabilities........................................... 5,892 4,333
------ ------
Minority interest............................................... 515 58
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust whose sole assets are the
convertible subordinated debentures due 2026 ("Convertible
Preferred Securities")......................................... 550 550
------ ------
Shareholders' equity
Common Stock, 750 million shares authorized; 225.6 million
shares in 1998 and 203.8 million shares in 1997 issued and
outstanding.................................................. 2 204
Additional paid-in capital.................................... 1,867 935
Accumulated other comprehensive income........................ (4) 12
Retained (deficit) earnings................................... (554) 49
------ ------
Total shareholders' equity.................................. 1,311 1,200
------ ------
$8,268 $6,141
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
57
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997
(in millions, except per common share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
REVENUES
Rooms................................................. $2,220 $1,850 $1,302
Food and beverage..................................... 984 776 515
Other................................................. 238 180 125
------ ------ ------
Total hotel revenues.................................. 3,442 2,806 1,942
Net gains (losses) on property transactions........... 57 (11) 1
Other................................................. 14 28 14
------ ------ ------
Total revenues........................................ 3,513 2,823 1,957
------ ------ ------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................. 524 428 313
Food and beverage..................................... 731 592 406
Other department costs and deductions................. 843 693 506
Management fees and other (including Marriott
International management fees of $196 million,
$162 million and $101 million, respectively)......... 726 649 461
Other................................................. 28 29 38
------ ------ ------
Total operating costs and expenses.................... 2,852 2,391 1,724
------ ------ ------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST................................. 661 432 233
Minority interest...................................... (52) (31) (6)
Corporate expenses..................................... (50) (45) (43)
REIT conversion expenses............................... (64) -- --
Interest expense....................................... (335) (288) (237)
Dividends on Convertible Preferred Securities of
subsidiary trust...................................... (37) (37) (3)
Interest income........................................ 51 52 48
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES................................................. 174 83 (8)
Provision for income taxes............................. (86) (36) (5)
Benefit from change in tax status...................... 106 -- --
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS............... 194 47 (13)
DISCONTINUED OPERATIONS
Income from discontinued operations (net of income tax
expense of $4 million in 1998)........................ 6 -- --
Provision for loss on disposal (net of income tax
benefit of $3 million in 1998)........................ (5) -- --
------ ------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS............... 195 47 (13)
Extraordinary items--gain (loss) on early
extinguishment of debt (net of income tax (benefit)
expense of
($80) million and $1 million in 1998 and 1997,
respectively)......................................... (148) 3 --
------ ------ ------
NET INCOME (LOSS)...................................... $ 47 $ 50 $ (13)
====== ====== ======
BASIC EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS.................................. $ .90 $ .22 $ (.06)
Discontinued operations (net of income taxes).......... .01 -- --
Extraordinary items--gain (loss) on early
extinguishment of debt (net of income taxes).......... (.69) .01 --
------ ------ ------
BASIC EARNINGS (LOSS) PER COMMON SHARE................. $ .22 $ .23 $ (.06)
====== ====== ======
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS.................................. $ .84 $ .22 $ (.06)
Discontinued operations (net of income taxes).......... .01 -- --
Extraordinary items--gain (loss) on early
extinguishment of debt (net of income taxes).......... (.58) .01 --
------ ------ ------
DILUTED EARNINGS (LOSS) PER COMMON SHARE............... $ .27 $ .23 $ (.06)
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
58
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME OF
HOST MARRIOTT CORPORATION
(predecessor to Host Marriott, L.P.)
Fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997
<TABLE>
<CAPTION>
Accumulated
Common Additional Other
Shares Common Paid-in Retained Comprehensive Comprehensive
Outstanding Stock Capital Earnings Income (Loss) Income (Loss)
----------- ------ ---------- -------- ------------- -------------
(in millions) (in millions)
<C> <S> <C> <C> <C> <C> <C>
Balance, December 29,
159.7 1995.................... $ 160 $ 499 $ 16 $ -- $ --
-- Net loss................ -- -- (13) -- (13)
Other comprehensive
-- income:
Unrealized gain on HM
Services common stock... -- -- -- 5 5
----
-- Comprehensive loss...... $ (8)
====
Adjustment to Host
Marriott
-- Services dividend....... -- -- (4) --
3.9 Common stock issued for
the comprehensive stock
and employee stock
purchase plans.......... 3 12 -- --
6.8 Common stock issued for
warrants exercised...... 7 42 -- --
Common stock issued in
31.6 stock offering.......... 32 368 -- --
- -------------------------------------------------------------------------------------------------
Balance, January 3,
202.0 1997.................... 202 921 (1) 5 --
-- Net income.............. -- -- 50 -- 50
Other comprehensive
-- income:
Unrealized gain on HM
Services common stock... -- -- -- 7 7
----
-- Comprehensive income.... $ 57
====
1.8 Common stock issued for
the comprehensive stock
and employee stock
purchase plans.......... 2 14 -- --
- -------------------------------------------------------------------------------------------------
Balance, January 2,
203.8 1998.................... 204 935 49 12 --
-- Net income.............. -- -- 47 -- 47
Other comprehensive
-- income (loss):
Unrealized loss on HM
Services common stock... -- -- -- (5) (5)
Foreign currency
translation adjustment.. -- -- -- (9) (9)
Reclassification of gain
realized on HM Services
common stock--net
income.................. -- -- -- (2) (2)
----
-- Comprehensive income.... $ 31
====
1.4 Common stock issued for
the comprehensive stock
and employee stock
purchase plans.......... -- 8 -- --
-- Adjustment of stock par
value from $1 to $.01
per share............... (202) 202 -- --
11.9 Common stock issued for
Special Dividend........ -- 143 (143) --
8.5 Common stock issued for
the REIT roll-up of
partnerships (Note 12).. -- 113 -- --
-- Increase in Operating
Partnership equity due
to issuance of OP Units
for limited partner
interests (net of $368
million minority
interest of the
Operating Partnership)
........................ -- 466 -- --
-- Distribution of stock of
Crestline Capital
Corporation............. -- -- (438) --
-- Cash portion of Special
Dividend................ -- -- (69) --
- -------------------------------------------------------------------------------------------------
Balance, December 31,
225.6 1998.................... $ 2 $1,867 $(554) $ (4)
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
59
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ----
(in millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations................ $ 194 $ 47 $(13)
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 243 231 168
Income taxes........................................... (103) (20) (35)
Amortization of deferred income........................ (4) (4) (6)
Net (gains) losses on property transactions............ (50) 19 4
Equity in earnings of affiliates....................... (1) (4) (3)
Other.................................................. 39 62 49
Changes in operating accounts:
Other assets........................................... (56) 57 9
Other liabilities...................................... 50 44 32
------ ------ ----
Cash from continuing operations........................ 312 432 205
Cash from (used in) discontinued operations............ 29 32 (4)
------ ------ ----
Cash from operations................................... 341 464 201
------ ------ ----
INVESTING ACTIVITIES
Proceeds from sales of assets........................... 227 51 373
Less non-cash proceeds................................. -- -- (35)
------ ------ ----
Cash received from sales of assets...................... 227 51 338
Acquisitions............................................ (988) (359) (702)
Capital expenditures:
Capital expenditures for renewals and replacements..... (165) (129) (87)
New investment capital expenditures.................... (87) (29) (72)
Purchases of short-term marketable securities........... (134) (354) --
Sales of short-term marketable securities............... 488 -- --
Notes receivable collections............................ 4 6 13
Affiliate notes receivable issuances and collections,
net.................................................... (13) (6) 21
Other................................................... 13 13 (15)
------ ------ ----
Cash used in investing activities from continuing
operations............................................ (655) (807) (504)
Cash used in investing activities from discontinued
operations............................................ (50) (239) --
------ ------ ----
Cash used in investing activities...................... (705) (1,046) (504)
------ ------ ----
FINANCING ACTIVITIES
Issuances of debt....................................... 2,496 857 46
Debt prepayments........................................ (1,898) (403) (173)
Cash contributed to Crestline at inception.............. (52) -- --
Cash contributed to Non-Controlled Subsidiary........... (30) -- --
Cost of extinguishment of debt.......................... (175) -- --
Scheduled principal repayments.......................... (51) (90) (82)
Issuances of common stock............................... 1 6 454
Issuances of Convertible Preferred Securities, net...... -- -- 533
Other................................................... (26) 22 28
------ ------ ----
Cash from financing activities from continuing
operations............................................ 265 392 806
Cash from (used in) financing activities from
discontinued operations............................... 24 (3) --
------ ------ ----
Cash from financing activities......................... 289 389 806
------ ------ ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (75) (193) 503
CASH AND CASH EQUIVALENTS, beginning of year............ 511 704 201
------ ------ ----
CASH AND CASH EQUIVALENTS, end of year.................. $ 436 $ 511 $704
====== ====== ====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties and discontinued senior living communities... $1,215 $ 733 $696
====== ====== ====
Distribution of net assets in connection with the
discontinued operations................................ $ 438
======
Contribution of net assets to Non-Controlled
Subsidiaries........................................... $ 12
======
</TABLE>
See Notes to Consolidated Financial Statements.
60
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Host Marriott Corporation a Maryland corporation formerly named HMC Merger
Corporation ("Host REIT"), operating through an umbrella partnership
structure, is the owner of full-service hotel properties. Host REIT operates
as a self-managed and self-administered real estate investment trust ("REIT")
and its operations are conducted solely through an operating partnership and
its subsidiaries. As REITs are not permitted to derive revenues directly from
the operations of hotels, Host REIT leases substantially all of the hotels to
subsidiaries of Crestline Capital Corporation ("Crestline" or the "Lessee")
and certain other lessees as further discussed at Note 9.
As of December 31, 1998, Host REIT owned, or had controlling interests in,
126 upscale and luxury, full-service hotel lodging properties generally
located throughout the United States and operated primarily under the
Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names. Most of
these properties are managed by Marriott International, Inc. ("Marriott
International"). Host REIT also has certain economic, non-voting interests in
certain Non-Controlled Subsidiaries, whose hotels are also managed by Marriott
International (see Note 4).
Basis of Presentation
On April 16, 1998, the Board of Directors of Host Marriott Corporation,
("Host Marriott"), a Delaware corporation and the predecessor to Host REIT,
approved a plan to reorganize Host Marriott's business operations through the
spin-off of Host Marriott's senior living business as part of Crestline and
the contribution of Host Marriott's hotels and certain other assets and
liabilities to a newly formed Delaware limited partnership, Host Marriott,
L.P. (the "Operating Partnership"). Host Marriott merged into HMC Merger
Corporation (the "Merger"), a newly formed Maryland corporation (renamed Host
Marriott Corporation) which intends to qualify, effective January 1, 1999, as
a real estate investment trust ("REIT") and is the sole general partner of the
Operating Partnership. Host Marriott's and its subsidiaries' contribution of
its hotels and certain assets and liabilities to the Operating Partnership and
its subsidiaries (the "Contribution") in exchange for units of partnership
interest in the Operating Partnership was accounted for at Host Marriott's
historical basis. As of December 31, 1998, Host REIT owned approximately 78%
of the Operating Partnership.
In these consolidated financial statements, the "Company" or "Host Marriott"
refers to Host Marriott Corporation, both before and after the Merger and its
conversion to a REIT (the "REIT Conversion").
On December 29, 1998, the Company completed the previously announced spin-
off of Crestline (see Note 2), through a taxable stock dividend to its
shareholders. Each Host Marriott shareholder of record on December 28, 1998
received one share of Crestline for every ten shares of Host Marriott common
stock owned (the "Distribution").
As a result of the Distribution, the Company's financial statements have
been restated to present the senior living communities' business results of
operations and cash flows as discontinued operations. See Note 2 for further
discussion of the Distribution. All historical financial statements presented
have been restated to conform to this presentation, with the historical assets
and liabilities of that segment presented on the balance sheet as Net
Investment in Discontinued Operations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in affiliates over
which the Company has the ability to exercise significant
61
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
influence, but does not control, are accounted for using the equity method.
All material intercompany transactions and balances have been eliminated.
Fiscal Year End Change
The U.S. Internal Revenue Code of 1986, as amended, requires REITs to file
their U.S. income tax return on a calendar year basis. Accordingly in 1998,
the Company changed its fiscal year-end to December 31 for both financial and
tax reporting requirements. Previously, the Company's fiscal year ended on the
Friday nearest to December 31. Fiscal year 1998 and 1997 included 52 weeks
compared to 53 weeks for fiscal year 1996.
Revenues and Expenses
Revenues primarily represent the gross sales generated by the Company's
hotel properties and net gains (losses) on property transactions. As discussed
below, the Company previously recorded only the house profit generated by the
Company's hotels as revenue. House profit is total hotel sales less certain
hotel property-level costs and expenses, which reflects the net revenues
flowing to the Company as the property owner.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Company considered the impact of EITF 97-2 on its financial statements
and determined that EITF 97-2 requires the Company to include property-level
sales and operating expenses of its hotels in its statements of operations.
The Company has given retroactive effect to the adoption of EITF 97-2 in the
accompanying consolidated statements of operations. Application of EITF 97-2
to the consolidated financial statements for the fiscal years ended December
31, 1998, January 2, 1998 and January 3, 1997 increased both revenues and
operating expenses by approximately $2.1 billion, $1.7 billion and $1.2
billion, respectively, and had no impact on operating profit, net income
(loss) or earnings per share.
In prior years operations for certain of the Company's hotels were recorded
from the beginning of December of the prior year to November of the current
year due to a one-month delay in receiving results from those hotel
properties. Upon conversion to a REIT, all operations are required to be
reported on a calendar year basis in accordance with Federal income tax
regulations. As a result, the Company has recorded one additional period of
operations in fiscal year 1998 for these properties. The effect on revenues
and net income was to increase revenues by $44 million and net income by $6
million and diluted earnings per share by $.02.
Earnings (Loss) Per Common Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per common share are computed by dividing net income by the weighted
average number of shares of common stock outstanding plus other dilutive
securities. Diluted earnings per common share has not been adjusted for the
impact of the Convertible Preferred Securities for 1997 and 1996 and for the
comprehensive stock plan and warrants for 1996 as they were anti-dilutive. In
December 1998, the Company declared the Special Dividend (Note 2) and, in
February 1999, the Company distributed 11.9 million shares to existing
shareholders in conjunction with the Special Dividend. The weighted average
number of common shares outstanding and the basic and diluted earnings per
share computations have been restated to reflect these shares as outstanding
for all periods presented.
62
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 1999, the Company issued 8.5 million shares in exchange for 8.5
million OP Units issued to certain limited partners in connection with the
Partnership Mergers (see Note 12) which are deemed outstanding at December 31,
1998.
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Weighted average number of common shares outstanding...... 216.3 215.0 200.6
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed purchased
at average market price.................................. 4.0 4.8 --
Assuming conversion of Convertible Preferred Securities... 35.8 -- --
Other..................................................... 0.3 0.3 --
----- ----- -----
Shares utilized for the calculation of diluted earnings
per share................................................ 256.4 220.1 200.6
===== ===== =====
</TABLE>
A reconciliation of net income (loss) to earnings (loss) used for the
calculation of diluted earnings per common share follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss).......................................... $47 $ 50 $(13)
Dividends, net of tax benefit, assuming conversion of
Convertible Preferred Securities.......................... 22 -- --
--- ---- ----
Earnings used for the calculation of diluted earnings per
share..................................................... $69 $ 50 $(13)
=== ==== ====
</TABLE>
International Operations
The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates: revenues of $121 million,
$105 million and $49 million and income (loss) before income taxes of $7
million, ($9 million) and ($2 million) in 1998, 1997 and 1996, respectively.
Minority Interest
The 22% of the Operating Partnership equity owned by outside third parties
is presented as minority interest ($368 million as of December 31, 1998).
Minority interest also includes minority interests in consolidated investments
of the Operating Partnership of $147 million.
Property and Equipment
Property and equipment is recorded at cost. For newly developed properties,
cost includes interest, ground rent and real estate taxes incurred during
development and construction. Replacements and improvements are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to ten
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.
Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire without further cost to the Company.
63
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In cases where management is holding for sale particular hotel properties,
the Company assesses impairment based on whether the estimated sales price
less costs of disposal of each individual property to be sold is less than the
net book value. A property is considered to be held for sale when the Company
has made the decision to dispose of the property. Otherwise, the Company
assesses impairment of its real estate properties based on whether it is
probable that undiscounted future cash flows from each individual property
will be less than its net book value. If a property is impaired, its basis is
adjusted to its fair market value.
Deferred Charges
Financing costs related to long-term debt are deferred and amortized over
the remaining life of the debt.
Cash, Cash Equivalents and Short-term Marketable Securities
The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $22 million and $115 million at December
31, 1998 and January 2, 1998, respectively, of cash related to certain
consolidated partnerships, the use of which is restricted generally for
partnership purposes to the extent it is not distributed to the partners.
Short-term marketable securities include investments with a maturity of 91
days to one year at the date of purchase. The Company's short-term marketable
securities represent investments in U.S. government agency notes and high
quality commercial paper. The short-term marketable securities are categorized
as available for sale and, as a result, are stated at fair market value.
Unrealized holding gains and losses are included as a separate component of
shareholders' equity until realized.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents
and short-term marketable securities. The Company maintains cash and cash
equivalents and short-term marketable securities with various high credit-
quality financial institutions. The Company performs periodic evaluations of
the relative credit standing of these financial institutions and limits the
amount of credit exposure with any institution.
The Company is also subject to credit risk as a party to interest rate swap
agreements. The Company monitors the creditworthiness of its contracting
parties by evaluating credit exposure and referring to the ratings of widely
accepted credit rating services. The Standard and Poors' long-term debt
ratings for the contracting parties are AA-, AA- and BBB+. The Company is
exposed to credit loss in the event of non-performance by the contracting
party to the interest rate swap agreements; however, the Company does not
anticipate non-performance by any of the contracting parties.
In addition, on January 1, 1999, subsidiaries of Crestline became the
lessees of virtually all the hotels and, as such, their rent payments are the
primary source of the Company's future revenues. Rent payments are provided
from pools of hotels which are guaranteed by Crestline. For discussion of the
guarantee, see Note 9. However, management believes that due to Crestline's
substantial assets, net worth and ability to operate as a separate publicly
traded company, Crestline will have the financial stability and access to
capital necessary to meet the substantial obligations as lessee under the
leases.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
64
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
REIT Conversion Expenses
The Company has incurred certain costs related to the REIT Conversion. These
costs consist of professional fees, printing and filing costs, consent fees
and certain other related fees and are classified as REIT conversion expenses
on the consolidated statement of operations. As of December 31, 1998, $48
million of REIT Conversion expenses were accrued and included in accounts
payable and accrued expenses.
Interest Rate Swap Agreements
The Company has entered into a limited number of interest rate swap
agreements for non-trading purposes. The Company uses such agreements to fix
certain of its variable rate debt to a fixed rate basis. The interest rate
differential to be paid or received on interest rate swap agreements is
recognized as an adjustment to interest expense.
Other Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130) which establishes new rules for the reporting
and display of comprehensive income and its components. SFAS 130 requires
unrealized gains or losses on the Company's right to receive HM Services stock
(see Note 10) and foreign currency translation adjustments, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
The components of total accumulated other comprehensive income in the
balance sheet are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net unrealized gains ............................................. 5 12
Foreign currency translation adjustment........................... (9) --
--- ---
Total accumulated other comprehensive income (loss)............... $(4) $12
=== ===
</TABLE>
Application of New Accounting Standards
During 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." In 1997, the
Company adopted SFAS No. 128, "Earnings Per Share;" SFAS No. 129, "Disclosure
of Information About Capital Structure" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The adoption of these
statements did not have a material effect on the Company's consolidated
financial statements and comprehensive income.
As discussed above, the Company has retroactively adopted EITF 97-2.
65
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company has not determined the impact of SFAS No. 133, but
management does not believe it will be material.
The EITF reached a consensus in May 1998 on Issue 98-9, "Accounting for
Contingent Rents in Interim Financial Periods," which required a lessor to
defer recognition of contingent rental income in interim periods until the
specified target that triggers the contingent rental income is achieved. In
November 1998, EITF 98-9 was rescinded; however, the impact of the accounting
principles outlined in EITF 98-9 must continue to be disclosed in quarterly
financial statements. The Company's accounting policy is to recognize rental
income based on an estimate of full-year rental income and disclose in the
footnotes to the financial statements the portion of rental income that is
contingent.
2. Distribution and Special Dividend
In December 1998, the Company distributed to its shareholders through a
taxable distribution the outstanding shares of common stock of Crestline (the
"Distribution"), formerly a wholly owned subsidiary of the Company, which, as
of the date of the Distribution, owned and operated the Company's senior
living communities, owned certain other assets and held leasehold interests in
substantially all of the Company's hotels. The Distribution provided Company
shareholders with one share of Crestline common stock for every ten shares of
Company common stock held by such shareholders on the record date of December
28, 1998. As a result of the Distribution, the Company's financial statements
have been restated to present the senior living communities' business results
of operations and cash flows as discontinued operations. Revenues for the
Company's discontinued operations totaled $241 million and $111 million in
1998 and 1997, respectively. The provision for loss on disposal includes
organizational and formation costs related to Crestline.
For purposes of governing certain of the ongoing relationships between the
Company and Crestline after the Distribution and to provide for an orderly
transition, the Company and Crestline entered into various agreements,
including a Distribution Agreement, an Employee Benefits Allocation Agreement
and a Tax Sharing Agreement. Effective as of December 29, 1998, these
agreements provide, among other things, for the division between the Company
and Crestline of certain assets and liabilities.
On December 18, 1998, the Board of Directors declared a special dividend
which entitled shareholders of record on December 28, 1998 to elect to receive
either $1.00 in cash or .087 of a share of common stock of the Company for
each outstanding share of the Company's common stock owned by such shareholder
on the record date (the "Special Dividend"). Cash totaling $69 million and
11.9 million shares of common stock that were elected in the Special Dividend
were paid and/or issued on February 10, 1999.
66
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
(in millions)
<S> <C> <C>
Land and land improvements................................ $ 740 $ 418
Buildings and leasehold improvements...................... 6,613 4,329
Furniture and equipment................................... 740 686
Construction in progress.................................. 78 36
------ ------
8,171 5,469
Less accumulated depreciation and amortization............ (970) (835)
------ ------
$7,201 $4,634
====== ======
</TABLE>
The detail of property and equipment above excludes net book value of the
discontinued senior living business of $583 million at January 2, 1998.
Interest cost capitalized in connection with the Company's development and
construction activities totaled $4 million in 1998, $1 million in 1997 and $3
million in 1996.
In 1997, the Company, through an agreement with the ground lessor of one of
its properties terminated its ground lease and recorded a $15 million loss on
the write-off of its investment, including certain transaction costs, which
has been included in net gains (losses) on property transactions in the
accompanying consolidated financial statements.
In 1996, the Company recorded a $4 million charge to write down an
undeveloped land parcel to its net realizable value based on its expected
sales value.
4. Investments in and Receivables from Affiliates
Investments in and receivables from affiliates consist of the following:
<TABLE>
<CAPTION>
Ownership
Interests 1998 1997
--------- ------ ------
(in millions)
<S> <C> <C> <C>
Equity investments
Rockledge Hotel Properties, Inc................... 95% $ 31 $ --
Fernwood Hotel Assets, Inc........................ 95% 2 --
Hotel partnerships(1)............................. 1%-50% -- 13
Notes and other receivables from affiliates, net.... -- 134 23
------ ------
$ 167 $ 36
====== ======
</TABLE>
- --------
(1) During 1998, all or substantially all of the interests in the previously
unconsolidated hotel partnerships were consolidated or contributed to the
Non-Controlled Subsidiaries (defined herein) as a result of the REIT
Conversion and the Partnership Mergers.
In connection with the REIT Conversion, Rockledge Hotel Properties, Inc. and
Fernwood Hotel Assets, Inc. (together, the "Non-Controlled Subsidiaries") were
formed to own various assets of approximately $264 million contributed by the
Company to the Operating Partnership, the direct ownership of which by the
Company or the Operating Partnership could jeopardize the Company's status as
a REIT. These assets primarily consist of
67
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
partnership or other interests in hotels which are not leased and certain
furniture, fixtures and equipment ("FF&E") used in the hotels. In exchange for
the contribution of these assets to the Non-Controlled Subsidiaries, the
Operating Partnership received only non-voting common stock of the Non-
Controlled Subsidiaries, representing 95% of the total economic interests
therein. The Host Marriott Statutory Employee/Charitable Trust, the
beneficiaries of which are certain employees of the Company and the J.W.
Marriott Foundation concurrently acquired all of the voting common stock
representing the remaining 5% of the total economic interest. As a result, as
of December 31, 1998, the Company did not control the Non-Controlled
Subsidiaries. The Non-Controlled Subsidiaries own three full-service hotels
and interests in partnerships that own an additional two full-service hotels
and 220 limited-service hotels.
In connection with the REIT Conversion, the Company completed the
Partnership Mergers and, as a result, investments in affiliates in prior years
include earnings and assets, which are now consolidated. (See Note 12 for
discussion.)
In 1997, the Company acquired all of the outstanding interests in Chesapeake
Hotel Limited Partnership ("CHLP") that owns six hotels and acquired
controlling interests in four affiliated partnerships for approximately $550
million, including the assumption of approximately $410 million of debt. In
early 1998, the Company obtained a controlling interest in the partnership
that owns the 1,671-room Atlanta Marriott Marquis for approximately $239
million, including the assumption of $164 million of mortgage debt.
Receivables from affiliates are reported net of reserves of $7 million at
December 31, 1998 and $144 million at January 2, 1998. Net amounts funded by
the Company totaled $10 million in 1997, and repayments were $14 million in
1998 and $2 million in 1997. There were no fundings in 1998 and 1996.
The Company's pre-tax income from affiliates includes the following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ----
(in millions)
<S> <C> <C> <C>
Interest income......................................... $ 1 $ 11 $17
Equity in net income.................................... 1 5 3
------ ------ ---
$ 2 $ 16 $20
====== ====== ===
Combined summarized balance sheet information for the Company's affiliates
follows:
<CAPTION>
1998 1997
------ ------
(in millions)
<S> <C> <C> <C>
Property and equipment, net............................. $1,656 $1,979
Other assets............................................ 258 283
------ ------
Total assets.......................................... $1,914 $2,262
====== ======
Debt, principally mortgages............................. $1,622 $2,179
Other liabilities....................................... 300 412
Partners' deficit....................................... (8) (329)
------ ------
Total liabilities and partners' deficit............... $1,914 $2,262
====== ======
</TABLE>
68
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Combined summarized operating results for the Company's affiliates follow:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Revenues............................................. $1,123 $1,393 $1,740
Operating expenses:
Cash charges (including interest).................. (930) (1,166) (1,469)
Depreciation and other non-cash charges............ (151) (190) (229)
------ ------ ------
Income before extraordinary items.................... 42 37 42
Extraordinary items--forgiveness of debt............. 4 40 12
------ ------ ------
Net income......................................... $ 46 $ 77 $ 54
====== ====== ======
</TABLE>
5. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
(in millions)
<S> <C> <C>
Series A senior notes, with a rate of 7 7/8% due August
2005........................................................ $ 500 $ --
Series B senior notes, with a rate of 7 7/8% due August
2008........................................................ 1,192 --
Series C senior notes, with a rate of 8.45% due December
2008........................................................ 498 --
Senior secured notes, with a rate of 9 1/2% due May 2005..... 21 600
Senior secured notes, with a rate of 8 7/8% due July 2007.... -- 600
Senior secured notes, with a rate of 9% due December 2007.... -- 350
Senior notes, with an average rate of 9 3/4% at December 31,
1998,
maturing through 2012....................................... 35 35
------ ------
Total senior notes......................................... 2,246 1,585
------ ------
Mortgage debt (non-recourse) secured by $3.3 billion of real
estate assets,
with an average rate of 7.77% at December 31, 1998, maturing
through
February 2023............................................... 2,438 1,762
Line of credit, terminated in August 1998.................... -- 22
------ ------
Total mortgage debt........................................ 2,438 1,784
------ ------
Line of credit, with a variable rate of Eurodollar plus 1.75%
(7.5% at
December 31, 1998).......................................... 350 --
Other notes, with an average rate of 7.39% at December 31,
1998, maturing through December 2017........................ 90 89
Capital lease obligations.................................... 7 8
------ ------
Total other................................................ 447 97
------ ------
$5,131 $3,466
====== ======
</TABLE>
The detail above excludes $317 million of debt relating to the discontinued
senior living business in 1997.
On July 10, 1997, HMH Properties, Inc. ("Properties," an indirect wholly
owned subsidiary of Host Marriott) and HMC Acquisitions Properties, Inc.
("Acquisitions", an indirect, wholly owned subsidiary of Host Marriott)
completed consent solicitations (the "1997 Consent Solicitations") with
holders of their senior notes ($600 million of 9 1/2% senior notes due 2005
and $350 million of 9% senior notes due 2007) to amend
69
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain provisions of their senior indentures. The 1997 Consent Solicitations
facilitated the merger of Acquisitions with and into Properties. The
amendments to the indentures also increased the ability of Properties to
acquire, through certain subsidiaries, additional properties subject to non-
recourse indebtedness and controlling interests in corporations, partnerships
and other entities holding attractive properties and increased the threshold
required to permit Properties to make distributions to affiliates.
Concurrent with the 1997 Consent Solicitations and the Properties and
Acquisitions merger, Properties issued an aggregate of $600 million of 8 7/8%
senior notes at par with a maturity of July 2007. Properties received net
proceeds of approximately $570 million, net of the costs of the 1997 Consent
Solicitations and the offering.
In conjunction with the REIT Conversion, Properties was merged with the
Operating Partnership and all of the debt of Host Marriott and Properties was
assumed by the Operating Partnership.
During 1997, the Company, through its wholly owned subsidiary, HMC Capital
Resources Corporation ("Resources"), entered into a credit facility (the "Old
Credit Facility") with a group of commercial banks under which it could borrow
up to $500 million for the acquisition of lodging real estate and for the
Company's working capital purposes. During August 1998, the Old Credit
Facility was terminated.
The Company also purchased 100% of the outstanding bonds secured by a first
mortgage on the San Francisco Marriott in 1997. The Company purchased the
bonds for $219 million, an $11 million discount to the face value of $230
million. In connection with the redemption and defeasance of the bonds, the
Company recognized an extraordinary gain of $5 million, which represents the
$11 million discount less the write-off of unamortized deferred financing
fees, net of taxes. In 1997, the Company also incurred approximately $418
million of mortgage debt in conjunction with the acquisition of 11 hotels.
In connection with the acquisition of the outstanding common stock of Forum
Group, Inc. (the "Forum Group") in June 1997, the Company assumed debt of
approximately $270 million. In 1997, an additional $33 million of debt
financing was provided by Marriott International. The Company also assumed
approximately $15 million of debt in conjunction with the acquisition of the
Leisure Park retirement community in 1997. As a result of the Distribution,
the debt related to the Forum Group and Leisure Park retirement community is
included in net investments of discontinued operations for 1997 (Note 2). The
Company continues to provide a guarantee on the Leisure Park debt.
In the fourth quarter of 1996, the Company repaid the $109 million mortgage
on the Philadelphia Marriott. In the first quarter of 1997, the Company
obtained $90 million in first mortgage financing from two insurance companies
secured by the Philadelphia Marriott. The mortgage bears interest at a fixed
rate of 8.49% and matures in April 2009.
In December 1997, the Company successfully completed the refinancing of the
MHP (defined herein) mortgage debt for approximately $152 million. The new
mortgage bears interest at 7.48% and matures in January 2008. In connection
with the refinancing, the Company recognized an extraordinary loss of $2
million which represents payment of a prepayment penalty and the write-off of
unamortized deferred financing fees, net of taxes.
On April 20, 1998, the Company and certain of its subsidiaries filed a shelf
registration on Form S-3 (the "Shelf Registration") with the Securities and
Exchange Commission for the issuance of up to $2.5 billion in securities.
70
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 5, 1998, the Company (through Properties) utilized the Shelf
Registration to issue an aggregate of $1.7 billion in new senior notes (the
"New Senior Notes"). The New Senior Notes were issued in two series, $500
million of 7 7/8% Series A notes due in 2005 and $1.2 billion of 7 7/8% Series
B notes due in 2008. The Company utilized the proceeds from the New Senior
Notes to purchase substantially all of its (i) $600 million in 9 1/2% senior
notes due 2005; (ii) $350 million in 9% senior notes due 2007; and (iii) $600
million in 8 7/8% senior notes due 2007 (collectively, the "Old Senior
Notes"). Approximately $21 million of the Old Senior Notes remain outstanding.
In connection with the purchase of substantially all of the Old Senior Notes,
the Company recorded a charge of approximately $148 million (net of income tax
benefit of $80 million) as an extraordinary item representing the amount paid
for bond premiums and consent fees, as well as the write-off of deferred
financing fees on the Old Senior Notes.
Concurrently with each offer to purchase, Properties successfully solicited
consents (the "1998 Consent Solicitations") from registered holders of the Old
Senior Notes to certain amendments to eliminate or modify substantially all of
the restrictive covenants and certain other provisions contained in the
indentures pursuant to which the Old Senior Notes were issued.
In conjunction with the issuance of the New Senior Notes, Properties entered
into a $1.25 billion credit facility (the "New Credit Facility") with a group
of commercial banks. The New Credit Facility has an initial three-year term
with two one-year extension options. Borrowings under the New Credit Facility
bear interest currently at the Eurodollar rate plus 1.75% (7.5% at December
31, 1998). The interest rate and commitment fee on the unused portion of the
New Credit Facility fluctuate based on certain financial ratios. The New
Senior Notes and the New Credit Facility were assumed by the Operating
Partnership in connection with the REIT Conversion. As of December 31, 1998,
$350 million was outstanding under the New Credit Facility.
The New Credit Facility and the indenture under which the New Senior Notes
were issued contain covenants restricting the ability of Properties and
certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and make
certain distributions to equityholders of Properties, the Company, and the
Operating Partnership. The New Credit Facility also contains certain financial
covenants relating to, among other things, maintaining certain levels of
tangible net worth and certain ratios of EBITDA to interest and fixed charges,
total debt to EBITDA, unencumbered assets to unsecured debt, and secured debt
to total debt. In connection with the REIT Conversion, Properties was merged
with, and into, the Operating Partnership in December 1998.
In December 1998, the Operating Partnership issued $500 million of 8.45%
Series C notes due in 2008 under the same indenture and with the same
covenants as the New Senior Notes. In February 1999, the Company issued $300
million of 8 3/8% Series D notes due in 2006. The debt was used to refinance,
or purchase, approximately $299 million of debt acquired in the Partnership
Mergers, and approximately $40 million of other mortgage debt.
In December 1998, the Company became party to eight interest rate swap
agreements in connection with the Blackstone Acquisition discussed in Note 12.
The notional amount of the agreements is approximately $365 million, with
expiration dates between August 2000 and August 2002. The Company receives
interest based on one month LIBOR (5.06% at December 31, 1998) and pays
interest at fixed rates ranging from 5.72% to 6.60%. The interest rate swap
agreements allow the Company to effectively eliminate the variability of the
interest rates on certain secured debt. The Company was party to an interest
rate swap agreement with a financial institution with an aggregate notional
amount of $100 million which expired in December 1998. In 1997, the Company
was party to two additional interest rate swap agreements with an aggregate
notional amount of $400 million which expired in May 1997. The Company
realized a net reduction of interest expense of $1 million in 1997 and $6
million in 1996 related to interest rate swap agreements. The reduction in
interest expense in 1998 was not material as the Company did not assume the
agreements until December 30.
71
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's debt balance at December 31, 1998, includes $87 million of
debt that is recourse to the parent company. Aggregate debt maturities at
December 31, 1998 are (in millions):
<TABLE>
<S> <C>
1999.............................................................. $ 405
2000.............................................................. 206
2001.............................................................. 435
2002.............................................................. 430
2003.............................................................. 121
Thereafter........................................................ 3,523
------
5,120
Discount on senior notes.......................................... (10)
Interest rate swap agreements..................................... 14
Capital lease obligation.......................................... 7
------
$5,131
======
</TABLE>
Cash paid for interest for continuing operations, net of amounts
capitalized, was $325 million in 1998, $278 million in 1997 and $220 million
in 1996. Deferred financing costs, which are included in other assets,
amounted to $98 million and $96 million, net of accumulated amortization, as
of December 31, 1998 and January 2, 1998, respectively. Amortization of
deferred financing costs totaled $10 million, $7 million and $5 million in
1998, 1997 and 1996, respectively.
6. Company-obligated Mandatorily Redeemable Convertible Preferred Securities
of a Subsidiary Trust Whose Sole Assets are the Convertible Subordinated
Debentures Due 2026
In December 1996, Host Marriott Financial Trust (the "Issuer"), a wholly-
owned subsidiary trust of the Company, issued 11 million shares of 6 3/4%
convertible quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by the Company to the extent the Issuer has funds
available therefor. This guarantee, when taken together with the Company's
obligations under the indenture pursuant to which the Debentures (defined
below) were issued, the Debentures, the Company's obligations under the Trust
Agreement and its obligations under the indenture to pay costs, expenses,
debts and liabilities of the Issuer (other than with respect to the
Convertible Preferred Securities) provides a full and unconditional guarantee
of amounts due on the Convertible Preferred Securities. Proceeds from the
issuance of the Convertible Preferred Securities were invested in 6 3/4%
Convertible Subordinated Debentures (the "Debentures") due December 2, 2026
issued by the Company. The Issuer exists solely to issue the Convertible
Preferred Securities and its own common securities (the "Common Securities")
and invest the proceeds therefrom in the Debentures, which is its sole asset.
Separate financial statements of the Issuer are not presented because of the
Company's guarantee described above; the Company's management has concluded
that such financial statements are not material to investors as the Issuer is
wholly-owned and essentially has no independent operations.
Each of the Convertible Preferred Securities is convertible at the option of
the holder into shares of Company common stock at the rate of 3.2537 shares
per Convertible Preferred Security (equivalent to a conversion price of
$15.367 per share of Company common stock). The Debentures are convertible at
the option of the holders into shares of Host Marriott common stock at a
conversion rate of 3.2537 shares for each $50 in
72
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
principal amount of Debentures. The Issuer will only convert Debentures
pursuant to a notice of conversion by a holder of Convertible Preferred
Securities. During 1998, 1997 and 1996, no shares were converted into common
stock. The conversion ratio and price were adjusted to reflect the impact of
the Distribution and the Special Dividend.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and payable
quarterly in arrears thereafter. The distribution rate and the distribution
and other payment dates for the Convertible Preferred Securities will
correspond to the interest rate and interest and other payment dates on the
Debentures. The Company may defer interest payments on the Debentures for a
period not to exceed 20 consecutive quarters. If interest payments on the
Debentures are deferred, so too are payments on the Convertible Preferred
Securities. Under this circumstance, the Company will not be permitted to
declare or pay any cash distributions with respect to its capital stock or
debt securities that rank pari passu with or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result
of the acceleration of the Debentures upon the occurrence of a default, the
Convertible Preferred Securities are subject to mandatory redemption.
In connection with consummation of the REIT Conversion, the Operating
Partnership assumed primary liability for repayment of the Debentures of the
Company underlying the Convertible Preferred Securities. Upon conversion by a
Convertible Preferred Securities holder, the Company will issue shares of
Company common stock, which will be delivered to such holder. Upon the
issuance of such shares by the Company, the Operating Partnership will issue
to the Company a number of OP Units equal to the number of shares of Company
common stock issued in exchange for the Debentures.
7. Shareholders' Equity
Seven hundered fifty million shares of common stock, with a par value of
$0.01 per share, are authorized, of which 225.6 million and 203.8 million were
outstanding as of December 31, 1998 and January 2, 1998, respectively. Fifty
million shares of no par value preferred stock are authorized with none
outstanding.
In conjunction with the Merger, the Blackstone Acquisition and the
Partnership Mergers (Note 12), the Operating Partnership issued approximately
64.5 million OP Units which are convertible into cash (or at Host Marriott's
option shares of Host Marriott common stock). These OP Units are restricted
from converting until July 1999, October 1999 and January 2000 when 23.9
million, 11.9 million and 28.8 million units, respectively, are eligible for
conversion.
The Company issued 11.9 million shares of common stock as part of the
Special Dividend (Note 2) and 8.5 million shares of common stock in exchange
for 8.5 million OP Units issued to certain limited partners in connection with
the Partnership Mergers (Note 12). Also, as part of the REIT Conversion, the
Company changed its par value from $1 to $0.01 per share. The change in par
value did not affect the number of shares outstanding.
On March 27, 1996, the Company completed the issuance of 31.6 million shares
of common stock for net proceeds of nearly $400 million.
In connection with a class action settlement, the Company issued warrants to
purchase up to 7.7 million shares of the Company's common stock at $8.00 per
share through October 8, 1996 and $10.00 per share thereafter. During 1996,
6.8 million warrants were exercised at $8.00 per share and an equivalent
number of
73
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shares of Company common stock were issued. During 1997 and 1998, 60,000 and
98,000 warrants were exercised at $10.00 per share. On October 8, 1998, the
remaining warrants expired.
In November 1998, the Board of Directors adopted a shareholder rights plan
(as amended December 24, 1998) under which a dividend of one preferred stock
purchase right was distributed for each outstanding share of the Company's
common stock. Each right when exercisable entitles the holder to buy 1/1,000th
of a share of a series A junior participating preferred stock of the Company
at an exercise price of $55 per share, subject to adjustment. The rights were
exercisable 10 days after a person or group acquired beneficial ownership of
at least 20%, or began a tender or exchange offer for at least 20%, of the
Company's common stock. Shares owned by a person or group on November 3, 1998
and held continuously thereafter were exempt for purposes of determining
beneficial ownership under the rights plan. The rights are non-voting and
expire on November 22, 2008, unless exercised or previously redeemed by the
Company for $.005 each. If the Company was involved in a merger or certain
other business combinations not approved by the Board of Directors, each right
entitles its holder, other than the acquiring person or group, to purchase
common stock of either the Company or the acquiror having a value of twice the
exercise price of the right.
8. Income Taxes
In December 1998, the Company restructured itself to enable the Company to
qualify for treatment as a REIT, pursuant to the US Internal Revenue Code of
1986, as amended, effective January 1, 1999. In general, a corporation that
elects REIT status and distributes at least 95% of its taxable income to its
shareholders and complies with certain other requirements (relating primarily
to the nature of its assets and the sources of its revenues) is not subject to
Federal income taxation to the extent it distributes its taxable income.
Management believes that the Company was organized and will operate so as to
qualify as a REIT as of January 1, 1999 (including distribution of at least
95% of its REIT taxable income to shareholders in 1999 and subsequent years).
Management expects that the Company will pay taxes on "built-in gains" on only
certain of its assets. Based on these considerations, management does not
believe that the Company will be liable for income taxes at the federal level
or in most of the states in which it operates in future years, and the Company
eliminated $106 million of its net existing deferred tax liabilities as of
December 31, 1998. The Company does not expect to provide for any material
deferred income taxes in future periods except in certain states and foreign
countries. In connection with the Distribution and formation of the Non-
Controlled Subsidiaries, the Company reduced deferred income tax liabilities
by $102 million.
In order to qualify as a REIT for federal income tax purposes, among other
things, the Company must have distributed all of the accumulated earnings and
profits ("E&P") of Host Marriott Corporation to its stockholders in one or
more taxable dividends prior to the end of the first full taxable year for
which the REIT election of the Company is effective, which currently is
expected to be the taxable year commencing January 1, 1999.
74
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In an effort to help accomplish the requisite distributions of the
accumulated E&P, Host Marriott made an initial E&P distribution consisting of
approximately 20.4 million shares of Crestline valued at $297 million, $69
million in cash, and approximately 11.9 million shares of Host Marriott stock
valued at $143 million.
The actual amount of the initial E&P distribution was based, in part, upon
the estimated amount of accumulated E&P of Host Marriott as of the last day of
its taxable year. To the extent that the initial E&P distribution was not
sufficient to eliminate Host Marriott's accumulated E&P, Host Marriott will
make one or more additional taxable distributions to its stockholders (in the
form of cash or securities) prior to the last day of Host Marriott's first
full taxable year as a REIT.
Where required, deferred income taxes are accounted for using the asset and
liability method. Under this method, deferred income taxes are recognized for
temporary differences between the financial reporting bases of assets and
liabilities and their respective tax bases and for operating loss and tax
credit carryforwards based on enacted tax rates expected to be in effect when
such amounts are realized or settled. However, deferred tax assets are
recognized only to the extent that it is more likely than not that they will
be realized based on consideration of available evidence, including tax
planning strategies and other factors.
Total deferred tax assets and liabilities at December 31, 1998 and January
2, 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997
------- ------
(in millions)
<S> <C> <C>
Deferred tax assets..................................... $ 32 $ 159
Deferred tax liabilities................................ (129) (646)
------- ------
Net deferred income tax liability..................... $ (97) $ (487)
======= ======
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of December 31, 1998 and January 2, 1998 follows:
<CAPTION>
1998 1997
------- ------
(in millions)
<S> <C> <C>
Investments in affiliates............................... $ -- $ (310)
Property and equipment.................................. -- (179)
Safe harbor lease investments........................... (24) (65)
Deferred tax gain....................................... (105) (92)
Reserves................................................ -- 103
Alternative minimum tax credit carryforwards............ 32 41
Other, net.............................................. -- 15
------- ------
Net deferred income tax liability..................... $ (97) $ (487)
======= ======
</TABLE>
75
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Current--Federal............................................ $116 $19 $(2)
--State.............................................. 27 4 3
--Foreign............................................ 4 3 3
---- --- ---
147 26 4
---- --- ---
Deferred--Federal........................................... (49) 8 2
--State............................................. (12) 2 (1)
---- --- ---
(61) 10 1
---- --- ---
$ 86 $36 $ 5
==== === ===
</TABLE>
At December 31, 1998, the Company had approximately $32 million of
alternative minimum tax credit carryforwards available which do not expire.
Through 1997, the Company settled with the Internal Revenue Service ("IRS")
substantially all issues for tax years through 1993. The Company expects to
resolve any remaining issues with no material impact on the consolidated
financial statements. The Company made net payments to the IRS of
approximately $27 million, $10 million and $45 million in 1998, 1997 and 1996,
respectively, related to these settlements. Certain adjustments totaling
approximately $2 million in 1996 were made to the tax provision related to
those settlements.
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows (excluding the impact of the change in tax
status):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Statutory Federal tax rate.............................. 35.0% 35.0 % (35.0)%
State income taxes, net of Federal tax benefit.......... 5.8 4.9 21.7
Tax credits............................................. (1.7) (2.7) --
Additional tax on foreign source income................. 4.2 6.0 40.8
Tax contingencies....................................... -- -- 25.0
Permanent non-deductible REIT Conversion expenses....... 4.6 -- --
Other permanent items................................... 1.2 .1 9.0
Other, net.............................................. 0.3 .1 1.0
---- ---- -----
Effective income tax rate............................. 49.4% 43.4 % 62.5 %
==== ==== =====
</TABLE>
Crestline and the Company entered into a tax sharing agreement (the "Tax
Sharing Agreement") which defines each party's rights and obligations with
respect to deficiencies and refunds of federal, state and other income or
franchise taxes relating to Crestline's business for taxable years prior to
the Distribution and with respect to certain tax attributes of Crestline after
the Distribution. The Company is responsible for filing consolidated returns
and paying taxes for periods through the date of the Distribution, and
Crestline is responsible for filing its returns and paying taxes for
subsequent periods.
Cash paid for income taxes, including IRS settlements, net of refunds
received, was $83 million in 1998, $56 million in 1997 and $40 million in
1996.
76
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Leases
As of January 1, 1999, the Company leases substantially all of its hotels to
subsidiaries of Crestline. Additionally, the Company also leases certain
property and equipment under non-cancellable operating and capital leases.
Hotel Leases. Due to current federal income tax law restrictions on a REIT's
ability to derive revenues directly from the operation of a hotel, the Company
leases its hotels (the "Leases") to one or more lessees (the "Lessees").
There generally is a separate Lessee for each hotel or group of hotels that
is owned by a separate subsidiary of the Company. The operating agreements for
such Lessees provide that the Crestline member of the Lessee has full control
over the management of the business of the Lessee, subject to blocking rights
by Marriott International, where it is the manager, over certain decisions by
virtue of its non-economic, limited voting interest in the lessee
subsidiaries. Each full-service hotel Lease has a fixed term generally ranging
from seven to ten years, subject to earlier termination upon the occurrence of
certain contingencies as defined in the Leases. Each Lease requires the Lessee
to pay 1) minimum rent in a fixed dollar amount per annum plus 2) to the
extent it exceeds minimum rent, percentage rent based upon specified
percentages of aggregate sales from the applicable hotel, including room
sales, food and beverage sales, and other income in excess of specified
thresholds. The amount of minimum rent and the percentage rent thresholds will
be adjusted each year based upon any increases in the Consumer Price Index and
the Employment Cost Index during the previous 10 months, as well as for
certain capital expenditures and casualty occurrences.
If the Company anticipates that the average tax basis of the Company's FF&E
and other personal property that are leased by any individual lessor entity
will exceed 15% of the aggregate average tax basis of the fixed assets in that
entity, then the Lessee would be obligated either to acquire such excess FF&E
from the Company or to cause a third party to purchase such FF&E. The Lessee
has agreed to give a right of first opportunity to a Non-Controlled Subsidiary
to acquire the excess FF&E and to lease the excess FF&E to the Lessee.
Each Lessee is responsible for paying all of the expenses of operating the
applicable hotel(s), including all personnel costs, utility costs and general
repair and maintenance of the hotel(s). The Lessee also is responsible for all
fees payable to the applicable manager, including base and incentive
management fees, chain services payments and franchise or system fees, with
respect to periods covered by the term of the Lease. Host Marriott also
remains liable under each management agreement.
The Company is responsible for paying real estate taxes, personal property
taxes (to the extent the Company owns the personal property), casualty
insurance on the structures, ground lease rent payments, required expenditures
for FF&E (including maintaining the FF&E reserve, to the extent such is
required by the applicable management agreement) and other capital
expenditures.
Crestline Guarantees
Crestline and certain of its subsidiaries entered into limited guarantees of
the Lease obligations of each Lessee. For each of four identified "pools" of
hotels (determined on the basis of the term of the particular Lease with all
leases having generally the same lease term placed in the same "pool"), the
cumulative limit of Crestline's guaranty obligation is the greater of 10% of
the aggregate rent payable for the immediately preceding fiscal year under all
Leases in the pool or 10% of the aggregate rent payable under all Leases in
the pool. For each pool, the subsidiary of Crestline that is the parent of the
Lessees in the pool (a "Pool Parent") also is a party to the guaranty of the
Lease obligations for that pool.
77
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The obligations of the Pool Parent under each guaranty is secured by all
funds received by the applicable Pool Parent from the hotels in the pool, and
the hotels in the pool are required to distribute their excess cash flow to
the Pool Parent for each accounting period, under certain conditions as
described by the guaranty.
In the event that Crestline's obligation under a guaranty is reduced to
zero, the applicable Pool Parent can elect to terminate its guaranty and the
pooling agreement for that pool by giving notice to the Operating Partnership.
In that event, subject to certain conditions, the Pool Parent's guaranty will
terminate six months after the effective date of such notice, subject to
reinstatement in certain limited circumstances.
The Operating Partnership sold the existing working capital to the
applicable Lessee upon the commencement of the Lease at a price equal to the
fair market value of such assets. The purchase price is represented by a note
evidencing a loan that bears interest at a rate of 5.12%. Interest accrued on
the working capital loan is due simultaneously with each periodic rent
payment, and the amount of each payment of interest is credited against such
rent payment. The principal amount of the working capital loan is payable upon
termination of the Lease. The Lessee can return the working capital in
satisfaction of the note. As of December 31, 1998, the note receivable from
Crestline for working capital was $95 million.
In the event the Company enters into an agreement to sell or otherwise
transfer any full-service hotel free and clear of the applicable Lease, the
Lessor must pay the Lessee a termination fee equal to the fair market value of
the Lessee's leasehold interest in the remaining term of the Lease using a
discount rate of 12%. Alternatively, the Lessor will be entitled to (i)
substitute a comparable hotel or hotels for any hotel that is sold or (ii)
sell the hotel subject to the Lease and certain conditions without being
required to pay a termination fee.
In the event that changes in the Federal income tax laws allow the Company,
or subsidiaries or affiliates of the Company, to directly operate the hotels
without jeopardizing the Company's status as a REIT, the Company will have the
right to terminate all, but not less than all, of the full-service and HPT
hotel Leases in return for paying the Lessees the fair market value of the
remaining terms of the full-service hotel Leases, valued in the same manner as
discussed above. The payment is payable in cash or, subject to certain
conditions, shares of the Company's common stock, at the election of the
Company. The rights of each Lessee will be expressly subordinated to
qualifying mortgage debt and any refinancing thereof.
The Company sold and leased back 37 of its Courtyard properties in 1995 and
an additional 16 Courtyard properties in 1996 to Hospitality Properties Trust
("HPT"). Additionally, in 1996, the Company sold and leased back 18 of its
Residence Inns to HPT. These leases, which are accounted for as operating
leases and are included in the table below, have initial terms expiring
through 2012 for the Courtyard properties and 2010 for the Residence Inn
properties, and are renewable at the option of the Company. Minimum rent
payments are $51 million annually for the Courtyard properties and $17 million
annually for the Residence Inn properties, and additional rent based upon
sales levels are payable to the owner under the terms of the leases.
In connection with the REIT Conversion, the Operating Partnership sublet the
HPT hotels (the "Subleases") to separate indirect sublessee subsidiaries of
Crestline ("Sublessee"), subject to the terms of the applicable HPT Lease.
The term of each Sublease expires simultaneously with the expiration of the
initial term of the HPT lease to which it relates and automatically renews for
the corresponding renewal term under the HPT lease, unless either the HPT
lessee (the "Sublessor") elects not to renew the HPT lease, or the Sublessee
elects not to renew the Sublease at the expiration of the initial term
provided, however, that neither party can elect to terminate fewer than all of
the Subleases in a particular pool of HPT hotels (one for Courtyard by
Marriott hotels and one for Residence Inn hotels). Rent under the Sublease
consists of the Minimum Rent payable under the HPT lease and an additional
percentage rent payable to the Sublessor. The percentage rent is sufficient to
cover the additional
78
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rent due under the HPT lease, with any excess being retained by the Sublessor.
The rent payable under the Subleases is guaranteed by Crestline, up to a
maximum amount of $30 million which amount is allocated between the two pools
of HPT hotels.
A number of the Company's leased hotel properties also include long-term
ground leases for certain hotels, generally with multiple renewal options.
Certain leases contain provision for the payment of contingent rentals based
on a percentage of sales in excess of stipulated amounts. Future minimum
annual rental commitments for all non-cancelable leases for which the Company
is the lessee are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(in millions)
<S> <C> <C>
1999....................................................... $ 2 $ 119
2000....................................................... 1 116
2001....................................................... 1 111
2002....................................................... 1 106
2003....................................................... 1 102
Thereafter................................................. 4 1,292
--- ------
Total minimum lease payments............................... 10 $1,846
======
Less amount representing interest.......................... (3)
---
Present value of minimum lease payments.................. $ 7
===
</TABLE>
Certain of the lease payments included in the table above relate to
facilities used in the Company's former restaurant business. Most leases
contain one or more renewal options, generally for five or 10-year periods.
Future rentals on leases have not been reduced by aggregate minimum sublease
rentals from restaurants and HPT subleases of $103 million and $915 million,
respectively, payable to the Company under non-cancellable subleases.
The aggregate minimum rental payments to be received by the Operating
Partnership under the hotel leases are $774 million in 1999 and will be
adjusted in future periods based on changes in the Consumer Price Index and
Employment Cost Index.
In conjunction with the refinancing of the mortgage of the New York Marriott
Marquis, the Company also renegotiated the terms of the ground lease. The
renegotiated ground lease provides for the payment of a percentage of the
hotel sales (3% in 1998, 4% in 1999 and 5% thereafter) through 2017, which is
to be used to amortize the existing deferred ground rent obligation of $116
million. The Company has the right to purchase the land under certain
circumstances.
The Company remains contingently liable at December 31, 1998 on certain
leases relating to divested non-lodging properties. Such contingent
liabilities aggregated $93 million at December 31, 1998. However, management
considers the likelihood of any substantial funding related to these leases to
be remote.
Rent expense consists of:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Minimum rentals on operating leases........................... $104 $ 98 $83
Additional rentals based on sales............................. 26 20 16
---- ---- ---
$130 $118 $99
==== ==== ===
</TABLE>
79
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Employee Stock Plans
At December 31, 1998, the Company maintained two stock-based compensation
plans, including the comprehensive stock plan (the "Comprehensive Plan"),
whereby the Company may award to participating employees (i) options to
purchase the Company's common stock, (ii) deferred shares of the Company's
common stock and (iii) restricted shares of the Company's common stock and the
employee stock purchase plan (the "Employee Stock Purchase Plan").
Total shares of common stock reserved and available for issuance under the
Comprehensive Plan at December 31, 1998 was 26.6 million.
Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. Non-qualified options generally expire up to 15 years after the
date of grant. Most options vest ratably over each of the first four years
following the date of the grant. In connection with the Marriott International
Distribution in 1993, the Company issued an equivalent number of Marriott
International options and adjusted the exercise prices of its options then
outstanding based on the relative trading prices of shares of the common stock
of the two companies.
In connection with the Host Marriott Services ("HM Services") spin-off in
1995, outstanding options held by current and former employees of the Company
were redenominated in both Company and HM Services stock and the exercise
prices of the options were adjusted based on the relative trading prices of
shares of the common stock of the two companies. Pursuant to the distribution
agreement between the Company and HM Services, the Company has the right to
receive up to 1.4 million shares of HM Services' common stock or an equivalent
cash value subsequent to exercise of the options held by certain former and
current employees of Marriott International. As of December 31, 1998, the
Company valued this right at approximately $9 million, which is included in
other assets.
Effective December 29, 1998, the Company adjusted the number of outstanding
stock options and the related exercise prices to maintain the intrinsic value
of the options to account for the Special Dividend and the Distribution. The
vesting provisions and option period of the original grant was retained. No
compensation expense was recorded by the Company as a result of these
adjustments. Employee optionholders that remained with the Company received
options only in the Company's stock and those employee optionholders that
became Crestline employees received Crestline options in exchange for the
Company's options.
The Company continues to account for expense under its plans according to
the provisions of Accounting Principle Board Opinion 25 and related
interpretations as permitted under SFAS No. 123. Consequently, no compensation
cost has been recognized for its fixed stock options under the Comprehensive
Plan and its Employee Stock Purchase Plan.
For purposes of the following disclosures required by SFAS No. 123, the fair
value of each option granted has been estimated on the date of grant using an
option-pricing model with the following weighted average assumptions used for
grants in 1997 and 1996, respectively: risk-free interest rate of 6.2% and
6.6%, respectively, volatility of 35% and 36%, respectively, expected lives of
12 years and no dividend yield. The weighted average fair value per option
granted during the year was $13.13 in 1997 and $8.68 in 1996. No options were
granted in 1998. Pro forma compensation cost for 1998, 1997 and 1996 would
have reduced (increased) net income (loss) by approximately $524,000, $330,000
and ($150,000), respectively. Basic and diluted earnings per share on a pro
forma basis were not impacted by the pro forma compensation cost in 1998, 1997
and 1996.
The effects of the implementation of SFAS No. 123 are not representative of
the effects on reported net income in future years because only the effects of
stock option awards granted in 1996 and 1997 have been considered.
80
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's stock option plan for 1998, 1997
and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(in millions) Exercise Price (in millions) Exercise Price (in millions) Exercise Price
------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, at beginning of
year................... 6.8 $ 4 8.3 $ 4 10.0 $ 4
Granted................. -- -- .1 20 .2 13
Exercised............... (1.3) 5 (1.6) 4 (1.9) 4
Forfeited/Expired....... (0.6) 4 -- -- -- --
Adjustment for
Distribution and
Special Dividend....... 0.7 3 -- -- -- --
---- ---- ----
Balance, at end of
year................... 5.6 3 6.8 4 8.3 4
==== ==== ====
Options exercisable at
year-end............... 5.5 6.4 7.6
==== ==== ====
</TABLE>
The following table summarizes information about stock options at December
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Prices (in millions) Life Price (in millions) Price
------------------------ ------------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$ 1 - 3 4.1 8 $ 2 4.1 $ 2
4 - 6 0.8 6 5 0.8 5
7 - 9 0.4 11 8 0.4 8
10 - 12 0.1 12 10 0.1 10
13 - 15 0.1 13 13 0.1 13
19 - 22 0.1 14 18 -- --
--- ---
5.6 5.5
=== ===
</TABLE>
Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. The Company accrues compensation expense for
the fair market value of the shares on the date of grant, less estimated
forfeitures. In 1998, 1997 and 1996, 12,000, 14,000 and 13,000 shares were
granted, respectively, under this plan. The compensation cost that has been
charged against income for deferred stock was not material in 1998, 1997 and
1996. The weighted average fair value per share granted during each year was
$19.21 in 1998, $15.81 in 1997 and $11.81 in 1996.
The Company from time to time awards restricted stock plan shares under the
Comprehensive Plan to officers and key executives to be distributed over the
next three to 10 years in annual installments based on continued employment
and the attainment of certain performance criteria. The Company recognizes
compensation expense over the restriction period equal to the fair market
value of the shares on the date of issuance adjusted for forfeitures, and
where appropriate, the level of attainment of performance criteria and
fluctuations in the fair market value of the Company's common stock. In 1998,
1997 and 1996, 2,900, 198,000 and 2,511,000 shares of additional restricted
stock plan shares were granted to certain key employees under these terms and
conditions. Approximately 16,842 and 161,000 shares were forfeited in 1998 and
1996, respectively. There were no shares forfeited in 1997. The Company
recorded compensation expense of $11 million, $13 million and $11 million in
1998, 1997 and 1996, respectively, related to these awards. The weighted
average fair value per share granted during each year was $18.13 in 1998,
$16.88 in 1997 and $14.01 in 1996. Under these awards 925,000 shares were
outstanding at December 31, 1998. The Board has voted to approve 3,199,000
shares for award in 1999 under similar terms.
81
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1998, 568,408 stock appreciation rights ("SARs") were issued under the
Comprehensive Plan to certain directors of the Company as a replacement for
previously issued options that were cancelled during the year. The conversion
to SARs was completed in order to comply with ownership limits applicable to
the Company upon conversion to a REIT. The SARs are fully vested and the grant
prices range from $1.20 to $5.13. In 1998, the Company recognized compensation
expense of $4.8 million related to this grant. Additionally, in future
periods, the Company will recognize compensation expense for outstanding SARs
as a result of fluctuations in the market price of the Company's common stock.
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at 90% of the lower of market
value at the beginning or market value at the end of the plan year.
11. Profit Sharing and Postemployment Benefit Plans
The Company contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements
and electing participation in the plans. The amount to be matched by the
Company is determined annually by the Board of Directors. The Company provides
medical benefits to a limited number of retired employees meeting restrictive
eligibility requirements. Amounts for these items were not material in 1996
through 1998.
12. Acquisitions and Dispositions
The Company acquired or gained controlling interest in 36 hotels with 15,166
rooms in 1998, 18 hotels with 9,128 rooms in 1997 and 24 hotels with 11,385
rooms in 1996. The Company has also disposed of a number of hotels, including
two hotels since 1997 and one subsequent to year-end 1998. Twenty-five of the
1998 acquisitions, consisting of the Blackstone Acquisition and the
Partnership Mergers, were completed on December 30, 1998 in conjunction with
the REIT Conversion. Additionally, three full-service properties were
contributed to one of the Non-Controlled Subsidiaries (Note 4). Each of these
transactions is discussed separately below.
1998 Acquisitions. In January 1998, the Company acquired an additional
interest in Atlanta Marriott Marquis II Limited Partnership, which owns an
interest in the 1,671-room Atlanta Marriott Marquis Hotel, for $239 million,
including the assumption of $164 million of mortgage debt. The Company
previously owned a 1.3% general and limited partnership interest. In March
1998, the Company acquired a controlling interest in a partnership that owns
three hotels: the 359-room Albany Marriott, the 350-room San Diego Marriott
Mission Valley and the 320-room Minneapolis Marriott Southwest for
approximately $50 million. In the second quarter of 1998, the Company acquired
the partnership that owns the 289-room Park Ridge Marriott in Park Ridge, New
Jersey for $24 million. The Company previously owned a 1% managing general
partner interest and a note receivable interest in such partnership. In
addition, the Company acquired the 281-room Ritz-Carlton, Phoenix for $75
million, the 397-room Ritz-Carlton in Tysons Corner, Virginia for $96 million
and the 487-room Torrance Marriott near Los Angeles, California for $52
million. In the third quarter of 1998, the Company acquired the 308-room Ritz-
Carlton, Dearborn for $65 million, the 336-room Ritz-Carlton, San Francisco
for $161 million and the 404-room Memphis Crowne Plaza (which was converted to
the Marriott brand upon acquisition) for $16 million.
Blackstone Acquisition. In December 1998, the Company completed the
acquisition of, or controlling interests in, twelve hotels and one mortgage
loan secured by an additional hotel (the "Blackstone Acquisition") from the
Blackstone Group, a Delaware limited partnership, and a series of funds
controlled by affiliates of Blackstone Real Estate Partners (together, the
"Blackstone Entities"). In addition, the Company acquired a 25% interest in
Swissotel Management (USA) L.L.C., which operates five Swissotel hotels in the
United States, from
82
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Blackstone Entities, which the Company transferred to Crestline in
connection with the Distribution. The Operating Partnership issued
approximately 43.9 million OP Units, which OP Units are redeemable for cash
(or at Host Marriott's option, shares of common stock of Host Marriott)
assumed debt and made cash payments totaling approximately $920 million and
distributed 1.4 million of the shares of Crestline common stock to the
Blackstone Entities. The actual number of OP Units to be issued to the
Blackstone Entities will fluctuate based upon certain adjustments to be
determined on March 31, 1999. Based on current stock prices, the Operating
Partnership will be required to issue to the Blackstone Entities approximately
3.7 million additional units in April 1999. The consideration received by the
Blackstone Entities was determined through negotiations between the Company
and Blackstone and was not based upon appraisals of the assets. Each OP Unit
is exchangeable for one share of the Company's common stock (or its cash
equivalent, at the Company's election). After all adjustments, the Blackstone
Entities will own approximately 16.4% of the outstanding OP Units of the
Operating Partnership.
At the closing of the Blackstone Acquisition, the hotels were leased to
subsidiaries of Crestline but will continue to be managed on behalf of the
Lessees under their existing management agreements.
Partnership Mergers. In December 1998, the Company announced the completion
of the Partnership Mergers which was the roll-up of eight public partnerships
and four private partnerships which own or control 28 properties, 13 of which
were already consolidated (the "Partnership Mergers"). The Operating
Partnership issued approximately 25 million OP Units to partners for their
interests valued at approximately $333 million. The eight public partnerships
that merged are: the Atlanta Marriott Marquis II, Limited Partnership
("Atlanta Marquis"); Desert Springs Marriott Limited Partnership ("Desert
Springs"); Hanover Marriott Limited Partnership ("Hanover"); Marriott
Diversified American Hotels, Limited Partnership ("MDAH"); Marriott Hotel
Properties, Limited Partnership ("MHP"); Marriott Hotel Properties II, Limited
Partnership ("MHP2"); Mutual Benefit Chicago Marriott Suite Hotel Partners,
Limited Partnership ("Chicago Suites") and Potomac Hotel Limited Partnership
("PHLP") (collectively, the "Public Partnerships"). The four private
partnerships in which all or controlling interests also were acquired include
privately-held ownership interests in the Atlanta Marriott Marquis; The Ritz-
Carlton, Naples; The Ritz-Carlton, Buckhead; the New York Marriott Marquis and
the Hartford Marriott (collectively, the "Private Partnerships"). The Company
had previously not consolidated three of the 12 partnerships. Those three
partnerships are: 1) MDAH, the owner of six full-service Marriott hotels; 2)
PHLP, the owner of eight Marriott hotels (two of which were previously
consolidated) and 3) Chicago Suites, the owner of the 256-room Marriott O'Hare
Suites. As a result of these transactions, the Company has increased its
ownership of most of the 28 properties to 100% while consolidating 13
additional hotels (4,445 rooms).
1998 Dispositions. In 1998, the Company sold the 662-room New York Marriott
East Side for approximately $191 million and recorded a pre-tax gain of
approximately $40 million. The Company also sold the 191-room Napa Valley
Marriott for approximately $21 million and recorded a pre-tax gain of
approximately $10 million.
1999 Dispositions. In February 1999, the Company sold the 479-room
Minneapolis/Bloomington Marriott for approximately $35 million and recorded a
pre-tax gain of approximately $13 million.
1997 Acquisitions. In 1997, the Company acquired eight full-service hotels
totaling 3,600 rooms for approximately $145 million. In addition, the Company
acquired controlling interests in nine full-service hotels totaling 5,024
rooms for approximately $621 million, including the assumption of
approximately $418 million of debt. The Company also completed the acquisition
of the 504-room New York Marriott Financial Center, after acquiring the
mortgage on the hotel for $101 million in late 1996.
83
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also in 1997, the Company acquired the outstanding common stock of the Forum
Group from Marriott Senior Living Services. The Company purchased the Forum
Group portfolio of 29 senior living communities for approximately $460
million, including approximately $270 million in debt. The Company also
acquired 49% of the remaining 50% interest in the partnership which owned the
418-unit Leisure Park retirement community for approximately $23 million,
including the assumption of approximately $15 million of debt. The Company
contributed these assets in conjunction with the Distribution of Crestline.
1996 Acquisitions. In 1996, the Company acquired six full-service hotels
totaling 1,964 rooms for an aggregate purchase price of approximately $189
million. In addition, the Company acquired controlling interests in 17 full-
service hotels totaling 8,917 rooms for an aggregate purchase price of
approximately $1.1 billion, including the assumption of approximately $696
million of debt. The Company also purchased the first mortgage of the 504-room
New York Marriott Financial Center for approximately $101 million.
In the first and second quarters of 1996, the Company completed the sale and
leaseback of 16 of its Courtyard properties and 18 of its Residence Inn
properties for $349 million. The Company received net proceeds of
approximately $314 million and will receive approximately $35 million upon
expiration of the leases. A deferred gain of $45 million on the sale/leaseback
transactions is being amortized over the initial term of the leases.
The Company's summarized, unaudited consolidated pro forma results of
operations, assuming the above transactions occurred on January 3, 1997, are
as follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Revenues................................................... $4,220 $3,919
Income before extraordinary items.......................... 189 71
Net income (loss).......................................... 41 74
Basic earnings (loss) per common share:
Income before extraordinary items........................ .88 .33
Basic earnings (loss) per common share................... .19 .34
Diluted earnings (loss) per common share:
Income before extraordinary items........................ .83 .32
Diluted earnings (loss) per common share................. .25 .33
</TABLE>
13. Fair Value of Financial Instruments
The fair values of certain financial assets and liabilities and other
financial instruments are shown below:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(in millions)
<S> <C> <C> <C> <C>
Financial assets
Short-term marketable securities.......... $ -- $ -- $ 354 $ 354
Receivables from affiliates............... 134 141 23 26
Notes receivable.......................... 69 69 29 46
Other..................................... 9 9 20 20
Financial liabilities
Debt, net of capital leases............... 5,110 5,125 3,458 3,493
Other financial instruments
Convertible Preferred Securities.......... 550 449 550 638
</TABLE>
84
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Short-term marketable securities and receivable Convertible Preferred
Securities are valued based on quoted market prices. Receivables from
affiliates, notes and other financial assets are valued based on the expected
future cash flows discounted at risk-adjusted rates. Valuations for secured
debt are determined based on the expected future payments discounted at risk-
adjusted rates. The fair values of the New Credit Facility and other notes are
estimated to be equal to their carrying value. Senior notes are valued based
on quoted market prices.
The fair value of the liability related to the interest rate swap agreements
assumed in the Blackstone Acquisition was $14 million. The fair value is based
on the estimated amount the Company would pay or receive to terminate the swap
agreements. The aggregate notional amount of the agreements was $365 million
at December 31, 1998 and $100 million at January 2, 1998.
14. Marriott International Distribution and Relationship with Marriott
International
The Company and Marriott International (formerly a wholly owned subsidiary,
the common stock of which was distributed to the Company's shareholders on
October 8, 1993) have entered into various agreements in connection with the
Marriott International Distribution and thereafter which provide, among other
things, that (i) the majority of the Company's hotel lodging properties are
managed by Marriott International under agreements with initial terms of 15 to
20 years and which are subject to renewal at the option of Marriott
International for up to an additional 16 to 30 years (see Note 15); (ii) 13 of
the Company's full-service properties are operated under franchise agreements
with Marriott International with terms of 15 to 30 years; (iii) Marriott
International provided the Company with $92 million of financing at an average
rate of 9% in 1997 related to the Company's discontinued senior living
operations; (iv) the Company acquired 49% of Marriott International's 50%
interest in the Leisure Park retirement community in 1997 for $23 million,
including approximately $15 million of assumed debt; (v) Marriott
International guarantees the Company's performance in connection with certain
loans and other obligations ($70 million at December 31, 1998); (vi) the
Company borrowed and repaid $109 million of first mortgage financing for
construction of the Philadelphia Marriott (see Note 5); (vii) Marriott
International and the Company formed a joint venture and Marriott
International provided the Company with $29 million in debt financing at an
average interest rate of 12.7% and $28 million in preferred equity in 1996 for
the acquisition of two full-service properties in Mexico City, Mexico; and
(viii) Marriott International provides certain limited administrative
services.
In 1998, 1997 and 1996, the Company paid to Marriott International $196
million, $162 million and $101 million, respectively, in hotel management
fees; $4 million, $13 million and $18 million, respectively, in interest and
commitment fees under the debt financing and line of credit provided by
Marriott International, and $3 million, $3 million and $4 million,
respectively, for limited administrative services. The Company also paid
Marriott International $9 million, $4 million and $2 million, respectively, of
franchise fees in 1998, 1997 and 1996. In connection with the discontinued
senior living communities' business, the Company paid Marriott International
$13 million and $6 million in management fees during 1998 and 1997,
respectively.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of the Company if certain events involving a change in
control of the Company occur.
15. Hotel Management Agreements
Most of the Company's hotels are subject to management agreements (the
"Agreements") under which Marriott International manages the Company's hotels,
generally for an initial term of 15 to 20 years with renewal terms at the
option of Marriott International of up to an additional 16 to 30 years. The
Agreements generally provide for payment of base management fees equal to one
to four percent of sales and incentive management
85
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
fees generally equal to 20% to 50% of Operating Profit (as defined in the
Agreements) over a priority return (as defined) to the Company, with total
incentive management fees not to exceed 20% of cumulative Operating Profit, or
20% of current year Operating Profit. In the event of early termination of the
Agreements, Marriott International will receive additional fees based on the
unexpired term and expected future base and incentive management fees. The
Company has the option to terminate certain management agreements if specified
performance thresholds are not satisfied. No agreement with respect to a
single lodging facility is cross-collateralized or cross-defaulted to any
other agreement and a single agreement may be canceled under certain
conditions, although such cancellation will not trigger the cancellation of
any other agreement.
As a result of the REIT Conversion, all fees payable under the Agreements
for subsequent periods are the primary obligations of the Lessees. The
obligations of the Lessees are guaranteed to a limited extent by Crestline.
The Company remains obligated to the managers in case the Lessee fails to pay
these fees (but it would be entitled to reimbursement from the Lessee under
the terms of the Leases).
Pursuant to the terms of the Agreements, Marriott International is required
to furnish the hotels with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in the
Marriott International hotel system. Chain Services include central training,
advertising and promotion, a national reservation system, computerized payroll
and accounting services, and such additional services as needed which may be
more efficiently performed on a centralized basis. Costs and expenses incurred
in providing such services are allocated among all domestic hotels managed,
owned or leased by Marriott International or its subsidiaries. In addition,
the Company's hotels also participate in the Marriott Rewards program. The
cost of this program is charged to all hotels in the Marriott hotel system.
Crestline, as the Company's Lessee, is obligated to provide the manager with
sufficient funds to cover the cost of (a) certain non-routine repairs and
maintenance to the hotels which are normally capitalized; and (b) replacements
and renewals to the hotels' property and improvements. Under certain
circumstances, Crestline will be required to establish escrow accounts for
such purposes under terms outlined in the Agreements.
Crestline assumed franchise agreements with Marriott International for 10
hotels. Pursuant to these franchise agreements, Crestline generally pays a
franchise fee based on a percentage of room sales and food and beverage sales
as well as certain other fees for advertising and reservations. Franchise fees
for room sales vary from four to six percent of sales, while fees for food and
beverage sales vary from two to three percent of sales. The terms of the
franchise agreements are from 15 to 30 years.
Crestline assumed management agreements with The Ritz-Carlton Hotel Company,
LLC ("Ritz-Carlton"), an affiliate of Marriott International, to manage ten of
the Company's hotels. These agreements have an initial term of 15 to 25 years
with renewal terms at the option of Ritz-Carlton of up to an additional 10 to
40 years. Base management fees vary from two to five percent of sales and
incentive management fees are generally equal to 20% of available cash flow or
operating profit, as defined in the agreements.
Crestline also assumed management agreements with hotel management companies
other than Marriott International and Ritz-Carlton for 23 of the Company's
hotels (10 of which are franchised under the Marriott brand). These agreements
generally provide for an initial term of 10 to 20 years with renewal terms at
the option of either party or, in some cases, the hotel management company of
up to an additional one to 15 years. The agreements generally provide for
payment of base management fees equal to one to four percent of sales.
Seventeen of the 23 agreements also provide for incentive management fees
generally equal to 10 to 25 percent of available cash flow, operating profit,
or net operating income, as defined in the agreements.
86
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Relationship with Crestline Capital Corporation
The Company and Crestline have entered into various agreements in connection
with the Distribution as discussed in Note 2 and further outlined below.
Distribution Agreement
Crestline and the Company entered into a distribution agreement (the
"Distribution Agreement"), which provided for, among other things, (i) the
distribution of shares of Crestline in connection with the Distribution; (ii)
the division between Crestline and the Company of certain assets and
liabilities; (iii) the transfer to Crestline of the 25% interest in the
Swissotel management company acquired in the Blackstone Acquisition and (iv)
certain other agreements governing the relationship between Crestline and the
Company following the Distribution. Crestline also granted the Company a
contingent right to purchase Crestline's interest in Swissotel Management
(USA) L.L.C. at fair market value in the event the tax laws are changed so
that the Company could own such interest without jeopardizing its status as a
REIT.
Subject to certain exceptions, the Distribution Agreement provides for,
among other things, assumptions of liabilities and cross-indemnities designed
to allocate to Crestline, effective as of the date of the Distribution,
financial responsibilities for liabilities arising out of, or in connection
with, the business of the senior living communities.
Asset Management Agreement
The Company and the Non-Controlled Subsidiaries entered into asset
management agreements (the "Asset Management Agreements") with Crestline
whereby Crestline agrees to provide advice on the operation of the hotels and
review financial results, projections, loan documents and hotel management
agreements. Crestline also agrees to consult on market conditions and
competition, as well as monitor and negotiate with governmental agencies,
insurance companies and contractors. Crestline will be paid a fee not to
exceed $4.5 million for each calendar year for its consulting services under
the Asset Management Agreements, which includes $0.25 million related to the
Non-Controlled Subsidiaries. The Asset Management Agreements each have terms
of two years with an automatic one year renewal, unless earlier terminated by
either party in accordance with the terms thereof.
Non-Competition Agreement
Crestline and the Company entered into a non-competition agreement that
limits the respective parties' future business opportunities. Pursuant to this
non-competition agreement, Crestline agrees, among other things, that until
the earlier of December 31, 2008, or the date on which it is no longer a
Lessee of more than 25% of the number of hotels owned by the Company at the
time of the Distribution, it will not own any full service hotel, manage any
limited service or full service hotel owned by the Company, or own or operate
a full service hotel franchise system operating under a common name brand,
subject to certain exceptions. In addition, the Company agrees not to
participate in the business of leasing, operating or franchising limited
service or full service properties, subject to certain exceptions.
1998 Employee Benefits and Other Employment Matters Allocation Agreement
As part of the REIT Conversion, the Company, the Operating Partnership and
Crestline entered into the 1998 Employee Benefits Allocation Agreement
relating to various compensation, benefits and labor matters. Under the
agreement, the Operating Partnership and Crestline each assumed certain
liabilities related to covered benefits and labor matters arising prior to the
effective date of the Distribution and relating to employees of
87
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
each organization, respectively, after the Distribution. The agreements also
govern the treatment of awards under the Comprehensive Plan and requires the
adoption of such a plan by Crestline and the Operating Partnership.
17. Litigation
The Company is and from time-to-time will be the subject of, or involved in,
judicial proceedings. Management believes that any liability or loss resulting
from such matters will not have a material adverse effect on the financial
position or results of operations of the Company.
In the fourth quarter of 1997, the Company reached a settlement in a lawsuit
against Trinity Industries and others for claims related to construction of
the New York Marriott Marquis. In settlement of the lawsuit, the Company and
its affiliate received a cash settlement of approximately $70 million, the
majority of which was considered a recovery of construction costs and $10
million of which has been recorded as other revenues in the accompanying
consolidated financial statements.
18. Geographic and Business Segment Information
The Company operates one business segment, hotel ownership. The Company's
hotels are primarily operated under the Marriott or Ritz-Carlton brands,
contain an average of nearly 465 rooms, as well as supply other amenities such
as meeting space and banquet facilities; a variety of restaurants and lounges;
gift shops and swimming pools. They are typically located in downtown,
airport, suburban and resort areas throughout the United States.
The Company evaluates the performance of its segment based primarily on
operating profit before depreciation, corporate expenses, and interest
expense. The Company's income taxes are included in the consolidated Federal
income tax return of the Company and its affiliates and is allocated based
upon the relative contribution to the Company's consolidated taxable
income/loss and changes in temporary differences. The allocation of taxes is
not evaluated at the segment level and, therefore, the Company does not
believe the information is material to the consolidated financial statements.
88
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents revenues and other financial information
excluding amounts related to the Company's discontinued senior living business
(in millions):
<TABLE>
<CAPTION>
1998
-----------------------------
Corporate
Hotels & Other Consolidated
------ --------- ------------
<S> <C> <C> <C>
Revenues.......................................... $3,492 $ 21 $3,513
Operating profit ................................. 618 43 661
Interest expense.................................. 328 7 335
Interest income................................... 37 14 51
Depreciation and amortization..................... 238 5 243
Capital expenditures.............................. 247 5 252
Total assets...................................... 7,908 360 8,268
<CAPTION>
1997
-----------------------------
Corporate
Hotels & Other Consolidated
------ --------- ------------
<S> <C> <C> <C>
Revenues.......................................... $2,806 $ 17 $2,823
Operating profit (loss)........................... 444 (12) 432
Interest expense.................................. 281 7 288
Interest income................................... 40 12 52
Depreciation and amortization..................... 226 5 231
Capital expenditures.............................. 154 4 158
Total assets...................................... 5,789 116 5,905
<CAPTION>
1996
-----------------------------
Corporate
Hotels & Other Consolidated
------ --------- ------------
<S> <C> <C> <C>
Revenues.......................................... $1,942 $ 15 $1,957
Operating profit (loss)........................... 256 (23) 233
Interest expense.................................. 228 9 237
Interest income................................... 31 17 48
Depreciation and amortization..................... 165 3 168
Capital expenditures.............................. 156 3 159
Total assets...................................... 4,770 382 5,152
</TABLE>
During most of 1998, the Company's foreign operations consisted of six full-
service hotel properties located in Mexico and Canada. As of December 31,
1998, the Company's foreign operations had decreased to four Canadian hotel
properties, as the hotels in Mexico were contributed to Rockledge Hotel
Properties, Inc. There were no intercompany sales between the properties and
the Company. The following table presents revenues and long-lived assets for
each of the geographical areas in which the Company operates (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Long-lived Long-lived Long-lived
Revenues Assets Revenues Assets Revenues Assets
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States...... $3,392 $7,112 $2,718 $4,412 $1,908 $3,587
International...... 121 89 105 222 49 218
------ ------ ------ ------ ------ ------
Total............. $3,513 $7,201 $2,823 $4,634 $1,957 $3,805
====== ====== ====== ====== ====== ======
</TABLE>
The long-lived assets for 1997 exclude $583 million of assets related to the
discontinued senior living business.
89
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
--------- --------- --------- ---------- ----------
(in millions, except per common share amounts)
<S> <C> <C> <C> <C> <C>
Revenues.................. $ 791 $ 839 $ 745 $ 1,138 $ 3,513
Operating profit before
minority interest,
corporate expenses and
interest................. 147 208 111 195 661
Income from continuing
operations............... 28 62 2 102 194
Income before
extraordinary items...... 30 66 4 95 195
Net income (loss)......... 30 66 (144) 95 47
Basic earnings (loss) per
common share:
Income from continuing
operations............. .13 .29 .01 .47 .90
Income before
extraordinary items.... .14 .31 .02 .44 .91
Net income (loss)....... .14 .31 (.67) .44 .22
Diluted earnings (loss)
per common share:
Income from continuing
operations............. .13 .26 .01 .43 .84
Income before
extraordinary items.... .14 .28 .02 .40 .85
Net income (loss)....... .14 .28 (.65) .40 .27
<CAPTION>
1997
--------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
--------- --------- --------- ---------- ----------
(in millions, except per common share amounts)
<S> <C> <C> <C> <C> <C>
Revenues.................. $ 624 $ 643 $ 615 $ 941 $ 2,823
Operating profit before
minority interest,
corporate expenses and
interest................. 91 124 82 135 432
Income from continuing
operations............... 6 26 6 9 47
Income before
extraordinary items...... 6 26 6 9 47
Net income................ 11 26 6 7 50
Basic earnings per common
share:
Income from continuing
operations............. .03 .12 .03 .04 .22
Income before
extraordinary items.... .03 .12 .03 .04 .22
Net income.............. .05 .12 .03 .03 .23
Diluted earnings per
common share:
Income from continuing
operations............. .03 .12 .03 .04 .22
Income before
extraordinary items.... .03 .12 .03 .04 .22
Net income.............. .05 .12 .03 .03 .23
</TABLE>
The quarterly data in the table above has been restated to reflect the
Company's senior living business as a discontinued operation and the impact of
the 1998 stock portion of the Special Dividend on earnings per share.
The first three quarters consist of 12 weeks each in both 1998 and 1997, and
the fourth quarter includes 16 weeks. The sum of the basic and diluted
earnings (loss) per common share for the four quarters in 1998 and 1997
differs from the annual earnings per common share due to the required method
of computing the weighted average number of shares in the respective periods.
90
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The information called for by Items 10-13 is incorporated by reference from
our 1999 Annual Meeting of Shareholders Notice and Proxy Statement (to be
filed pursuant to Regulation 14A not later than 120 days after the close of
fiscal year).
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(i) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under Item 8 of
this Report on Form 10-K.
(ii)FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the pages
indicated.
Financial Schedules:
<TABLE>
<CAPTION>
Page
----------
<C> <S> <C>
III. Real Estate and Accumulated Depreciation.................. S-1 to S-2
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
(iii)EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger by and among Host Marriott Corporation,
HMC Merger Corporation and Host Marriott L.P. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 333-
64793).
3.3 Bylaws of Host Marriott Corporation dated September 28, 1998
(incorporated by reference to Host Marriott Corporation Registration
Statement No. 333-64793).
3.4 Articles of Amendment and Restatement of Articles of Incorporation of
Host Marriott Corporation (incorporated by reference to Host Marriott
Corporation Registration Statement No. 333-64793).
4.1 Form of Common Stock Certificate of Host Marriott Corporation
(incorporated by reference to Host Marriott Corporation Registration
Statement No. 333-55807).
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.2 Guarantee Agreement, dated December 2, 1996, between Host Marriott
Corporation and IBJ Schroeder Bank & Trust Company, as Guarantee
Trustee (incorporated by reference to Exhibit 4.6 of Host Marriott
Corporation Registration Statement No. 333-19923).
4.3(i) Rights Agreement between Host Marriott Corporation and The Bank of
New York as Rights Agent dated as of November 23, 1998 (incorporated
by reference to Host Marriott Corporation Current Report on Form 8-K
dated November 23, 1998).
4.3(ii) Amendment No. 1 to Rights Agreement between Host Marriott
Corporation and The Bank of New York as Rights Agent dated as of
December 18, 1998 (incorporated by reference to Host Marriott
Corporation Current Report on Form 8-K dated December 18, 1998).
4.4 Indenture by and among HMC Acquisition Properties, Inc., as Issuer,
HMC SFO, Inc., as Subsidiary Guarantors, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Registration Statement No. 333-00768).
4.5 Indenture by and among HMH Properties, Inc., as Issuer, HMH
Courtyard Properties, Inc., HMC Retirement Properties, Inc.,
Marriott Financial Services, Inc., Marriott SBM Two Corporation, HMH
Pentagon Corporation and Host Airport Hotels, Inc., as Subsidiary
Guarantors, and Marine Midland Bank, as Trustee (incorporated by
reference to Host Marriott Corporation Registration Statement
33-95058).
4.6 Indenture by and among HMH Properties, Inc., as Issuer, and the
Subsidiary Guarantors named therein, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Current Report on Form 8-K dated August 6, 1998).
4.7 Indenture for the 6 3/4% Convertible Debentures, dated December 2,
1996, between Host Marriott Corporation and IBJ Schroeder Bank &
Trust Company, as Indenture Trustee (incorporated by reference to
Exhibit 4.3 of Host Marriott Corporation Registration Statement No.
333-19923).
4.8 Amended and Restated Trust Agreement, dated December 2, 1996, among
Host Marriott Corporation, IBJ Schroeder Bank & Trust Company, as
Property Trustee, Delaware Trust Capital Management, Inc., as
Delaware Trustee, and Robert E. Parsons, Jr., Bruce D. Wardinski and
Christopher G. Townsend, as Administrative Trustees (incorporated by
reference to Exhibit 4.2 of Host Marriott Corporation Registration
Statement No. 333-19923).
4.9 Amended and Restated Trust Agreement, dated as of December 29, 1998,
among HMC Merger Corporation, as Depositor, IBJ Schroder Bank &
Trust Company, as Property Trustee, Delaware Trust Capital
Management, Inc., as Delaware Trustee, and Robert E. Parsons, Jr.,
Ed Walter and Christopher G. Townsend, as Administrative Trustees.
10.1 Second Amended and Restated Agreement of Limited Partnership of Host
Marriott, L.P. (incorporated by reference to Exhibit 3.1 of Host
Marriott Corporation Registration Statement No. 333-55807).
10.2 Indenture between Host Marriott L.P., as Issuer, and Marine Midland
Bank, as Indenture Trustee, and Form of 6.56% Callable Note due
December 15, 2005 (incorporated by reference to Exhibit 4.1 of Host
Marriott Corporation Registration Statement No. 333-55807).
10.3 Amended and Restated Credit Agreement dated as of June 19, 1997 and
Amended and Restated as of August 5, 1998 among Host Marriott
Corporation, Host Marriott Hospitality, Inc., HMH Properties, Inc.,
Host Marriott, L.P., HMC Capital Resources Corp., Various Banks,
Wells Fargo Bank, National Association, The Bank of Nova Scotia and
Credit Lyonnais New York Branch, as Co-Arrangers, and Bankers Trust
Company as Arranger and Administrative Agent (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K
dated September 11, 1998).
10.4* First Amendment and Waiver of Amended and Restated Credit Agreement
dated as of June 19, 1997 and Amended and Restated as of August 5,
1998, among Host Marriott Corporation, Host Marriott Hospitality
Inc., HMH Properties, Inc., Host Marriott, L.P., HMC Capital
Resources Corp., Various Banks, Wells Fargo Bank, National
Association, The Bank of Nova Scotia and Credit Lyonnais New York
Branch, as Co-Arrangers and Bankers Trust Company as Arranger and
Administrative Agent dated as of November 25, 1998.
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.5* Second Amendment and Consent to Credit Agreement of Amended and
Restated Credit Agreement dated as of June 19, 1997 and Amended and
Restated as of August 5, 1998, among Host Marriott Corporation, Host
Marriott Hospitality Inc., HMH Properties, Inc., Host Marriott, L.P.,
HMC Capital Resources Corp., Various Banks, Wells Fargo Bank, National
Association, The Bank of Nova Scotia and Credit Lyonnais New York
Branch, as Co-Arrangers and Bankers Trust Company as Arranger and
Administrative Agent dated as of December 17, 1998.
10.6* Third Amendment and Waiver to Credit Agreement Amended and Restated
Credit Agreement dated as of June 19, 1997 and Amended and Restated as
of August 5, 1998, among Host Marriott Corporation, Host Marriott
Hospitality Inc., HMH Properties, Inc., Host Marriott, L.P., HMC
Capital Resources Corp., Various Banks, Wells Fargo Bank, National
Association, The Bank of Nova Scotia and Credit Lyonnais New York
Branch, as Co-Arrangers and Bankers Trust Company as Arranger and
Administrative Agent dated as of March 15, 1999.
10.7* Host Marriott L.P. Executive Deferred Compensation Plan effective as
of December 29, 1998 (formerly the Marriott Corporation Executive
Deferred Compensation Plan).
10.8 Host Marriott Corporation 1997 Comprehensive Incentive Stock Plan
(incorporated by reference to Host Marriott Corporation's Proxy
Statement filed April 3, 1997).
10.9 Distribution Agreement dated as of September 15, 1993 between Marriott
Corporation and Marriott International, Inc. (incorporated by
reference from Host Marriott Corporation Current Report on Form 8-K
dated October 23, 1993).
10.10 Amendment No. 1 to the Distribution Agreement dated December 29, 1995
by and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K
dated January 16, 1996).
10.11 Amendment No. 2 to the Distribution Agreement dated June 21, 1997 by
and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 333-
64793).
10.12 Amendment No. 3 to the Distribution Agreement dated March 3, 1998 by
and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 333-
64793).
10.13 Amendment No. 4 to the Distribution Agreement by and among Host
Marriott Corporation and Marriott International Inc. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 333-
64793).
10.14* Amendment No. 5 to the Distribution Agreement dated December 18, 1998
by and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International Inc.
10.15 Distribution Agreement dated December 22, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference to Host Marriott Corporation Current Report
on Form 8-K dated January 16, 1996).
10.16* Amendment to Distribution Agreement dated December 22, 1995 by and
between Host Marriott Corporation and Host Marriott Services
Corporation
10.17 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K
dated October 23, 1993).
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.18* License Agreement dated as of December 29, 1998 by and among Host
Marriott Corporation, Host Marriott, L.P., Marriott International,
Inc. and Marriott Worldwide Corporation.
10.19* Noncompetition Agreement between Host Marriott Corporation, Host
Marriott, L.P. and Crestline Capital Corporation and other parties
named therein.
10.20 Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Host Marriott Corporation Current Report
on Form 8-K dated October 23, 1993).
10.21 Restated Noncompetition Agreement dated March , 1998 by and among
Host Marriott Corporation, Marriott International, Inc. and Sodexho
Marriott Services, Inc. (incorporated by reference to Host Marriott
Corporation Registration Statement No. 333-64793).
10.22 First Amendment to Restated Noncompetition Agreement by and among Host
Marriott Corporation, Marriott International, Inc. and Sodexho
Marriott Services, Inc. (incorporated by reference to Host Marriott
Corporation Registration Statement No. 333-64793).
10.23 Host Marriott Lodging Management Agreement--Marriott Hotels, Resorts
and Hotels dated September 25, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 33-
51707).
10.24 Employee Benefits and Other Employment Matters Allocation Agreement
dated as of December 29, 1995 by and between Host Marriott Corporation
and Host Marriott Services Corporation (incorporated by reference to
Host Marriott Corporation Current Report on Form 8-K dated January 16,
1996).
10.25 Tax Sharing Agreement dated as of December 29, 1995 by and between
Host Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference to Host Marriott Corporation Current Report
on Form 8-K dated January 16, 1996).
10.26* Host Marriott, L.P. Retirement and Savings Plan and Trust.
10.27 Contribution Agreement dated as of April 16, 1998 among Host Marriott
Corporation, Host Marriott, L.P. and the contributors named therein,
together with Exhibit B (incorporated by reference to Exhibit 10.18 of
Host Marriott Corporation Registration Statement No. 333-55807).
10.28 Amendment No. 1 to Contribution Agreement dated May 8, 1998 among
Marriott Corporation, Host Marriott, L.P. and the contributors named
therein (incorporated by reference to Exhibit 10.19 of Host Marriott
Corporation Registration Statement No. 333-55807).
10.29 Amendment No. 2 to Contribution Agreement dated May 18, 1998 among
Host Marriott Corporation, Host Marriott, L.P. and the contributors
named therein (incorporated by reference to Exhibit 10.20 of Host
Marriott Corporation Registration Statement No. 333-55807).
#10.30 Form of Lease Agreement (incorporated by reference to Host Marriott
Corporation Registration Statement No. 333-64793).
#10.31 Form of Management Agreement for Full-Service Hotels (incorporated by
reference to Host Marriott Corporation Registration Statement No. 33-
51707).
#10.32 Form of Owner's Agreement between Host Marriott Corporation, Marriott
International and Crestline Capital Corporation (incorporated by
reference to Crestline Capital Corporation Registration Statement No.
333-64657).
10.33 Employee Benefits and Other Employment Matters Allocation Agreement
between Host Marriott Corporation, Host Marriott, L.P. and Crestline
Capital Corporation (incorporated by reference to Host Marriott
Corporation Registration Statement No. 333-64793).
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.34* Amendment to the Employee Benefits and Other Employment Matters
Allocation Agreement effective as of December 29, 1998 by and between
Host Marriott Corporation, Marriott International, Sodexho Marriott
Services, Inc., Crestline Capital Corporation and Host Marriott, L.P.
10.35 Pool Guarantee Agreement between Host Marriott Corporation, the
lessees referred to therein and Crestline Capital Corporation
(incorporated by reference to Host Marriott Corporation Registration
Statement No. 333-64793).
10.36 Pooling and Security Agreement by and among Host Marriott Corporation
and Crestline Capital Corporation (incorporated by reference to Host
Marriott Corporation Registration Statement No. 333- 64793).
10.37 Amended and Restated Communities Noncompetition Agreement
(incorporated by reference to Host Marriott Corporation Registration
Statement No. 333-64793).
10.38 Asset Management Agreement between Host Marriott, L.P. and Crestline
Capital Corporation (incorporated by reference to Crestline Capital
Corporation Registration Statement No. 333-64657).
12.1* Computation of Ratios of Earnings to Fixed Charges.
21* List of Subsidiaries of Host Marriott Corporation.
23.1* Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule. (Incorporated by reference to Host Marriott
Corporation 8-K/A filed on March 15, 1999)
</TABLE>
- --------
# Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
* Filed herewith.
95
<PAGE>
(b) REPORTS ON FORM 8-K
. November 25, 1998--Report of the announcement that Host Marriott mailed a
Proxy Statement to its stockholders relating to a special meeting of its
stockholders to be held on December 15, 1998.
. December 10, 1998--Report that Host Marriott and The Bank of New York
entered into an Amendment No. 3 to the Rights Agreement, dated November
23, 1998 which was originally entered into on February 3, 1989 and as
amended by Amendment No. 1, dated October 8, 1993, and further amended by
Amendment No. 2, dated November 3, 1998.
. December 22, 1998--Report of the announcement that Host Marriott and
certain of its subsidiaries executed an underwriting agreement and Host
Marriott agreed to issue and sell $500,000,000 aggregate principal amount
of 8.45% Series C Senior Notes due 2008 which was consummated on December
11, 1998.
. December 22, 1998--Report of the announcement of Host Marriott's
declaration of a special dividend payable in either cash or common stock
of Host Marriott, at the election of each Host Marriott stockholder, a
dividend of shares of Crestline Capital Corporation, a subsidiary of Host
Marriott, and a receipt of the necessary partnership approvals to acquire
eight public limited hotel partnerships.
. December 29, 1998--Report of the announcement that HMC Merger
Corporation, a Maryland corporation and formerly a wholly owned
subsidiary of Host Marriott Corporation, a Delaware corporation,
completed its merger with Host Marriott Corporation and, as the surviving
corporation in the merger, HMC Merger Corporation changed its name from
HMC Merger Corporation to Host Marriott Corporation.
. December 31, 1998--Report of the announcement that Host Marriott
successfully completed the final steps in its conversion to a real estate
investment trust ("REIT") and that it is positioned to elect REIT status
effective January 1, 1999. Also the announcement that Host Marriott
acquired ownership of, or controlling interests in, 12 upscale and luxury
full-service hotels and certain other assets from the Blackstone Group
and a series of funds controlled by Blackstone Real Estate Partners.
. January 14, 1999--Report that Host Marriott Corporation, through its
subsidiary Host Marriott L.P., acquired ownership of, or controlling
interests in, twelve upscale and luxury full-service hotels and certain
other assets from the Blackstone Group and a series of funds controlled
by Blackstone Real Estate Partners, and financial statements will be
filed within 60 days of the filing of the report.
. January 14, 1999--Report on the December 29, 1998 Host Marriott
Corporation distribution of Crestline shares to shareholders of record
and Host Marriott belief that the fair market value of the Crestline
shares on December 29, 1998 was $15.30 per share (a distribution value of
$1.53 per Host Marriott share) which is the value determined by the Host
Marriott Board of Directors.
. January 15, 1999--Report of the announcement that on December 30, 1998
Host Marriott Corporation had completed the final steps in its conversion
to a real estate investment trust ("REIT") and had positioned itself to
elect REIT status, effective January 1, 1999.
. January 22, 1999--Report that, based upon its annual budget for 1999,
Host Marriott Corporation estimates that on a standalone basis its 1999
Earnings Before Interest, Expense, Taxes, Depreciation and Amortization
and other non-cash items will be in the range of approximately $1.0
billion to $1.05 billion while its 1999 Funds From Operations will be in
the range of approximately $565 million to $595 million.
. March 15, 1999--Report that on December 30, 1998, Host Marriott
Corporation, through its subsidiary Host Marriott, L.P., acquired
ownership of, or controlling interests in, 12 upscale and luxury full-
service hotels and certain other assets from the Blackstone Group, and a
series of funds controlled by affiliates Blackstone Real Estate Partners.
In exchange for these assets, (1) Host Marriott, L.P. issued
approximately 43.9 million of its limited partnership units, assumed debt
and made cash payments totaling approximately $920 million and (2) Host
Marriott distributed 1.4 million shares of Crestline Capital Corporation.
The actual number of OP Units to be issued to the Blackstone Entities
will fluctuate based upon certain adjustments to be determined on March
31, 1999.
(d) OTHER INFORMATION
96
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Bethesda, State of
Maryland, on March 24, 1999.
Host Marriott Corporation
/s/ Robert E. Parsons, Jr.
By: _________________________________
Robert E. Parsons, Jr.
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Terence C. Golden President, Chief Executive March 24, 1999
______________________________________ Officer and Director
Terence C. Golden (Principal Executive
Officer)
/s/ Robert E. Parsons, Jr. Executive Vice President March 24, 1999
______________________________________ and Chief Financial
Robert E. Parsons, Jr. Officer (Principal
Financial Officer)
/s/ Donald D. Olinger Senior Vice President and March 24, 1999
______________________________________ Corporate Controller
Donald D. Olinger (Principal Accounting
Officer)
/s/ Richard E. Marriott Chairman of the Board of March 24, 1999
______________________________________ Directors
Richard E. Marriott
/s/ R. Theodore Ammon Director March 24, 1999
______________________________________
R. Theodore Ammon
/s/ Robert M. Baylis Director March 24, 1999
______________________________________
Robert M. Baylis
/s/ J.W. Marriott, Jr. Director March 24, 1999
______________________________________
J.W. Marriott, Jr.
/s/ Ann Dore McLaughlin Director March 24, 1999
______________________________________
Ann Dore McLaughlin
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ John G. Schreiber Director March 24, 1999
______________________________________
John G. Schreiber
/s/ Harry L. Vincent, Jr. Director March 24, 1999
______________________________________
Harry L. Vincent, Jr.
</TABLE>
98
<PAGE>
SCHEDULE III
Page 1 of 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in millions)
<TABLE>
<CAPTION>
Gross Amount at
Initial Costs December 31, 1998
----------------- Subsequent ------------------------ Date of
Buildings & Costs Buildings & Accumulated Completion of Date
Description Debt Land Improvements Capitalized Land Improvements Total Depreciation Construction Acquired
----------- ------ ---- ------------ ----------- ---- ------------ ------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full-service hotels:
New York Marriott
Marquis Hotel, New
York, NY.......... $ 145 $-- $552 $24 $-- $576 $576 $(144) 1986 N/A
Other full-service
properties, each
less than 5% of
total............. $2,293 $724 $5,638 $376 $727 $6,032 $6,759 $(413) various various
------ ---- ------ ---- ---- ------ ------ -----
Total full-
service......... 2,438 724 6,190 400 727 6,608 7,335 (557)
Other properties,
each less than 5%
of total.......... -- 13 5 -- 13 5 18 (18) various N/A
------ ---- ------ ---- ---- ------ ------ -----
Total........... $2,438 $737 $6,195 $400 $740 $6,613 $7,353 $(575)
====== ==== ====== ==== ==== ====== ====== =====
<CAPTION>
Depreciation
Description Life
----------- ------------
<S> <C>
Full-service hotels:
New York Marriott
Marquis Hotel, New
York, NY.......... 40
Other full-service
properties, each
less than 5% of
total............. 40
Total full-
service.........
Other properties,
each less than 5%
of total.......... various
Total...........
</TABLE>
S-1
<PAGE>
SCHEDULE III
Page 2 of 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in millions)
Notes:
(A) The change in total cost of properties for the fiscal years ended December
31, 1998, January 2, 1998 and January 3, 1997 is as follows:
<TABLE>
<S> <C>
Balance at December 29, 1995......................................... $2,986
Additions:
Acquisitions....................................................... 1,087
Capital expenditures............................................... 77
Transfers from construction-in-progress............................ 28
Deductions:
Dispositions and other............................................. (322)
------
Balance at January 3, 1997......................................... 3,856
Additions:
Acquisitions....................................................... 1.459
Capital expenditures............................................... 117
Transfers from construction-in-progress............................ 30
Deductions:
Dispositions and other............................................. (145)
------
Balance at January 2, 1998........................................... 5,317
Additions:
Acquisitions....................................................... 2,849
Capital Expenditures............................................... 46
Transfers from construction-in-progress............................ 14
Deductions:
Dispositions and other............................................. (91)
Transfers to Non-Controlled Subsidiary............................. (139)
Transfers to Spin-Off (Crestline Capital Corporation).............. (643)
------
Balance at December 31, 1998......................................... $7,353
======
</TABLE>
(B) The change in accumulated depreciation and amortization of real estate
assets for the fiscal years ended December 31, 1998, January 2, 1998 and
January 3, 1997 is as follows:
<TABLE>
<S> <C>
Balance at December 29, 1995........................................... $374
Depreciation and amortization.......................................... 96
Dispositions and other................................................. (59)
Balance at January 3, 1997............................................. 411
Depreciation and amortization.......................................... 126
Dispositions and other................................................. (31)
----
Balance at January 2, 1998............................................. 506
Depreciation and amortization.......................................... 132
Dispositions and other................................................. (13)
Transfers to Non-Controlled Subsidiary................................. (29)
Transfers to Spin-Off (Crestline Capital Corporation).................. (21)
----
Balance at December 31, 1998........................................... $575
====
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $5,786 million at December 31, 1998.
(D) The total cost of properties excludes construction-in-progress properties.
S-2
<PAGE>
Exhibit 4.9
AMENDED AND RESTATED
TRUST AGREEMENT
AMONG
HMC MERGER CORPORATION
AS DEPOSITOR,
IBJ SCHRODER BANK & TRUST COMPANY
AS PROPERTY TRUSTEE,
DELAWARE TRUST CAPITAL MANAGEMENT, INC.
AS DELAWARE TRUSTEE,
AND
THE ADMINISTRATIVE TRUSTEES NAMED HEREIN
DATED AS OF DECEMBER 29, 1998
HOST MARRIOTT FINANCIAL TRUST
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
DEFINED TERMS
SECTION 1.1. Definitions................................................... 2
ARTICLE 2
ESTABLISHMENT OF THE TRUST
SECTION 2.1. Name....................................................... 13
SECTION 2.2. Office of the Delaware Trustee; Principal Place of
Business................................................. 13
SECTION 2.3. Organizational Expenses.................................... 13
SECTION 2.4. Issuance of the Preferred Securities....................... 13
SECTION 2.5. Subscription and Purchase of Debentures;
Issuance of the Common Securities.......................... 14
SECTION 2.6. Declaration of Trust....................................... 14
SECTION 2.7. Authorization to Enter into Certain Transactions........... 15
SECTION 2.8. Assets of Trust............................................ 18
SECTION 2.9. Title to Trust Property.................................... 18
ARTICLE 3
PAYMENT ACCOUNT
SECTION 3.1. Payment Account............................................ 19
ARTICLE 4
DISTRIBUTIONS; REDEMPTION; EXCHANGE; CONVERSION
SECTION 4.1. Distributions.............................................. 19
SECTION 4.2. Redemption................................................. 20
SECTION 4.3. Conversion................................................. 22
SECTION 4.4. Special Event Exchange or Redemption....................... 25
SECTION 4.5. Subordination of Common Securities......................... 27
SECTION 4.6. Payment Procedures......................................... 27
SECTION 4.7. Tax Returns and Reports.................................... 27
SECTION 4.8. Payment of Taxes, Duties, Etc. of the Trust............... 27
SECTION 4.9. Payments under Indenture................................... 28
i
<PAGE>
PAGE
ARTICLE 5
TRUST SECURITIES CERTIFICATES
SECTION 5.1 Initial Ownership........................................ 28
SECTION 5.2 The Trust Securities Certificates........................ 28
SECTION 5.3 Delivery of Trust Securities Certificates................ 28
SECTION 5.4 Registration of Transfer and Exchange of Preferred
Securities; Restrictions on Transfer..................... 29
SECTION 5.5. Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates............................................. 33
SECTION 5.6. Persons Deemed Securityholders........................... 34
SECTION 5.7. Access to List of Securityholders' Names and Addresses... 34
SECTION 5.8. Maintenance of Office or Agency.......................... 34
SECTION 5.9. Appointment of Paying Agent.............................. 35
SECTION 5.10 Ownership of Common Securities by Depositor.............. 35
SECTION 5.11. Global Securities; Non-Global Securities; Common
Securities Certificate................................... 35
SECTION 5.12. Notices to Clearing Agency............................... 37
SECTION 5.13. Definitive Preferred Securities Certificates............. 37
SECTION 5.14. Rights of Securityholders................................ 37
SECTION 5.15. Restrictive Legends...................................... 37
ARTICLE 6
ACT OF SECURITYHOLDERS; MEETINGS; VOTING
SECTION 6.1. Limitations on Voting Rights............................. 38
SECTION 6.2. Notice of Meetings....................................... 40
SECTION 6.3. Meetings of Preferred Securityholders.................... 40
SECTION 6.4. Voting Rights............................................ 41
SECTION 6.5. Proxies, Etc............................................. 41
SECTION 6.6. Securityholder Action by Written Consent................. 41
SECTION 6.7. Record Date for Voting and Other Purposes................ 41
SECTION 6.8. Acts of Securityholders.................................. 41
SECTION 6.9. Inspection of Records.................................... 43
ARTICLE 7
REPRESENTATIONS AND WARRANTIES
SECTION 7.1. Representations and Warranties of the Property Trustee
and the Delaware Trustee................................. 43
SECTION 7.2. Representations and Warranties of Depositor.............. 44
ii
<PAGE>
PAGE
ARTICLE 8
THE TRUSTEES
SECTION 8.1. Certain Duties and Responsibilities...................... 44
SECTION 8.2. Notice of Defaults....................................... 46
SECTION 8.3. Certain Rights of Property Trustee....................... 48
SECTION 8.4. Not Responsible for Recitals or Issuance of Securities... 50
SECTION 8.5. May Hold Securities...................................... 50
SECTION 8.6. Compensation; Indemnity; Fees............................ 50
SECTION 8.7. Property Trustee Required; Eligibility of Trustees....... 51
SECTION 8.8. Conflicting Interests.................................... 51
SECTION 8.9. Resignation and Removal; Appointment of Successor........ 51
SECTION 8.10 Acceptance of Appointment by Successor................... 53
SECTION 8.11. Merger, Conversion, Consolidation or Succession to
Business...................................................53
SECTION 8.12. Preferential Collection of Claims Against Depositor
or Trust................................................. 54
SECTION 8.13. Reports by Property Trustee.............................. 54
SECTION 8.14. Reports to the Property Trustee.......................... 54
SECTION 8.15. Evidence of Compliance with Conditions Precedent......... 55
SECTION 8.16. Number of Trustees....................................... 55
SECTION 8.17. Delegation of Power...................................... 55
ARTICLE 9
TERMINATION, LIQUIDATION AND MERGER
SECTION 9.1. Termination upon Expiration Date......................... 56
SECTION 9.2. Early Termination........................................ 56
SECTION 9.3. Termination.............................................. 56
SECTION 9.4. Liquidation.............................................. 56
SECTION 9.5. Mergers, Consolidations, Amalgamations or Replacements of
the Trust................................................ 58
ARTICLE 10
MISCELLANEOUS PROVISIONS
SECTION 10.1. Limitation of Rights of Securityholders.................. 59
SECTION 10.2. Amendment................................................ 59
SECTION 10.3. Separability............................................. 60
SECTION 10.4. GOVERNING LAW............................................ 60
SECTION 10.5. Payments Due on Non-Business Day......................... 60
SECTION 10.6. Successors............................................... 60
SECTION 10.7. Headings................................................. 61
SECTION 10.8. Reports, Notices and Demands............................. 61
SECTION 10.9. Agreement Not to Petition................................ 61
SECTION 10.10. Trust Indenture Act; Conflict with Trust Indenture Act... 62
SECTION 10.11. Acceptance of Terms of Trust Agreement,
Guarantee and Indenture.................................. 62
iii
<PAGE>
PAGE
ARTICLE 11
REGISTRATION RIGHTS
SECTION 11.1. Registration Rights...................................... 62
EXHIBIT A Certificate of Trust of Host Marriott Financial Trust
EXHIBIT B Form of Certificate Depositary Agreement
EXHIBIT C Form of Common Securities of Host Marriott Financial Trust
EXHIBIT D Form of Preferred Securities of Host Marriott Financial Trust
EXHIBIT E Form of Regulation S Certificate
EXHIBIT F Form of Restricted Securities Certificate
EXHIBIT G Form of Unrestricted Securities Certificate
EXHIBIT H Notice of Conversion
iv
<PAGE>
HOST FINANCIAL TRUST*
Certain Sections of this Trust Agreement
relating to Sections 310 through 318
of the Trust Indenture Act of 1939:
TRUST INDENTURE TRUST AGREEMENT
SECTION SECTION
Section 310 (a)(1)..........................................8.7
(a)(2)..........................................8.7
(a)(4)..........................................2.7(a)(ii)
(b).............................................8.8
Section 311 (a).............................................8.12
(b).............................................8.12
Section 312 (a).............................................5.7
(b).............................................5.7
(c).............................................5.7
Section 313 (a).............................................8.13(a)
(c).............................................10.8
(d).............................................8.13(c)
(a)(4)..........................................8.13(b)
(b).............................................8.13(b)
Section 314 (a).............................................8.14
(b).............................................Not Applicable
(c)(1)..........................................8.15
(c)(2)..........................................8.15
(c)(3)..........................................Not Applicable
(d).............................................Not Applicable
(e).............................................1.1, 8.15
Section 315 (a).............................................8.1(a), 8.3(a)
(b).............................................8.2, 10.8
(c).............................................8.1(a)
(d).............................................8.1, 8.3
(e).............................................Not Applicable
Section 316 (a).............................................Not Applicable
(a)(1)(A).......................................Not Applicable
(a)(1)(B).......................................Not Applicable
(a)(2)..........................................Not Applicable
(b).............................................Not Applicable
(c).............................................6.7
Section 317 (a)(1)..........................................Not Applicable
(b).............................................5.9
Section 318 (a).............................................10.10
v
<PAGE>
* Note: This reconciliation and tie sheet shall not, for any purpose, be deemed
to be a part of the Trust Agreement.
vi
<PAGE>
AMENDED AND RESTATED TRUST AGREEMENT, dated as of December 29, 1998
among (i) HMC Merger Corporation, a Maryland corporation (including any
successors or assigns, "the Depositor"), (ii) IBJ Schroder Bank & Trust Company,
a New York banking corporation, as property trustee (in such capacity, the
"Property Trustee" and, in its personal capacity and not in its capacity as
Property Trustee, the "Bank"), (iii) Delaware Trust Capital Management, Inc., a
corporation duly organized and existing under the laws of the State of Delaware,
as Delaware trustee (in such capacity, the "Delaware Trustee"), (iv) Robert E.
Parsons, Jr., an individual, Ed Walter, an individual, and Christopher G.
Townsend, an individual, each of whose address is c/o Host Marriott Corporation,
10400 Fernwood Road, Bethesda, Maryland 20817, (each, an "Administrative
Trustee" and, collectively, the "Administrative Trustees" and, collectively with
the Property Trustee and Delaware Trustee, the "Trustees") and (v) the several
Holders as hereinafter defined.
W I T N E S S E T H:
WHEREAS, the Depositor and the Trustees have heretofore duly declared and
established a business trust pursuant to the Delaware Business Trust Act by the
entering into of that certain Trust Agreement, dated as of December 28, 1998
(the "Original Trust Agreement"), and by the execution and filing by the
Trustees with the Secretary of State of the State of Delaware of the Certificate
of Trust, filed on December 29, 1998, attached as Exhibit A, for the purposes of
(i) merging Host Financial Trust, a Delaware business trust originally formed on
November 25, 1996 (the "Old Trust") with and into the Trust (the "Merger"), (ii)
in connection with the Merger, having the Trust assume all of the obligations
and liabilities of the Old Trust, including under the Common Securities and the
Preferred Securities, which originally represented undivided beneficial
interests in the assets of the Old Trust, and pursuant to the Merger and this
Trust Agreement, hereafter represent undivided beneficial interests in the
assets of the Trust, and (iii) in connection with the Merger, acquiring all of
the Old Trust's assets and rights, including those accruing under the Debentures
(as defined herein) originally acquired by the Old Trust with the proceeds from
the sale of the Common Securities and the Preferred Securities pursuant to the
Purchase Agreement;
WHEREAS, other than the Common Securities and the Preferred Securities, no
interests in the Trust have been issued; and
NOW THEREFORE, in consideration of the agreements and obligations set forth
herein and for other good and valuable consideration, the sufficiency of which
is hereby acknowledged, each party, for the benefit of the other party and for
the benefit of the Holders of the Preferred Securities, hereby amends and
restates the Original Trust Agreement in its entirety and agrees as follows:
ARTICLE 1
DEFINED TERMS
SECTION 1.1. Definitions. For all purposes of this Trust Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to them in
this Article and include the plural as well as the singular;
1
<PAGE>
(b) all other terms used herein that are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein;
(c) unless the context otherwise requires, any reference to an "Article" or
a "Section" refers to an Article or a Section, as the case may be, of this Trust
Agreement; and
(d) the words "herein", "hereof" and "hereunder" and other words of similar
import refer to this Trust Agreement as a whole and not to any particular
Article, Section or other subdivision.
"Act" has the meaning specified in Section 6.8.
"Additional Amount" means, with respect to the Trust Securities, the amount
of Additional Interest (as defined in the Indenture) paid by the Depositor on
the Debentures.
"Additional Sums" means, with respect to the Trust Securities, the amount
of Additional Sums (as defined in the Indenture) paid by the Depositor on the
Debentures.
"Administrative Trustee" means each of Robert E. Parsons, Jr., Ed Walter
and Christopher G. Townsend, each solely in his capacity as Administrative
Trustee of the Trust formed and continued hereunder and not in his individual
capacity, or such Administrative Trustee's successor in interest in such
capacity, or any successor in interest in such capacity, or any successor
administrative trustee appointed as herein provided.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person, provided, however that an Affiliate of the
Depositor shall not be deemed to include the Trust. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Applicable Procedures" means, with respect to any transfer or transaction
involving a Global Certificate or beneficial interest therein, the rules and
procedures of Euroclear and Cedel, and of the Clearing Agency for such security,
in each case to the extent applicable to such transaction and as in effect from
time to time.
"Bank" has the meaning specified in the preamble to this Trust Agreement.
"Bankruptcy Event" means, with respect to any Person:
(a) the entry of a decree or order by a court having jurisdiction in
the premises judging such Person as bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjudication
or composition of or in respect of such Person under any applicable Federal
or State bankruptcy, insolvency, reorganization or other similar law, or
appointing a receiver, liquidator, assignee, trustee, sequestrator (or
other
2
<PAGE>
similar official) of such Person or of any substantial part of its property
or ordering the winding-up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period
of 60 consecutive days; or
(b) the institution by such Person of proceedings to be adjudicated as
bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under any
applicable Federal or State bankruptcy, insolvency, reorganization or other
similar law, or the consent by it to the filing of any such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or similar official) of such Person or of any substantial part of its
property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its
debts generally as they become due and its willingness to be adjudicated a
bankrupt, or the taking of corporate action by such Person in furtherance
of any such action.
"Bankruptcy Laws" has the meaning specified in Section 10.9.
"Board of Directors" means either the board of directors of the Depositor
or any committee of that board duly authorized to act hereunder.
"Book-Entry Preferred Securities Certificates" means a beneficial interest
in the Preferred Securities Certificates, ownership and transfers of which shall
be made through book entries by a Clearing Agency as described in Section 5.11.
"Business Day" means any day other than a Saturday or Sunday or a day on
which banking institutions in The City of New York are authorized or required by
law or executive order to remain closed or a day on which the Corporate Trust
Office of the Property Trustee or the corporate trust office of the Debenture
Trustee, is closed for business.
"Certificate Depository Agreement" means the agreement among the Old Trust,
the predecessor to the Depositor and The Depository Trust Company, as the
initial Clearing Agency, dated as of the Closing Date and assumed by the Trust
by operation of law pursuant to the Merger, relating to the Trust Securities
Certificates substantially in the form attached as Exhibit B, as the same may be
amended and supplemented from time to time.
"Certificated Preferred Security" has the meaning specified in Section 5.2.
"Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. The
Depository Trust Company will be the initial Clearing Agency.
"Clearing Agency Participant" means a broker, dealer, bank, other financial
institution or other Person for whom from time to time a Clearing Agency effects
book-entry transfers and pledges of securities deposited with the Clearing
Agency.
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"Closing Date" means the first Time of Delivery (as defined in the Purchase
Agreement), which date is the date of execution and delivery of the Restated
and Amended Trust Agreement of the Old Trust.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of this instrument such Commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties at such time.
"Common Securities Certificate" means a certificate evidencing ownership of
Common Securities, substantially in the form attached as Exhibit C, but
including any certificate evidencing ownership of Common Securities in the form
issued by the Old Trust.
"Common Security" means an undivided beneficial interest in the assets of
the Old Trust, which by operation of law pursuant to the Merger represents an
undivided beneficial interest in the assets of the Trust, having a Liquidation
Amount with respect to the assets of the Trust of $50 and having the rights
provided therefor in this Trust Agreement, including the right to receive
Distributions and a Liquidation Distribution as provided herein.
"Common Stock" means common stock, $0.01 par value per share, of the
Depositor.
"Conversion Agent" has the meaning specified in Section 4.3.
"Conversion Date" has the meaning specified in Section 4.3.
"Conversion Expiration Date" means the date selected by the Depositor not
less than 30 days nor more than 60 days after the date on which the Depositor
issues a press release announcing its intention to terminate the conversion
rights of the Holders.
"Conversion Price" has the meaning specified in Section 4.3.
"Corporate Trust Office" means the principal corporate trust office of the
Property Trustee at which at any particular time its corporate trust business
shall be administered, which office at the date hereof is located at One State
Street, 11th Floor, New York, New York 10004, Attention: Corporate Trust &
Agency Department.
"Current Market Price", with respect to Common Stock, means for any day the
last reported sale price, regular way, on such day, or, if no sale takes place
on such day, the average of the reported closing bid and asked prices on such
day, regular way, in either case as reported on the New York Stock Exchange
Composite Transactions Tape, or, if Common Stock is not listed or admitted to
trading on the New York Stock Exchange on such day, on the principal national
securities exchange on which Common Stock is listed or admitted to trading, if
Common Stock is listed on a national securities exchange, or the Nasdaq National
Market, or, if Common Stock is not quoted or admitted to trading on such
quotation system, on the principal quotation system on which Common Stock may be
listed or admitted to trading or quoted, or, if not listed or admitted to
trading or quoted on any national securities exchange or quotation system, the
average of the closing bid
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and asked prices of Common Stock in the over-the-counter market on the day in
question as reported by the National Quotation Bureau Incorporated, or a similar
generally accepted reporting service, or, if not so available in such manner, as
furnished by any New York Stock Exchange member firm selected from time to time
by the Board of Directors for that purpose or, if not so available in such
manner, as otherwise determined in good faith by the Board of Directors.
"Debenture Event of Default" means an "Event of Default" as defined in the
Indenture.
"Debenture Redemption Date" means, with respect to any Debentures to be
redeemed under the Indenture, the date fixed for redemption thereof under the
Indenture.
"Debenture Trustee" means IBJ Schroder Bank & Trust Company, a New York
banking corporation, as trustee under the Indenture.
"Debentures" means $567,050,000 aggregate principal amount of the
Depositor's predecessor's 6 3/4% convertible subordinated debentures issued
pursuant to the Indenture, the obligations under which have been assumed by the
Depositor.
"Definitive Preferred Securities Certificates" means either or both (as the
context requires) of (a) Preferred Securities Certificates issued in
certificated, fully registered form as provided in Section 5.11(a) and (b)
Preferred Securities Certificates issued in certificated, fully registered form
as provided in Section 5.13.
"Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware
Code, 12 Del. C. (S)(S) 3801, et. seq., as it may be amended from time to
time.
"Delaware Trustee" means the Person identified as the "Delaware Trustee" in
the preamble to this Trust Agreement solely in its capacity as Delaware Trustee
of the Trust formed and continued hereunder and not in its individual capacity,
or its successor in interest in such capacity, or any successor Delaware trustee
appointed as herein provided.
"Depositor" has the meaning specified in the preamble to this Trust
Agreement.
"Direct Action" has the meaning specified in Section 6.8.
"Distribution Date" has the meaning specified in Section 4.1(a).
"Distributions" means amounts payable in respect of the Trust Securities as
provided in Section 4.1.
"Early Termination Event" has the meaning specified in Section 9.2.
"Event of Default" means the occurrence of a Debenture Event of Default,
whatever the reason for such Debenture Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
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"Exchange Notice" has the meaning specified in Section 4.4(b).
"Expiration Date" has the meaning specified in Section 9.1.
"Global Certificate" means a Preferred Security that is registered in the
Securities Register in the name of a Clearing Agency or a nominee thereof.
"Guarantee" means the Guarantee Agreement executed and delivered by the
Depositor's predecessor and IBJ Schroder Bank & Trust Company, a New York
banking corporation, as guarantee trustee, on the Closing Date, for the benefit
of the Holders of the Preferred Securities, as amended from time to time.
"Holder" means a Person in whose name a Trust Securities Certificate
representing a Trust Security is registered, such Person being a beneficial
owner within the meaning of the Delaware Business Trust Act.
"Indenture" means the Convertible Subordinated Indenture, dated as of
December 2, 1996 between the Depositor's predecessor and the Debenture Trustee,
as amended or supplemented from time to time.
"Investment Company Event" means the receipt by the Property Trustee, on
behalf of the Trust, of an Opinion of Counsel, rendered by a law firm having a
national tax and securities practice (which Opinion of Counsel shall not have
been rescinded by such law firm), to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority (a "Change in 1940 Act Law") that there is more
than an insubstantial risk that the Trust is or will be considered an
"investment company" that is required to be registered under the 1940 Act, which
Change in 1940 Act Law becomes effective on or after the date of original
issuance of the Preferred Securities under this Trust Agreement.
"Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of
trust, adverse ownership interest, hypothecation, assignment, security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever.
"Liquidated Damages" has the meaning specified under the Indenture.
"Liquidation Amount" means an amount with respect to the assets of the
Trust equal to $50 per Trust Security.
"Liquidation Date" means each date on which Debentures or cash are to be
distributed to Holders of Trust Securities in connection with a termination and
liquidation of the Trust pursuant to Section 9.4(a).
"Liquidation Distribution" has the meaning specified in Section 9.4(d).
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"1940 Act" means the Investment Company Act of 1940, as amended.
"Notice of Conversion" means the notice given by a holder of Preferred
Securities to the Conversion Agent directing the Conversion Agent to exchange
such Preferred Security for Debentures and to convert such Debentures into
Common Stock on behalf of such holder. Such notice is substantially in the form
set forth in Exhibit H.
"Officers' Certificate" means a certificate signed by (i) the Chairman of
the Board, a Vice Chairman, the President or a Vice President, and by (ii) the
Treasurer, an Assistant Treasurer, the Controller, the Secretary or an Assistant
Secretary, of the Depositor, and delivered to the Trustee. One of the officers
signing an Officers' Certificate given pursuant to Section 8.15 shall be the
principal executive, financial or accounting officer of the Depositor. Any
Officers' Certificate delivered with respect to compliance with a condition or
covenant provided for in this Trust Agreement shall include:
(a) a statement that each officer signing the Officers' Certificate
has read the covenant of condition and the definitions relating
thereto;
(b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers'
Certificate;
(c) a statement that each officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable
such officer to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such officer,
such condition or covenant has been complied with.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Trust, the Property Trustee or the Depositor, and who may be an employee
of any thereof, and who shall be acceptable to the Property Trustee. Any Opinion
of Counsel delivered with respect to compliance with a condition or covenant
provided for in this Trust Agreement shall include:
(a) a statement that each individual signing the Opinion of Counsel
has read the covenant or condition and the definitions relating
thereto;
(b) a brief statement of the nature and scope of the examination or
investigation undertaken by each individual in rendering the Opinion
of Counsel;
(c) a statement that each individual has made such examination or
investigation as is necessary to enable such individual to express an
informed opinion as to whether or not such covenant or condition has
been complied with; and
(d) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
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"Optional Redemption Price" means, except as set forth below, with respect
to the Preferred Securities, the following percentages of the Liquidation
Amounts thereof, and accumulated and unpaid Distributions, if any, to the date
fixed for redemption if redeemed during the twelve-month period commencing
December 2 in each of the following years indicated:
Year Redemption Price Year Redemption Price
1999 104.725% 2003 102.025%
2000 104.050% 2004 101.350%
2001 103.375% 2005 100.675%
2002 102.700% 2006 and 100%
thereafter
In the event of a redemption of Trust Securities upon the occurrence of a Tax
Event, Trust Securities shall be redeemed at the redemption price of $50 per
Trust Security and all accumulated and unpaid Distributions, if any to the date
fixed for redemption.
In the event of a redemption of Trust Securities pursuant to Section 4.2(a)(ii),
Trust Securities shall be redeemed as the redemption price specified therein.
"Original Trust Agreement" has the meaning specified in the recitals to
this Trust Agreement.
"Outstanding", when used with respect to Trust Securities, means, as of the
date of determination, all Trust Securities theretofore executed and delivered
under this Trust Agreement, except:
(a) Trust Securities theretofore cancelled by the Securities Registrar
or delivered to the Securities Registrar for cancellation or tendered
for conversion;
(b) Trust Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Property
Trustee or any Paying Agent for the Holders of such Trust Securities;
provided that, if such Trust Securities are to be redeemed, notice of
such redemption has been duly given pursuant to this Trust Agreement;
and
(c) Trust Securities which have been paid or in exchange for or in
lieu of which other Trust Securities have been executed and delivered
pursuant to Section 5.5: provided, however, that in determining
whether the Holders of the requisite Liquidation Amount of the
Outstanding Trust Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Trust
Securities owned by the Depositor, any Trustee or any affiliate of
the Depositor or any Trustee shall be disregarded and deemed not to be
Outstanding, except that (a) in
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determining whether any Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or
waiver, only Trust Securities that such Trustee knows to be so owned
shall be so disregarded and (b) the foregoing shall not apply at any
time when all of the Outstanding Trust Securities are owned by the
Depositor, one or more of the Trustees and/or any such Affiliate.
Trust Securities so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction
of the Securities Registrar the pledgee's right so to act with respect
to such Trust Securities and that the pledgee is not the Depositor or
any Affiliate of the Depositor.
"Owner" means each Person who is the beneficial owner of a Book-Entry
Preferred Securities Certificate as reflected in the records of the Clearing
Agency or, if a Clearing Agency Participant is not the Owner, then as reflected
in the records of a Person maintaining an account with such Clearing Agency
(directly or indirectly, in accordance with the rules of such Clearing Agency).
"Paying Agent" means any paying agent or co-paying agent appointed pursuant
to Section 5.9.
"Payment Account" means a segregated non-interest bearing corporate trust
account maintained by the Property Trustee with the Bank in its trust department
for the benefit of the Securityholders in which all amounts paid in respect of
the Debentures will be held and from which the Property Trustee shall make
payments to the Securityholders in accordance with Section 4.1.
"Person" means any individual, corporation, partnership, joint venture,
trust, limited liability company or corporation, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Securities Certificate" means a certificate evidencing ownership
of Preferred Securities, substantially in the form attached as Exhibit D, but
including any certificate evidencing ownership of Preferred Securities in the
form issued by the Old Trust.
"Preferred Security" means an undivided beneficial interest in the assets
of the Old Trust, which by operation of law pursuant to the Merger represents an
undivided beneficial interest in the assets of the Trust, having a Liquidation
Amount with respect to the assets of the Trust of $50 and having the rights
provided therefor in this Trust Agreement, including the right to receive
Distributions and a Liquidation Distribution as provided herein.
"Property Trustee" means the commercial bank or trust company identified as
the "Property Trustee" in the preamble to this Trust Agreement solely in its
capacity as Property Trustee of the Trust heretofore formed and continued
hereunder and not in its individual capacity, or its successor in interest in
such capacity, or any successor property trustee appointed as herein provided.
"Purchase Agreement" means the Purchase Agreement, dated as of November 25,
1996 among the Old Trust, the Depositor's predecessor and the Purchasers named
therein.
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"Redemption Date" means, with respect to any Trust Security to be redeemed,
each Debenture Redemption Date.
"Redemption Price" means, with respect to any Trust Security, $50 per Trust
Security, plus accumulated and unpaid Distributions (including any Additional
Sums) to the date of redemption.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated December 2, 1996, among the Depositor's predecessor, the Old Trust, and
the Purchasers named in the Purchase Agreement.
"Regulation S Certificate" means a certificate substantially in the form
set forth in Exhibit E.
"Regulation S Global Certificate" has the meaning specified in Section 5.2.
"Regulation S Legend" has the meaning specified in Section 5.15(b).
"Regulation S Preferred Security" means all Preferred Securities required
pursuant to Section 5.4(c) to bear a Regulation S Legend. Such term includes
the Regulation S Global Certificate.
"Relevant Trustee" has the meaning specified in Section 8.9.
"Restricted Global Certificate" has the meaning specified in Section 5.2.
"Restricted Period" means, with respect to the Preferred Securities, the
one-year period, and with respect to the Debentures or the Common Stock Isabel
on conversion of the Preferred Securities, the 40-day period, in either case
following the last original issue date of the Preferred Securities (including
any Preferred Securities issued to cover over-allotments).
"Restricted Securities" means all Preferred Securities required pursuant to
Section 5.4 to bear any Restricted Securities Legend. Such term includes the
Restricted Global Certificate.
"Restricted Securities Certificate" means a certificate substantially in
the form set forth in Exhibit F.
"Restricted Securities Legend" has the meaning specified in Section
5.15(a).
"Rights" has the meaning specified in Section 4.3.
"Rule 144A Preferred Securities" has the meaning specified in Section 5.2.
"Securities Act Legend" means a Restricted Securities Legend or a
Regulation S Legend.
"Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 5.4.
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"Securityholder" or "Holder" means a Person in whose name a Trust Security
or Securities is registered in the Securities Register; any such Person shall be
deemed to be a beneficial owner within the meaning of the Delaware Business
Trust Act.
"Special Event" means a Tax Event or an Investment Company Event.
"Successor Delaware Trustee" has the meaning specified in Section 8.9.
"Successor Property Trustee" has the meaning specified in Section 8.9.
"Successor Securities" has the meaning specified in Section 9.5.
"Tax Event" means the receipt by the Property Trustee, on behalf of the
Trust, of an Opinion of Counsel, rendered by a law firm having a national tax
and securities practice (which Opinion of Counsel shall not have been rescinded
by such law firm), to the effect that, as a result of any amendment to, or
change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after the date of issuance of
the Preferred Securities under this Trust Agreement, there is more than an
insubstantial risk in each case after the date thereof that (i) the Trust is, or
will be within 90 days after the date thereof, subject to United States Federal
income tax with respect to income received or accrued on the Debentures, (ii)
interest payable by the Depositor on the Debentures is not, or will not be,
within 90 days after the date hereof, deductible, in whole or in part, for
United States Federal income tax purposes or (iii) the Trust is, or will be
within 90 days after the date thereof, subject to more than de minimis amount of
other taxes, duties, assessments or other governmental charges.
"Trust" means the Delaware business trust continued hereby and identified
on the cover page of this Trust Agreement.
"Trust Agreement" means this Amended and Restated Trust Agreement, as the
same may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this Trust Agreement and any such modification, amendment or supplement,
respectively.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
"Trust Property" means the property acquired by the Trust by operation of
law pursuant to the Merger, including (a) the Debentures, (b) any cash on
deposit in, or owing to, the Payment
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Account and (c) all proceeds and rights in respect of the foregoing to be held
by the Property Trustee pursuant to the terms of this Trust Agreement for the
benefit of the Securityholders.
"Trust Securities Certificate" means any one of the Common Securities
Certificates, the Global Certificates or the Certificated Preferred Securities,
including, without limitation, any certificate evidencing any Trust Securities
in the form issued by the Old Trust.
"Trust Security" means any one of the Common Securities or the Preferred
Securities.
"Trustees" means, collectively, the Property Trustee, the Delaware Trustee
and the Administrative Trustees.
"Unrestricted Securities Certificate" means a certificate substantially in
the form set forth in Exhibit G.
ARTICLE 2
ESTABLISHMENT OF THE TRUST
SECTION 2.1. Name. The Trust continued hereby shall be known as "Host
Marriott Financial Trust", as such name may be modified from time to time by the
Administrative Trustees following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued. Contemporaneously with the execution
and delivery of this Trust Agreement, the Administrative Trustees are authorized
and directed to execute and file a Certificate of Amendment to the Trust's
Certificate of Trust, to change the Trust's name from Host Marriott REIT
Financial Trust to Host Marriott Financial Trust, the name of the Old Trust.
SECTION 2.2. Office of the Delaware Trustee; Principal Place of Business.
The address of the Delaware Trustee in the State of Delaware is 300 Delaware
Avenue, Wilmington, Delaware 19801, Attention: Corporate Trust Administration,
or such other address in the State of Delaware as the Delaware Trustee may
designate by written notice to the Securityholders and the Depositor. The
principal executive office of the Trust is 10400 Fernwood Road, Bethesda,
Maryland, 20817.
SECTION 2.3. Organizational Expenses. The Depositor shall pay
organizational expenses of the Trust as they arise or shall, upon request of any
Trustee, promptly reimburse such Trustee for any such expenses paid by such
Trustee. The Depositor shall make no claim upon the Trust Property for the
payment of such expenses.
SECTION 2.4. Issuance of the Preferred Securities. On November 25, 1996
the Depositor's predecessor and an administrative trustee on behalf of the Old
Trust executed and delivered the Purchase Agreement. On the Closing Date, an
administrative trustee, on behalf of the Old Trust, executed in accordance with
section 5.2 of the Amended and Restated Trust Agreement of the Old Trust and
delivered to the Purchasers named in the Purchase Agreement Preferred Securities
Certificates, in an aggregate amount of 11,000,000 Preferred Securities having
an aggregate Liquidation Amount of $550,000,000, against receipt of the
aggregate purchase price of such
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Preferred Securities of $550,000,000, which amount the administrative trustees
of the Old Trust thereafter promptly delivered to the property trustee of the
Old Trust. All such Preferred Securities, with no further action required on the
part of the holders thereof, the Old Trust, the Trust, or the Trustees (other
than the consummation of the Merger, which has been accomplished), shall be and
constitute Preferred Securities of the Trust as if originally issued under this
Trust Agreement on their respective dates of issuance.
SECTION 2.5. Subscription and Purchase of Debentures; Issuance of the
Common Securities. On the Closing Date, the administrative trustees, on behalf
of the Old Trust, subscribed to and purchased from the Depositor's predecessor
Debentures, registered in the name of the property trustee of the Old Trust (in
its capacity as such) and having an aggregate principal amount equal to
$567,050,000, and, in satisfaction of the purchase price for such Debentures,
the property trustee of the Old Trust, on behalf of the Old Trust, delivered to
the Depositor's predecessor the sum of $567,050,000. Contemporaneously
therewith, an administrative trustee, on behalf of the Old Trust, executed in
accordance with Section 5.2 of the Restated and Amended Trust Agreement of the
Old Trust and delivered to the Depositor's predecessor Common Securities
Certificates registered in the name of the Depositor's predecessor, in an
aggregate amount of 341,000 Common Securities having an aggregate Liquidation
Amount of $17,050,000 against receipt of the aggregate purchase price of such
Common Securities from the Depositor of the sum of $17,050,000. All such Common
Securities, with no further action required on the part of the holder thereof,
the Old Trust, the Trust, or the Trustees (other than the consummation of the
Merger, which has been accomplished), shall be and constitute Common Securities
of the Trust as if originally issued under this Trust Agreement on their
respective dates of issuance.
SECTION 2.6. Declaration of Trust. The exclusive purposes and functions
of the Trust are (a) merging the Old Trust with and into the Trust pursuant to
the Merger, which as of the execution hereof has been accomplished, (b) in
connection with the Merger, having the Trust assume all of the obligations and
liabilities of the Old Trust, including under the Common Securities and the
Preferred Securities, which originally represented undivided beneficial
interests in the assets of the Old Trust, and pursuant to the Merger and this
Trust Agreement, hereafter represent undivided beneficial interests in the
assets of the Trust, (c) in connection with the Merger, acquiring all of the Old
Trust's assets and rights, including those accruing under the Debentures
originally acquired by the Old Trust with the proceeds from the sale of the
Common Securities and the Preferred Securities pursuant to the Purchase
Agreement, and (d) engaging in only those other activities necessary or
incidental thereto. The Trust shall not borrow money, issue debt or reinvest
proceeds derived from investments, pledge any of its assets or otherwise
undertake (or permit to be undertaken) any activity that would cause the Trust
not to be classified for United States Federal income tax purposes as a grantor
trust. The Depositor hereby appoints the Trustees as trustees of the Trust, to
have all the rights, powers and duties to the extent set forth herein, and the
Trustees hereby accept such appointment. The Property Trustee hereby declares
that it will hold the Trust Property in trust upon and subject to the conditions
set forth herein for the benefit of the Trust and the Securityholders. The
Administrative Trustees shall have all rights, powers and duties set forth
herein and in accordance with applicable law with respect to accomplishing the
purposes of the Trust. The Delaware Trustee shall not be entitled to exercise
any powers, nor shall the Delaware Trustee have any of the duties and
responsibilities, of the Property Trustee or the Administrative Trustees set
forth herein. The Delaware Trustee shall be one of the Trustees of the Trust
for the
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sole and limited purpose of fulfilling the requirements of Section 3807 of the
Delaware Business Trust Act.
SECTION 2.7. Authorization to Enter into Certain Transactions.
(a) The Trustees shall conduct the affairs of the Trust in accordance with
the terms of this Trust Agreement. Subject to the limitations set forth in
Section 2.6 and paragraph (b) of this Section, and in accordance with the
following provisions (i) and (ii), the Trustees shall have the exclusive power,
duty and the authority to cause the Trust to engage in the following activities:
(i) As among the Trustees, each Administrative Trustee shall have the power
and authority to act on behalf of the Trust with respect to the following
matters:
(A) to issue and sell the Trust Securities, including all matters
relating to the prior issuance and sale of the Trust Securities by the Old
Trust; provided, however, that the Trust may issue no more than one series
of Preferred Securities and no more than one series of Common Securities,
and, provided, further, that there shall be no interests in the Trust other
than the Trust Securities, and the issuance of Trust Securities shall be
limited to simultaneous issuance of both Preferred Securities and Common
Securities that previously occurred on the Closing Date and any other date
Preferred Securities and Common Securities may have been sold pursuant to
the over-allotment option granted to the initial purchasers in the Purchase
Agreement, subject to the issuance of Trust Securities pursuant to Section
5.5 and Successor Securities pursuant to Section 9.5;
(B) to perform on behalf of the Trust, the Registration Rights
Agreement, the Purchase Agreement and the Certificate Depository Agreement,
each of which the Trust assumed from the Old Trust by operation of law
pursuant to the Merger, and to cause the Trust to enter into, execute,
and perform on behalf of the Trust such other agreements as may be
necessary or incidental to the purposes and function of the Trust;
(C) to assist in ongoing registration matters relating to the
Preferred Securities under the Securities Act of 1933, as amended, and
under state securities or blue sky laws, and the qualification of this
Trust Agreement as a trust indenture under the Trust Indenture Act;
(D) to assist in the listing of the Preferred Securities upon such
securities exchange or exchanges as shall be determined by the Depositor,
and the registration of the Preferred Securities under the Securities
Exchange Act of 1934, as amended, and the preparation and filing of all
periodic and other reports and other documents pursuant to the foregoing
(only to the extent that such listing or registration is requested by the
Depositor);
(E) to appoint a Paying Agent, a Securities Registrar and an
authenticating agent in accordance with this Trust Agreement, all of which
shall be the same as their respective counterparts under the Amended and
Restated Trust Agreement of the Old Trust;
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(F) to the extent provided in this Trust Agreement, to wind up the
affairs of and liquidate the Trust and prepare, execute and file the
certificate of cancellation with the Secretary of State of the State of
Delaware;
(G) unless otherwise determined by the Depositor, the Property Trustee
or the Administrative Trustees, or as otherwise required by the Delaware
Business Trust Act or the Trust Indenture Act, to execute on behalf of the
Trust (either acting alone or together with any other Administrative
Trustees) any documents that the Administrative Trustees have the power to
execute pursuant to this Trust Agreement; and
(H) to take any action incidental to the foregoing as the Trustees may
from time to time determine is necessary or advisable to give effect to the
terms of this Trust Agreement including, but not limited to:
(i) causing the Trust not to be deemed to be an Investment
Company required to be registered under the 1940 Act;
(ii) causing the Trust to be classified for United States Federal
income tax purposes as a grantor trust; and
(iii) cooperating with the Depositor to ensure that the Debentures
will be treated as indebtedness of the Depositor for United States
Federal income tax purposes;
provided that such action does not adversely affect in any material respect
the interests of Securityholders except as otherwise provided in Section
10.2(a).
(ii) As among the Trustees, the Property Trustee shall have the power, duty
and authority to act on behalf of the Trust with respect to the following
matters:
(A) the handling and responsibility for the payment account of the Old
Trust acquired by the Trust by operation of law pursuant to the Merger;
(B) the receipt of, and by operation of law pursuant to the Merger
taking title to, the Debentures;
(C) the collection of interest, principal and any other payments made
in respect of the Debentures in the Payment Account;
(D) the distribution from the Trust Property of amounts owed to the
Securityholders in respect of the Trust Securities;
(E) the exercise of all of the rights, powers and privileges of a
holder of the Debentures;
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(F) the sending of notices of default, other notices and other
information regarding the Trust Securities and the Debentures to the
Securityholders in accordance with this Trust Agreement;
(G) the distribution of the Trust Property in accordance with the
terms of this Trust Agreement;
(H) to the extent provided in this Trust Agreement, the winding up of
the affairs of and liquidation of the Trust and the preparation, execution
and filing of the certificate of cancellation with the Secretary of State
of the State of Delaware;
(I) after an Event of Default, the taking of any action incidental to
the foregoing as the Property Trustee may from time to time determine is
necessary or advisable to give effect to the terms of this Trust Agreement
and protect and conserve the Trust Property for the benefit of the
Securityholders (without consideration of the effect of any such action on
any particular Securityholder);
(J) subject to this Section 2.7(a)(ii), the Property Trustee shall
have none of the duties, liabilities, powers or the authority of the
Administrative Trustees set forth in Section 2.7(a)(i); and
(K) to act as Paying Agent and/or Securities Registrar to the extent
appointed as such hereunder.
(b) So long as this Trust Agreement remains in effect, the Trust (or the
Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trust shall not, and the Trustees shall not and
shall cause the Trust not to (i) invest any proceeds received by the Trust from
holding the Debentures (rather, the Trustees shall distribute all such proceeds
to the Securityholders pursuant to the terms of this Trust Agreement and the
Trust Securities), acquire any investments or engage in any activities not
authorized by this Trust Agreement, (ii) sell, assign, transfer, exchange,
mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or
interests therein, including to Securityholders, except as expressly provided
herein, (iii) take any action that would cause the Trust to fail or cease to
qualify as a "grantor trust" for United States Federal income tax purposes, (iv)
make any loans or incur any indebtedness for borrowed money or issue any other
debt, (v) take or consent to any action that would result in the placement of a
Lien on any of the Trust Property, (vi) possess any power or otherwise act in
such a way as to vary the Trust assets or the terms of the Trust Securities in
any way whatsoever except as permitted by the terms of this Trust Agreement, or
(vii) issue any securities or other evidences of beneficial ownership of, or
beneficial interest in, the Trust other than the Trust Securities. The
Administrative Trustees shall defend all claims and demands of all Persons at
any time claiming any Lien on any of the Trust Property adverse to the interest
of the Trust or the Securityholders in their capacity as Securityholders.
(c) In connection with the original issuance and sale of the Preferred
Securities, the Depositor's predecessor had the right and responsibility to
assist the Old Trust with respect to, or effect on behalf of the Old Trust, the
following actions. Pursuant to this Trust Agreement, the
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Depositor shall have the right and responsibility, as applicable, to assist the
Trust with respect to, or effect on behalf of the Trust, the following actions
(and any actions taken by the Depositor's predecessor or the Depositor in
furtherance of the following prior to the date of this Trust Agreement are
hereby ratified and confirmed in all respects):
(i) to file by the Trust with the Commission and to execute on
behalf of the Trust a registration statement on the appropriate form in
relation to the Preferred Securities, including any amendments thereto;
(ii) to determine the States and foreign jurisdictions in which to
take appropriate action to qualify or register for sale all or part of the
Preferred Securities and to do any and all such acts, other than actions
which must be taken by or on behalf of the Trust, and advise the Trustees
of actions they must take on behalf of the Trust, and prepare for execution
and filing any documents to be executed and filed by the Trust or on behalf
of the Trust, as the Depositor deems necessary or advisable in order to
comply with the applicable laws of any such States and foreign
jurisdictions;
(iii) to the extent necessary, to prepare for filing by the Trust
with the Commission and to execute on behalf of the Trust a registration
statement on Form 8-A relating to the registration of the Preferred
Securities under Section 12(b) or 12(g) of the Securities Exchange Act of
1934, as amended, including any amendments thereto (it being understood
that neither the Trust nor the Depositor has any obligation under the
Indenture, the Purchase Agreement or the Trust Agreement to register any
Trust Securities under the Securities Exchange Act of 1934, as amended or
to list any Trust Securities on any securities exchange);
(iv) any other actions necessary or incidental to carry out any of
the foregoing activities.
(d) Notwithstanding anything herein to the contrary, the Administrative
Trustees are authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that the Trust will not be deemed to be an "investment
company" required to be registered under the 1940 Act, or taxed as a corporation
for United States Federal income tax purposes and so that the Debentures will be
treated as indebtedness of the Depositor for United States Federal income tax
purposes. In this connection, the Depositor and the Administrative Trustees are
authorized to take any action, not inconsistent with applicable law, the
Certificate of Trust or this Trust Agreement, that each of the Depositor and the
Administrative Trustees determines in their discretion to be necessary or
desirable for such purposes, so long as such action does not adversely affect in
any material respect the interests of the Holders of the Preferred Securities
except as otherwise provided in Section 10.2(a).
SECTION 2.8. Assets of Trust. The assets of the Trust shall consist of
only the Trust Property.
SECTION 2.9. Title to Trust Property. Legal title to all Trust Property
shall be vested at all times in the Property Trustee (in its capacity as such)
and shall be held and administered by the
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Property Trustee for the benefit of the Trust and the Securityholders in
accordance with this Trust Agreement. The Securityholder shall not have legal
title to any part of the assets of the Trust, but shall have an undivided
beneficial interest in the assets of the Trust.
ARTICLE 3
PAYMENT ACCOUNT
SECTION 3.1. Payment Account.
(a) On or prior to the Closing Date, the property trustee of the Old Trust
established the Payment Account under the Amended and Restated Trust Agreement
of the Old Trust. Pursuant to the Merger and by operation of law, the Property
Trustee acquired title to the Payment Account and shall maintain the same in
accordance with this Trust Agreement. The Property Trustee and any agent of the
Property Trustee shall have exclusive control and sole right of withdrawal with
respect to the Payment Account for the purpose of making deposits in and
withdrawals from the Payment Account in accordance with this Trust Agreement.
All monies and other property deposited or held from time to time in the Payment
Account shall be held by the Property Trustee in the Payment Account for the
exclusive benefit of the Securityholders and for distribution as herein provided
including (and subject to) any priority of payments provided for herein.
(b) The Property Trustee shall deposit in the Payment Account, promptly
upon receipt, all payments of principal of or interest on, and any other
payments or proceeds with respect to, the Debentures. Amounts held in the
Payment Account shall not be invested by the Property Trustee pending
distribution thereof.
ARTICLE 4
DISTRIBUTIONS; REDEMPTION; EXCHANGE; CONVERSION
SECTION 4.1. Distributions.
(a) Distributions on the Trust Securities shall be cumulative, and shall
accrue from the date of original issuance under the Amended and Restated Trust
Agreement of the Old Trust, or the most recent Distribution Date (as defined
herein) and, except in the event that the Depositor exercises its right to defer
the payment of interest on the Debentures pursuant to the Indenture, have been
paid quarterly in arrears on March 1, June 1, September 1 and December 1 of each
year, commencing on March 1, 1997, and shall continue to be payable quarterly in
arrears on March 1, June 1, September 1 and December 1 of each year, commencing
on March 1, 1999 (which dates correspond to the interest payment dates on the
Debentures), when, as and if available for payment by the Property Trustee, as
further described in paragraph (c) of this Section 4.1. If any date on which
Distributions are otherwise payable on the Trust Securities is not a Business
Day, then the payment of such Distributions shall be made on the next succeeding
day which is a Business Day (and no interest shall accrue for the period from
and after such date until the next succeeding Business Day) with the same force
and effect as if made on such date (each date on which Distributions are payable
in accordance with this Section 4.1(a), a "Distribution Date").
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(b) The Trust Securities represent undivided beneficial interests in the
Trust Property, and the Distributions on the Trust Securities shall be payable
at a rate of 6 3/4% per annum of the Liquidation Amount of the Trust Securities,
such rate being the rate of interest payable on the Debentures to be held by the
Property Trustee. The amount of Distributions payable for any period shall be
computed on the basis of a 360-day year of twelve 30-day months. For periods
less than a full month, distributions shall reflect interest on Debentures
computed on the basis of the actual number of elapsed days based on a 360-day
year. The amount of Distributions payable for any period shall include the
Additional Amounts, if any.
(c) Distributions on the Trust Securities shall be made by the Property
Trustee from the Payment Account and shall be payable on each Distribution Date
only to the extent that the Trust has funds then on hand and available in the
Payment Account for the payment of such Distributions.
(d) Distributions on the Trust Securities with respect to a Distribution
Date shall be payable to the Holders thereof as they appear on the Securities
Register for the Trust Securities on the relevant record date, which shall be
the date which is the fifteenth day (whether or not a Business Day) next
preceding such Distribution Date.
SECTION 4.2. Redemption. (a)
(i) Upon an optional redemption (as set forth in the Indenture) of
Debentures, the proceeds from such redemption shall be applied to redeem
Trust Securities having an aggregate Liquidation Amount equal to the
aggregate principal amount of the Debentures so redeemed by the Depositor,
including pursuant to Section 4.4, at the Optional Redemption Price, and
upon a mandatory redemption (as set forth in the Indenture) of Debentures,
the proceeds from such redemption shall be applied to redeem Trust
Securities, having an aggregate Liquidation Amount equal to the aggregate
principal amount of the Debentures so redeemed by the Depositor, at the
Redemption Price.
(ii) If at any time following the Conversion Expiration Date, less
than five percent (5%) in principal amount of the Debentures originally
issued by the Depositor remain outstanding, such Debentures are redeemable,
at the option of the Depositor, in whole but not in part, at a redemption
price equal to the aggregate principal amount thereof, and all accrued and
unpaid interest; in such event, the proceeds from such redemption shall be
applied to redeem the Outstanding Trust Securities.
(b) Notice of redemption (which notice will be irrevocable) shall be given
by the Property Trustee by first-class mail, postage prepaid, mailed not less
than 30 nor more than 60 days prior to the Redemption Date to the Depositor and
each Holder of Trust Securities to be redeemed, at such Holder's address as it
appears in the Securities Register. All notices of redemption shall state:
(i) the Redemption Date;
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(ii) the Redemption Price or the Optional Redemption Price, as
the case may be;
(iii) the CUSIP number;
(iv) if less than all of the Outstanding Trust Securities are to
be redeemed, the identification and the aggregate Liquidation Amount
of the particular Trust Securities to be redeemed;
(v) If the Preferred Securities are convertible, (A) that a
Holder of Preferred Securities who desires to convert such Preferred
Securities called for redemption must satisfy the requirements for
conversion contained in Section 4.3 below, (B) the Conversion Price
and (C), if previously determined, the Conversion Expiration Date;
(vi) that on the Redemption Date the Redemption Price or the
Optional Redemption Price, as the case may be, will become due and
payable upon each such Trust Security to be redeemed and that
Distributions thereon will cease to accrue on and after said date; and
(vii) the place or places where such Trust Securities are to be
surrendered for payment of the Redemption Price or the Optional
Redemption Price, as the case may be.
(c) The Trust Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price or the Optional Redemption Price, as the case may be,
with the proceeds from the contemporaneous redemption of Debentures. Redemptions
of the Trust Securities shall be made and the Redemption Price or the Optional
Redemption Price, as the case may be, shall be payable on each Redemption Date
only to the extent that the Trust has funds then on hand and available in the
Payment Account for the payment of such Redemption Price or the Optional
Redemption Price, as the case may be.
(d) If the Property Trustee gives a notice of redemption in respect of any
Preferred Securities, then, by 12:00 noon, New York City time, on the Redemption
Date, subject to Section 4.2(c), the Property Trustee will, so long as and to
the extent the Preferred Securities are in book-entry-only form, irrevocably
deposit with the Clearing Agency for the Preferred Securities funds sufficient
to pay the applicable Redemption Price. If the Preferred Securities are no
longer in book-entry only form, the Property Trustee, subject to Section 4.2(c),
will irrevocably deposit with the Paying Agent funds sufficient to pay the
applicable Redemption Price or Optional Redemption Price, as the case may be, on
such Preferred Securities held in certificated form and will give the Paying
Agent irrevocable instructions and authority to pay the Redemption Price or the
Optional Redemption Price, as the case may be, to the Holders thereof upon
surrender of their Preferred Securities Certificates. Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date for any
Trust Securities called for redemption shall be payable to the Holders of such
Trust Securities as they appear on the Securities Register for the Trust
Securities on the relevant record dates for the related Distribution Dates. If
notice of redemption shall have been
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given and funds deposited as required, then, upon the date of such deposit, all
rights of Securityholders holding Trust Securities so called for redemption will
cease, except the right of such Securityholders to receive the Redemption Price
or the Optional Redemption Price, as the case may be, but without interest, and
such Trust Securities will cease to be Outstanding. In the event that any date
on which any Redemption Price or the Optional Redemption Price, as the case may
be, is payable is not a Business Day, then payment of the Redemption Price or
the Optional Redemption Price, as the case may be, payable on such date will be
made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), with the same force and
effect as if made on such date.
(e) If less than all the Outstanding Trust Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust
Securities to be redeemed shall be allocated on a pro rata basis (based on
Liquidation Amounts) among the Common Securities and the Preferred Securities
that are to be redeemed. The particular Preferred Securities to be redeemed
shall be selected not more than 60 days prior to the Redemption Date by the
Property Trustee from the Outstanding Preferred Securities not previously
called for redemption, by lot or by such other method as the Property Trustee
shall deem fair and appropriate and which may provide for the selection for
redemption of portions (equal to $50 or an integral multiple of $50 in excess
thereof) of the liquidation amount of the Preferred Securities. The Property
Trustee shall promptly notify the Securities Registrar and the Conversion Agent
in writing of the Preferred Securities selected for redemption and, in the case
of any Preferred Securities selected for partial redemption, the Liquidation
Amount thereof to be redeemed; it being understood that, in the case of
Preferred Securities registered in the name of and held of record by the
Clearing Agency (or any successor) or any nominee, the distribution of the
proceeds of such redemption will be made in accordance with the procedures of
the Clearing Agency or its nominee. For all purposes of this Trust Agreement,
unless the context otherwise requires, all provisions relating to the redemption
of Preferred Securities shall relate, in the case of any Preferred Securities
redeemed or to be redeemed only in part, to the portion of the Liquidation
Amount of Preferred Securities which has been or is to be redeemed. In the event
of any redemption in part, the Trust shall not be required to (i) issue,
register the transfer of or exchange of any Preferred Security during a period
beginning at the opening of business 15 days before any selection for redemption
of Preferred Securities and ending at the close of business on the earliest date
in which the relevant notice of redemption is deemed to have been given to all
holders of Preferred Securities to be so redeemed or (ii) register the transfer
of or exchange of any Preferred Securities so selected for redemption, in whole
or in part, except for the unredeemed portion of any Preferred Securities being
redeemed in part.
SECTION 4.3. Conversion. The Holders of Trust Securities, subject to the
limitations set forth in this Section, shall have the right at any time prior to
the Conversion Expiration Date, at their option, to cause the Conversion Agent
to convert Trust Securities, on behalf of the converting Holders, into shares of
Common Stock in the manner described herein on and subject to the following
terms and conditions:
(i) The Trust Securities will be convertible into fully paid and
nonassessable shares of Common Stock pursuant to the Holder's direction to the
Conversion Agent to exchange such Trust Securities for a portion of the
Debentures, and immediately convert such amount of Debentures into fully paid
and nonassessable shares of Common Stock at an initial rate of 2.6876 shares of
Common
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Stock for each Trust Security (which is equivalent to a conversion price of
$18.604 per $50 principal amount of Debentures), subject to certain adjustments
set forth in the Indenture (as so adjusted, "Conversion Price").
(ii) In order to convert Trust Securities into Common Stock, the Holder of
such Trust Securities shall submit to the Conversion Agent an irrevocable Notice
of Conversion to convert Trust Securities on behalf of such Holder, together, if
the Trust Securities are in certificated form, with such certificates. The
Notice of Conversion shall (i) set forth the number of Trust Securities to be
converted and the name or names, if other than the Holder, in which the shares
of Common Stock should be issued and (ii) direct the Conversion Agent (a) to
exchange such Trust Securities for a portion of the Debentures held by the
Property Trustee (at the rate of exchange specified in the preceding paragraph)
and (b) to immediately convert such Debentures, on behalf of such Holder, into
Common Stock (at the conversion rate specified in the preceding paragraph). The
Conversion Agent shall notify the Property Trustee of the Holder's election to
exchange Trust Securities for a portion of the Debentures held by the Property
Trustee and the Property Trustee shall, upon receipt of such notice, deliver to
the Conversion Agent the appropriate principal amount of Debentures for exchange
in accordance with this Section. The Conversion Agent shall thereupon notify
the Depositor of the Holder's election to convert such Debentures into shares
of Common Stock. Holders of Trust Securities at the close of business on a
Distribution payment record date will be entitled to receive the Distribution
paid on such Trust Securities on the corresponding Distribution Date
notwithstanding the conversion of such Trust Securities following such record
date but prior to such Distribution Date. Except as provided above, neither the
Trust nor the Depositor will make, or be required to make, any payment,
allowance or adjustment upon any conversion on account of any accumulated and
unpaid Distributions whether or not in arrears accrued on the Trust Securities
surrendered for conversion, or on account of any accumulated and unpaid
dividends on the shares of Common Stock issued upon such conversion. Trust
Securities shall be deemed to have been converted immediately prior to the close
of business on the day on which an irrevocable Notice of Conversion relating to
such Trust Securities is received by the Conversion Agent in accordance with the
foregoing provision (the "Conversion Date"). The Person or Persons entitled to
receive the Common Stock issuable upon conversion of the Debentures shall be
treated for all purposes as the record holder or holders of such Common Stock on
the date of conversion. As promptly as practicable on or after the Conversion
Date, the Depositor shall issue and deliver at the office of the Conversion
Agent a certificate or certificates for the number of full shares of Common
Stock issuable upon such conversion, together with the cash payment, if any, in
lieu of any fraction of any share to the Person or Persons entitled to receive
the same, unless otherwise directed by the Holder in the notice of conversion
and the Conversion Agent shall distribute such certificate or certificates to
such Person or Persons.
(iii) On and after December 2, 1999, the Depositor may, at its option,
cause the conversion rights of holders of the Debentures (and the corresponding
conversion rights of Holders of Trust Securities) to expire; provided, however,
that the Depositor may exercise this option only if for 20 trading days within
any period of 30 consecutive trading days, including the last trading day of
such period, the Current Market Price of Common Stock exceeds 120% of the
Conversion Price. In order to exercise its option to terminate the conversion
rights of the Debentures, the Depositor must issue a press release for
publication on the Dow Jones News Service announcing the Conversion Expiration
Date prior to the opening of business on the second trading day after any
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period in which the condition in the preceding sentence has been met, but in no
event prior to December 2, 1999. The press release shall announce the Conversion
Expiration Date (which may not occur sooner than 30 nor more than 60 days after
the Depositor issues the press release announcing its intention to terminate the
conversion rights of the Debentures) and provide the current Conversion Price
and Current Market Price of Common Stock, in each case as of the close of
business on the trading day next preceding the date of the press release.
Conversion rights will terminate at the close of business on the Conversion
Expiration Date. The Depositor, or at the request of the Depositor, the Property
Trustee shall send notice of the expiration of conversion rights by first-class
mail to the Holders of the Trust Securities and the holders of the Debentures
not more than four Business Days after the Depositor issues the press release
or, if the Property Trustee is requested to send such notice, which shall be on
the date of such press release, after the Depositor delivers written
instructions to the Property Trustee containing the information required by the
next sentence to be in the notice. Such mailed notice of the expiration of the
conversion rights of the Holders shall state: (A) the Conversion Expiration
Date; (B) the Conversion Price of the Trust Securities and the Current Market
Price of the Common Stock, in each case as of the close of business on the
Business Day next preceding the date of the notice of expiration of the
conversion rights of the Holders; (C) the place or places at which Trust
Securities may be surrendered prior to the Conversion Expiration Date for
certificates representing shares of Common Stock; and (D) such other information
or instructions as the Depositor deems necessary or advisable to enable a Holder
to exercise its conversion right hereunder. No defect in the notice of
expiration of the conversion rights of the Holders or in the mailing thereof
with respect to any Trust Security shall affect the validity of such notice with
respect to any other Trust Security. As of the close of business on the
Conversion Expiration Date, the Debentures (and correspondingly, the Trust
Securities) shall no longer be convertible into Common Stock. In the event that
the Depositor does not exercise its option to terminate the conversion rights of
the Debentures, the Conversion expiration Date with respect to the Trust
Securities will be the close of business two Business Days preceding the date
set for redemption of the Trust Securities upon the mandatory or optional
redemption of the Debentures.
(iv) Each Holder of a Trust Security by its acceptance thereof initially,
pursuant to the Amended and Restated Trust Agreement of the Old Trust, appointed
IBJ Schroder Bank & Trust Company not in its individual capacity but solely as
conversion agent (the "Conversion Agent") for the purpose of effecting the
conversion of Trust Securities in accordance with this Section. IBJ Schroder
Bank & Trust Company, not in its individual capacity but solely as Conversion
Agent shall remain the Conversion Agent under this Trust Agreement. In
effecting the conversion and transactions described in this Section, the
Conversion Agent shall be acting as agent of the Holders of Trust Securities
directing it to effect such conversion transactions. The Conversion Agent is
hereby authorized (i) to exchange Trust Securities from time to time for
Debentures held by the Trust in connection with the conversion of such Trust
Securities in accordance with this Section and (ii) to convert all or a portion
of the Debentures into Common Stock and thereupon to deliver such shares of
Common Stock in accordance with the provisions of this Section and to deliver
to the Property Trustee any new Debenture or Debentures for any resulting
unconverted principal amount delivered to the Conversion Agent by the Debenture
Trustee.
(v) No fractional shares of Common Stock will be issued as a result of
conversion, but, in lieu thereof, such fractional interest will be paid in cash
by the Depositor to the Conversion
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Agent in an amount equal to the Current Market Price of the fractional share of
the Common Stock, and the Conversion Agent will in turn make such payment to the
Holder or Holders of Trust Securities so converted.
(vi) Nothing in this Section 4.3 shall limit the requirement of the Trust
to withhold taxes pursuant to the terms of the Trust Securities or as set forth
in this Agreement or otherwise required of the Property Trustee or the Trust to
pay any amounts on account of such withholdings.
SECTION 4.4. Special Event Exchange or Redemption.
(a) If a Special Event shall occur and be continuing, the Property Trustee
shall direct the Conversion Agent to exchange all Outstanding Trust Securities
for Debentures having a principal amount equal to the aggregate Liquidation
Amount of the Trust Securities to be exchanged and with accrued interest in an
amount equal to any unpaid Distribution (including any Additional Amounts) on
the Trust Securities; provided, however, that, in the case of a Tax Event, the
Depositor shall have the right to (i) direct that less than all, or none, as
appropriate, of the Trust Securities be so exchanged if and for so long as the
Depositor shall have elected to pay any Additional Sums (as defined in the
Indenture) such that the amount received by Holders of Trust Securities not so
exchanged in respect of Distributions and other distributions are not reduced as
a result of such Tax Event, and shall not have revoked any such election or
failed to make such payments or (ii) cause the Trust Securities to be redeemed
in the manner set forth below. If a Tax Event shall occur or be continuing, the
Depositor shall have the right, upon not less than 30 nor more than 60 days'
notice, to redeem the Debentures, in whole or in part, for cash upon the later
of (i) 90 days following the occurrence of such Tax Event or (ii) December 2,
1999. Promptly following such redemption, Trust Securities with an aggregate
liquidation amount equal to the aggregate principal amount of the Debentures so
redeemed will be redeemed by the Trust at the Optional Redemption Price on a pro
rata basis.
(b) Notice of any exchange pursuant to this Section 4.4 (an "Exchange
Notice") of the Trust Securities, which Exchange Notice shall be irrevocable,
will be given by the Property Trustee by first-class mail to the Depositor and
to each record Holder of Trust Securities to be exchanged not fewer than 30 nor
more than 60 days prior to the date fixed for exchange thereof. For purposes of
the calculation of the date of exchange and the dates on which notices are given
pursuant to this paragraph (b), an Exchange Notice shall be deemed to be given
on the day such notice is first mailed by first-class mail, postage prepaid, to
each Holder. Each Exchange Notice shall be addressed to each Holder of Trust
Securities at the address of such Holder appearing in the books and records of
the Trust. Each Exchange Notice shall state: (A) the exchange date; (B) the
aggregate Liquidation Amount and any unpaid Distributions (including any
Additional Amounts) on the Trust Securities to be exchanged and the aggregate
principal amount and any accrued interest on the Debentures to be exchanged
therefor; (C) that on the exchange date the Trust Securities to be so
exchanged shall be exchanged for Debentures and that Distributions on the Trust
Securities so exchanged will cease to accumulate on and after said date; and (D)
the identity of the Conversion Agent, if any, and the place or places where
each Trust Certificate to be exchanged is to be surrendered in exchange for
Debentures. No defect in the Exchange Notice or in the mailing
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thereof with respect to any Trust Security shall affect the validity of the
exchange proceedings for any other Trust Security.
(c) In the event that fewer than all the Outstanding Preferred Securities
are to be exchanged, then, on the exchange date, (i) if all of the Outstanding
Preferred Securities are represented by Definitive Preferred Securities
Certificates, the particular Preferred Securities to be exchanged will be
selected by the Property Trustee from the Outstanding Preferred Securities not
previously called for redemption or exchange on a pro rata basis, (ii) if all of
the Outstanding Preferred Securities are represented by Book-Entry Preferred
Securities Certificates, the Property Trustee shall provide for the selection
for exchange of a portion of the Global Certificate representing the Book-Entry
Preferred Securities Certificates on a pro rata basis and (iii) if Outstanding
Trust Securities are represented by both Definitive Preferred Securities
Certificates and Book-Entry Preferred Securities Certificates, the Property
Trustee shall select the portion of the Global Certificate representing the
Book-Entry Preferred Securities Certificates and the particular Outstanding
Preferred Securities represented by Definitive Preferred Securities Certificates
to be exchanged on a pro rata basis. In the case of clause (ii) or (iii) above,
the particular Book-Entry Preferred Securities Certificates to be exchanged
shall be selected in accordance with the applicable rules and procedures for the
Clearing Agency in whose name, or whose nominee's name, such global certificate
is then held. Any Preferred Securities Certificate that is to be exchanged only
in part shall be surrendered with due endorsement or by a written instrument of
transfer fully executed by the Holder thereof (or its attorney duly authorized
in writing) and the Trust shall prepare and deliver to such Holder, without
service charge, a new Preferred Securities Certificate or Certificates in
aggregate stated Liquidation Amount equal to, and in exchange for, the
unredeemed portion of the Preferred Securities Certificate so surrendered. The
Common Securities shall be exchanged in a similar manner.
(d) In the event of an exchange pursuant to this Section 4.4, on the date
fixed for any such exchange, (i) if the Preferred Securities are represented by
Book-Entry Preferred Securities Certificates, the Clearing Agency of its
nominee, as the record Holder of the Preferred Securities, will exchange through
the Conversion Agent the Global Certificate representing the Preferred
Securities to be exchanged for a registered Global Certificate or certificates
representing the Debentures to be delivered upon such exchange, (ii) if the
Preferred Securities are represented by Definitive Preferred Securities
Certificates, the certificates representing the Preferred Securities to be so
exchanged will be deemed to represent Debentures having a principal amount equal
to the aggregate stated Liquidation Amount of such Preferred Securities until
such certificates are presented to the Conversion Agent for exchange for
definitive certificates representing Debentures and (iii) all rights of the
Holders of the Preferred Securities so exchanged will cease, except for the
right of such Holders to receive Debentures. The Common Securities shall be
exchanged in a similar manner.
(e) Each Holder, by becoming a party to the Amended and Restated Trust
Agreement of the Old Trust and remaining a Holder pursuant to the Merger and by
operation of law, will be deemed, in accordance with Section 10.11 of this Trust
Agreement, to have agreed to be bound by these exchange provisions in regard to
the exchange of Trust Securities for Debentures pursuant to the terms described
above.
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(f) Nothing in this Section 4.4 shall limit the requirement of the Trust to
withhold taxes pursuant to the terms of the Trust Securities or as set forth in
this Agreement or otherwise require the Property Trustee or the Trust to pay any
amounts on account of such withholdings.
SECTION 4.5. Subordination of Common Securities. Payment of Distributions
(including Additional Amounts, if applicable) on, and the Redemption Price of,
the Trust Securities, as applicable, shall be made pro rata based on the
Liquidation Amount of the Trust Securities; provided, however, that if on any
Distribution Date or Redemption Date an Event of Default shall have occurred and
be continuing, no payment of any Distribution (including Additional Amounts, if
applicable) on, or the Redemption Price of, any Common Security, and no other
payment on account of the redemption, liquidation or other acquisition of Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions (including Additional Amounts, if applicable) on all
Outstanding Preferred Securities for all Distribution periods terminating on or
prior thereto, or in the case of payment of the Redemption Price the full
amount of such Redemption Price on all Outstanding Preferred Securities, shall
have been made or provided for, and all funds immediately available to the
Property Trustee shall first be applied to the payment in full in cash of all
Distributions (including Additional Amounts, if applicable) on, or the
Redemption Price of, Preferred Securities then due and payable.
SECTION 4.6. Payment Procedures. Payments in respect of the Preferred
Securities shall be made by check mailed to the address of the Person entitled
thereto as such address shall appear on the Securities Register or, if the
Preferred Securities are held by a Clearing Agency, such Distributions shall be
made to the Clearing Agency in immediately available funds, in accordance
with the Certificate Depositary Agreement on the applicable Distribution Dates.
Payments in respect of the Common Securities shall be made in such manner as
shall be mutually agreed between the Property Trustee and the Holder of the
Common Securities.
SECTION 4.7. Tax Returns and Reports. The Administrative Trustees shall
prepare (or cause to be prepared), at the Depositor's expense, and file all
United States Federal, State and local tax and information returns and reports
required to be filed by or in respect of the Trust. In this regard, the
Administrative Trustees shall (a) prepare and file (or cause to be prepared or
filed) Form 1041 or the appropriate Internal Revenue Service form required to be
filed in respect of the Trust in each taxable year of the Trust and (b) prepare
and furnish (or cause to be prepared and furnished) to each Securityholder a
Form 1099 or the appropriate Internal Revenue Service form required to be
furnished to such Securityholder or the information required to be provided on
such form. The Administrative Trustees shall provide the Depositor and the
Property Trustee with a copy of all such returns, reports and schedules promptly
after such filing or furnishing. The Trustees shall comply with United States
Federal withholding and backup withholding tax laws and information reporting
requirements with respect to any payments to Securityholders under the Trust
Securities.
SECTION 4.8. Payment of Taxes, Duties, Etc. of the Trust. Upon receipt
under the Debentures of Additional Sums, the Property Trustee, upon receipt of
written notice from the Depositor or the Administrative Trustees, shall promptly
pay from such Additional Sums any taxes, duties or governmental charges of
whatsoever nature (other than withholding taxes) imposed on the Trust by the
United States or any other taxing authority.
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SECTION 4.9. Payments under Indenture. Any amount payable hereunder to
any Holder of Preferred Securities (and any Owner with respect thereto) shall be
reduced by the amount of any corresponding payment such Holder (or Owner) has
directly received pursuant to Section 5.8 of the Indenture in accordance with
the terms of Section 6.8 hereof.
ARTICLE 5
TRUST SECURITIES CERTIFICATES
SECTION 5.1. Initial Ownership. Upon the formation of the Trust and until
the assumption by the Trust of all of the duties and obligations of the Old
Trust under the Trust Securities, no Trust Securities were Outstanding, and the
Depositor was the sole beneficial owner of the Trust.
SECTION 5.2. The Trust Securities Certificates. The Preferred Securities
Certificates shall be issued in minimum denominations of $50 Liquidation Amount
and integral multiples of $50 in excess thereof, and the Common Securities
Certificates shall be issued in denominations of $50 Liquidation Amount and
integral multiples thereof. The consideration received by the Trust for the
issuance of the Trust Securities shall constitute a contribution to the capital
of the Trust and shall not constitute a loan to the Trust. Preferred Securities
initially sold by the Old Trust to qualified institutional buyers in reliance on
Rule 144A under the Securities Act ("Rule 144A Preferred Securities") were
represented by one or more certificates in registered, global form
(collectively, the "Restricted Global Certificate"). Preferred Securities
initially sold by the Old Trust in off-shore transactions in reliance on
Regulation S ("Regulation S Preferred Securities") were represented by one or
more certificates in registered, global form (collectively, the "Regulation S
Global Certificate" and, together with the Restricted Global Certificate, the
"Global Certificates"). Preferred Securities initially transferred, in
accordance with Section 5.4, to institutional accredited investors in a manner
exempt from the registration requirements of the Securities Act will be
exchanged for Preferred Securities in registered, certificated form (the
"Certificated Preferred Securities"). Trust Securities Certificates issued by
the Old Trust shall represent Trust Securities of the Trust and need not be
reissued by the Trust. Except as set forth in the preceding sentence, the Trust
Securities Certificates shall be executed on behalf of the Trust by manual or
facsimile signature of at least one Administrative Trustee and authenticated by
the Property Trustee. Trust Securities Certificates bearing the manual or
facsimile signatures of individuals who were, at the time when such signatures
shall have been affixed, authorized to sign on behalf of the Trust, or the Old
Trust, as the case may be, shall be validly issued and entitled to the benefit
of this Trust Agreement, notwithstanding that such individuals or any of them
shall have ceased to be so authorized prior to the delivery of such Trust
Securities Certificates or did not hold such offices at the date of delivery of
such Trust Securities Certificates. A transferee of a Trust Securities
Certificate shall become a Securityholder, and shall be entitled to the rights
and subject to the obligations of a Securityholder hereunder, upon due
registration of such Trust Securities Certificate in such transferee's name
pursuant to Section 5.4.
SECTION 5.3. Delivery of Trust Securities Certificates. On the Closing
Date, the administrative trustees of the Old Trust caused Trust Securities
Certificates, in an aggregate Liquidation Amount as provided in Sections 2.4 and
2.5, to be executed on behalf of the Trust and delivered to or upon the written
order of the Depositor's predecessor, signed by its Chairman of the
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Board, any Vice Chairman, its President, any Senior Vice President or any Vice
President, Treasurer or Assistant Treasurer or Controller without further
corporate action by the Depositor's predecessor, in authorized denominations. A
Trust Security Certificate shall not be valid until authenticated by the manual
signature of an authorized signatory of the Property Trustee. The signature
shall be conclusive evidence that the Trust Security Certificate has been
authenticated under this Trust Agreement. Upon a written order of the Trust
signed by one Administrative Trustee, the Property Trustee shall authenticate
the Trust Security Certificates for original issue. The Property Trustee may
appoint an authenticating agent acceptable to the Administrative Trustees to
authenticate Trust Security Certificates. An authenticating agent may
authenticate Trust Security Certificates whenever the Property Trustee may do
so. Each reference in this Trust Agreement to authentication by the Property
Trustee includes authentication by such agent. An authenticating agent has the
same rights as the Property Trustee to deal with the Depositor or an Affiliate
with respect to the authentication of Trust Securities. Notwithstanding the
foregoing, Trust Securities Certificates issued by the Old Trust shall represent
Trust Securities of the Trust and need not be reissued by the Trust.
SECTION 5.4. Registration of Transfer and Exchange of Preferred
Securities; Restrictions on Transfer.
(a) The Securities Registrar shall keep or cause to be kept, at the office
or agency maintained pursuant to Section 5.8, a Securities Register in which,
subject to such reasonable regulations as it may prescribe, the Securities
Registrar shall provide for the registration of Preferred Securities
Certificates and Common Securities Certificates (subject to Section 5.10 in the
case of the Common Securities Certificates) and registration of transfers and
exchanges of Preferred Securities Certificates as herein provided. The Property
Trustee shall be the initial Securities Registrar. Subject to the other
provisions of this Trust Agreement regarding restrictions on transfer, upon
surrender for registration of transfer of any Preferred Security at an office or
agency of the Depositor designated pursuant to Section 5.8 for such purpose, the
Depositor shall execute, and the Property Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Preferred Securities of any authorized denominations and of a like aggregate
principal amount and bearing such restrictive legends as may be required by this
Trust Agreement. At the option of the Holder, and subject to the other
provisions of this Section 5.4, Preferred Securities may be exchanged for other
Preferred Securities of any authorized denomination and of a like Liquidation
Amount, upon surrender of the Preferred Securities to be exchanged at any such
office or agency. Whenever any Preferred Securities are so surrendered for
exchange, the Depositor shall execute, and the Property Trustee shall
authenticate and deliver, the Preferred Securities which the Holder making the
exchange is entitled to receive. All Preferred Securities issued upon any
registration of transfer or exchange of Preferred Securities shall be the valid
obligations of the Depositor, evidencing the same debt, and entitled to the same
benefits under this Trust Agreement, as the Securities surrendered upon such
registration of transfer or exchange. Every Preferred Security presented or
surrendered for registration of transfer or for exchange shall (if so requested
by the Depositor or the Securities Registrar) be duly endorsed, or be
accompanied by a written instrument of transfer in form satisfactory to the
Depositor and the Securities Registrar duly executed, by the Holder thereof or
his attorney duly authorized in writing. No service charge shall be made for any
registration of transfer or exchange of Preferred Securities Certificates, but
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the Securities Registrar may require payment of a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any transfer
or exchange of Preferred Securities Certificates.
(b) Certain Transfers and Exchanges. Notwithstanding any other provision
of this Trust Agreement or the Preferred Securities, transfers and exchanges of
Preferred Securities and beneficial interests in a Global Certificate of the
kinds specified in this Section 5.4(b) shall be made only in accordance with
this Section 5.4(b).
(i) Restricted Global Certificate to Regulation S Global Certificate.
If the owner of a beneficial interest in the Restricted Global Certificate
wishes at any time to transfer such interest to a Person who wishes to
acquire the same in the form of a beneficial interest in the Regulation S
Global Certificate, such transfer may be effected in accordance with the
provisions of this Clause (b)(i) and Clause (b)(vii) below and subject to
the Applicable Procedures. Upon receipt by the Property Trustee, as
Securities Registrar, of (A) an order given by the Clearing Agency or its
authorized representative directing that a beneficial interest in the
Regulation S Global Certificate in a specified principal amount be credited
to a specified participant's account and that a beneficial interest in the
Restricted Global Certificate in an equal principal amount be debited from
another specified participant's account and (B) a Regulation S Certificate,
satisfactory to the Property Trustee and duly executed by the owner of such
beneficial interest in the Restricted Global Certificate or his attorney
duly authorized in writing, then the Property Trustee, as Securities
Registrar but subject to Clause (b)(vii) below, shall reduce the share
number of the Restricted Global Certificate and increase the share number
of the Regulation S Global Certificate by such specified principal amount
as provided in Section 5.11(b).
(ii) Regulation S Global Certificate to Restricted Global Certificate.
If the owner of a beneficial interest in the Regulation S Global
Certificate wishes at any time to transfer such interest to a Person who
wishes to acquire the same in the form of a beneficial interest in the
Restricted Global Certificate, such transfer may be effected only in
accordance with this Clause (b)(ii) and subject to the Applicable
Procedures. Upon receipt by the Property Trustee, as Securities Registrar,
of (A) an order given by the Clearing Agency or its authorized
representative directing that a beneficial interest in the Restricted
Global Certificate in a specified principal amount be credited to a
specified participant's account and that a beneficial interest in the
Regulation S Global Certificate in an equal principal amount be debited
from another specified participant's account and (B) if such transfer is to
occur during the Restricted Period, a Restricted Securities Certificate,
satisfactory to the Property Trustee and duly executed by the owner of such
beneficial interest in the Regulation S Global Certificate or his attorney
duly authorized in writing, then the Property Trustee, as Securities
Registrar, shall reduce the principal amount of the Regulation S Global
Certificate and increase the principal amount of the Restricted Global
Certificate by such specified principal amount as provided in Section
5.11(b).
(iii) Restricted Non-Global Certificate to Restricted Global
Certificate or Regulation S Global Certificate. If the Holder of a
Restricted Security (other than a Global Certificate) wishes at any time to
transfer all or any portion of such Restricted Security to a
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Person who wishes to take delivery thereof in the form of a beneficial
interest in the Restricted Global Certificate or the Regulation S Global
Certificate, such transfer may be effected only in accordance with the
provisions of this Clause (b)(iii) and Clause (b)(vii) below and subject to
the Applicable Procedures. Upon receipt by the Property Trustee, as
Securities Registrar, of (A) such Restricted Security as provided in
Section 5.4(a) and instructions satisfactory to the Property Trustee
directing that a beneficial interest in the Restricted Global Certificate
or Regulation S Global Certificate in a specified principal amount not
greater than the share amount of such Preferred Security be credited to a
specified participant's account and (B) a Restricted Securities
Certificate, if the specified account is to be credited with a beneficial
interest in the Restricted Global Certificate, or a Regulation S
Certificate, if the specified account is to be credited with a beneficial
interest in the Regulation S Global Certificate, in either case
satisfactory to the Property Trustee and duly executed by such Holder or
his attorney duly authorized in writing, then the Property Trustee, as
Securities Registrar but subject to Clause (b)(vii) below, shall cancel
such Restricted Security (and issue a new Restricted Security in respect of
any untransferred portion thereof) as provided in Section 5.4(a) and
increase the principal amount of the Restricted Global Certificate or the
Regulation S Global Certificate, as the case may be, by the specified
principal amount as provided in Section 5.11(b).
(iv) Regulation S Non-Global Certificate to Restricted Global
Certificate or Regulation S Global Certificate. If the Holder of a
Regulation S Preferred Security (other than a Global Certificate) wishes at
any time to transfer all or any portion of such Regulation S Security to a
Person who wishes to acquire the same in the form of a beneficial interest
in the Restricted Global Certificate or the Regulation S Global
Certificate, such transfer may be effected only in accordance with this
Clause (b)(iv) and Clause (b)(vii) below and subject to the Applicable
Procedures. Upon receipt by the Property Trustee, as Securities Registrar,
of (A) such Regulation S Security as provided in Section 5.4(a) and
instructions satisfactory to the Property Trustee directing that a
beneficial interest in the Restricted Global Certificate or Regulation S
Global Certificate in a specified share amount not greater than the share
amount of such Preferred Security be credited to a specified participant's
account and (B) if the transfer is to occur during the Restricted Period
and the specified account is to be credited with a beneficial interest in
the Restricted Global Certificate, a Restricted Securities Certificate
satisfactory to the Property Trustee and duly executed by such Holder or
his attorney duly authorized in writing then the Property Trustee, as
Securities Registrar but subject to Clause (b)(vii) below, shall cancel
such Regulation S Security (and issue a new Regulation S Security in
respect of any untransferred portion thereof) as provided in Section 5.4(a)
and increase the principal amount of the Restricted Global Certificate or
the Regulation S Global Certificate, as the case may be, by the specified
principal amount as provided in Section 5.11(b).
(v) Non-Global Certificate to Non-Global Certificate. A Security
that is not a Global Certificate may be transferred, in whole or in part,
to a Person who takes delivery in the form of another Security that is not
a Global Certificate as provided in Section 5.11, provided that, if the
Security to be transferred in whole or in part is a Restricted Security, or
is a Regulation S Preferred Security and the transfer is to occur during
the Restricted Period, then the Property Trustee shall have received (A) a
Restricted Securities Certificate,
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satisfactory to the Property Trustee and duly executed by the transferor
Holder or his attorney duly authorized in writing, in which case the
transferee Holder shall take delivery in the form of a Restricted Security,
or (B) a Regulation S Certificate, satisfactory to the Property Trustee and
duly executed by the transferor Holder or his attorney duly authorized in
writing, in which case the transferee Holder shall take delivery in the
form of a Regulation S Preferred Security (subject in every case to Section
5.4(c)).
(vi) Exchanges between Global Certificate and Non-Global
Certificate. A beneficial interest in a Global Certificate may be exchanged
for a Preferred Security that is not a Global Certificate as provided in
Section 5.11 to an institution that is an accredited investor within the
meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D of the
Securities Act of 1933, as amended, provided that, if such interest is a
beneficial interest in the Restricted Global Certificate, or if such
interest is a beneficial interest in the Regulation S Global Certificate
and such exchange is to occur during the Restricted Period, then such
interest shall be exchanged for a Restricted Security (subject in each case
to Section 5.4(c)). A Preferred Security that is not a Global Certificate
may be exchanged for a beneficial interest in a Global Certificate only if
(A) such exchange occurs in connection with a transfer effected in
accordance with Clause (b)(iii) or (iv) above or (B) such Security is a
Regulation S Preferred Security and such exchange occurs after the
Restricted Period.
(vii) Regulation S Global Certificate to be Held Through Euroclear or
Cedel during Restricted Period. The Depositor shall use its best efforts
to cause the Clearing Agency to ensure that, until the expiration of the
Restricted Period, beneficial interests in the Regulation S Global
Certificate may be held only in or through accounts maintained at the
Clearing Agency by Euroclear or Cedel (or by participants acting for the
account thereof), and no person shall be entitled to effect any transfer or
exchange that would result in any such interest being held otherwise than
in or through such an account; provided that this Clause (b)(vii) shall not
prohibit any transfer or exchange of such an interest in accordance with
Clause (b)(ii) or (vi) above.
(c) Securities Act Legends. Rule 144A Securities, Certificated Preferred
Securities and their respective Successor Securities shall bear a Restricted
Securities Legend as set forth in Section 5.15, and the Regulation S Preferred
Securities and their Successor Securities shall bear a Regulation S Legend,
subject to the following:
(i) subject to the following Clauses of this Section 5.4(c), a
Preferred Security or any portion thereof which is exchanged, upon transfer
or otherwise, for a Global Certificate or any portion thereof shall bear
the Securities Act Legend borne by such Global Certificate while
represented thereby;
(ii) subject to the following Clauses of this Section 5.4(c), a new
Preferred Security which is not a Global Certificate and is issued in
exchange for another Preferred Security (including, a Global Certificate)
or any portion thereof, upon transfer or otherwise, shall bear the
Securities Act Legend borne by such other Preferred Security, provided
that, if such new Preferred Security is required pursuant to Section
5.4(b)(v) or (vi) to be issued in the form of a Restricted Security, it
shall bear a Restricted Securities Legend and, if such
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new Preferred Security is so required to be issued in the form of a
Regulation S Preferred Security, it shall bear a Regulation S Legend;
(iii) Any Preferred Securities which are sold or otherwise disposed
of pursuant to an effective registration statement under the Securities Act
(including the Shelf Registration Statement), together with their Successor
Securities shall not bear a Securities Act Legend; the Depositor shall
inform the Property Trustee in writing of the effective date of any such
registration statement registering the Preferred Securities under the
Securities Act and shall notify the Property Trustee at any time when
prospectuses may not be delivered with respect to Preferred Securities to
be sold pursuant to such registration statement. The Property Trustee shall
not be liable for any action taken or omitted to be taken by it in good
faith in accordance with the aforementioned registration statement;
(iv) at any time after the Preferred Securities may be freely
transferred without registration under the Securities Act or without being
subject to transfer restrictions pursuant to the Securities Act, a new
Preferred Security which does not bear a Securities Act Legend may be
issued in exchange for or in lieu of a Preferred Security (other than a
Global Certificate) or any portion thereof which bears such a legend if the
Property Trustee has received an Unrestricted Securities Certificate,
satisfactory to the Property Trustee and duly executed by the Holder of
such legended Preferred Security or his attorney duly authorized in
writing, and after such date and receipt of such certificate, the Property
Trustee shall authenticate and deliver such a new Preferred Security in
exchange for or in lieu of such other Preferred Security as provided in
this Article 5;
(v) a new Preferred Security which does not bear a Securities Act
Legend may be issued in exchange for or in lieu of a Preferred Security
(other than a Global Certificate) or any portion thereof which bears such a
legend if, in the Depositor's judgment, placing such a legend upon such new
Preferred Security is not necessary to ensure compliance with the
registration requirements of the Securities Act, and the Property Trustee,
at the direction of the Depositor, shall authenticate and deliver such a
new Preferred Security as provided in this Article 5; and
(vi) notwithstanding the foregoing provisions of this Section
5.4(c), a Successor Security of a Preferred Securities that does not bear a
particular form of Securities Act Legend shall not bear such form of legend
unless the Depositor has reasonable cause to believe that such Successor
Security is a "restricted security" within the meaning of Rule 144, in
which case the Property Trustee, at the direction of the Depositor, shall
authenticate and deliver a new Preferred Security bearing a Restricted
Securities Legend in exchange for such Successor Security as provided in
this Article 5.
SECTION 5.5. Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates.
If (a) any mutilated Trust Securities Certificate shall be surrendered to
the Securities Registrar, or if the Securities Registrar shall receive evidence
to its satisfaction of the destruction, loss or theft of any Trust Securities
Certificate and (b) there shall be delivered to the Securities Registrar and the
Administrative Trustees such security or indemnity as may be required by them to
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save each of them harmless, then in the absence of notice that such Trust
Securities Certificate shall have been acquired by a bona fide purchaser, the
Administrative Trustees, or any one of them, on behalf of the Trust shall
execute and make available for authentication and delivery, in exchange for or
in lieu of any such mutilated, destroyed, lost or stolen Trust Securities
Certificate, a new Trust Securities Certificate of like denomination. In
connection with the issuance of any new Trust Securities Certificate under this
Section, the Securities Registrar may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
therewith. Any duplicative Trust Securities Certificate issued pursuant to this
Section shall constitute conclusive evidence of an undivided beneficial interest
in the assets of the Trust, as if originally issued, whether or not the lost,
stolen or destroyed Trust Securities Certificate shall be found at any time.
SECTION 5.6. Persons Deemed Securityholders. The Property Trustee and the
Securities Registrar shall treat the Person in whose name any Trust Securities
Certificate shall be registered in the Securities Register as the owner of such
Trust Securities Certificate for the purpose of receiving Distributions and for
all other purposes whatsoever, and neither the Property Trustee nor the
Securities Registrar shall be bound by any notice to the contrary.
SECTION 5.7. Access to List of Securityholders' Names and Addresses. The
Administrative Trustees or the Depositor shall furnish or cause to be furnished
(unless the Property Trustee is acting as Securities Registrar with respect to
the Trust Securities under the Trust Agreement) a list, in such form as the
Property Trustee may reasonably require, of the names and addresses of the
Securityholders as of the most recent record date (a) to the Property Trustee,
quarterly at least 5 Business Days before each Distribution Date, and (b) to the
Property Trustee, promptly after receipt by the Depositor of a request therefor
from the Property Trustee in order to enable the Property Trustee to discharge
its obligations under this Trust Agreement, in each case to the extent such
information is in the possession or control of the Administrative Trustees or
the Depositor and is not identical to a previously supplied list or has not
otherwise been received by the Property Trustee in its capacity as Securities
Registrar. The rights of Securityholders to communicate with other
Securityholders with respect to their rights under this Trust Agreement or under
the Trust Securities, and the corresponding rights of the Trustee shall be as
provided in the Trust Indenture Act, except to the extent Section 3819 of the
Delaware Business Trust Act would require greater access to such information, in
which case the latter shall apply. Each Holder, by receiving and holding a Trust
Securities Certificate, and each Owner shall be deemed to have agreed not to
hold the Depositor, the Property Trustee or the Administrative Trustees
accountable by reason of the disclosure of its name and address, regardless of
the source from which such information was derived.
SECTION 5.8. Maintenance of Office or Agency. The Securities Registrar
shall maintain in The City of New York an office or offices or agency or
agencies where Preferred Securities Certificates may be surrendered for
registration of transfer, exchange or conversion and where notices and demands
to or upon the Trustees in respect of the Trust Securities Certificates may be
served. The Securities Registrar initially designates One State Street, 11th
Floor, New York, New York 10004, Attention: Corporate Trust Department, as its
principal corporate trust office for such purposes. The Securities Registrar
shall give prompt written notice to the Depositor and to the
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Securityholders of any change in the location of the Securities Register or any
such office or agency.
SECTION 5.9. Appointment of Paying Agent. In the event that the Preferred
Securities are not in book-entry form only, the Trust shall maintain in the
Borough of Manhattan, City of New York, an office or agency (the "Paying Agent")
where the Preferred Securities may be presented for payment. The Paying Agent
shall make Distributions to Securityholders from the Payment Account and shall
report the amounts of such Distributions to the Property Trustee and the
Administrative Trustees. Any Paying Agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making the
Distributions referred to above. The Administrative Trustees may revoke such
power and remove the Paying Agent if such Trustees determine in their sole
discretion that the Paying Agent shall have failed to perform its obligations
under this Trust Agreement in any material respect. The Paying Agent shall
initially be the Property Trustee, and any co-paying agent chosen by the
Property Trustee and acceptable to the Administrative Trustees and the
Depositor. Any Person acting as Paying Agent shall be permitted to resign as
Paying Agent upon 30 days' written notice to the Property Trustee and the
Depositor. In the event that the Property Trustee shall no longer be the Paying
Agent or a successor Paying Agent shall resign or its authority to act be
revoked, the Administrative Trustees shall appoint a successor that is
acceptable to the Property Trustee and the Depositor to act as Paying Agent
(which shall be a bank or trust company). Each successor Paying Agent or any
additional Paying Agent shall agree with the Trustees that, as Paying Agent,
such successor Paying Agent or additional Paying Agent will hold all sums, if
any, held by it for payment to the Securityholders in trust for the benefit of
the Securityholders entitled thereto until such sums shall be paid to each
Securityholder. The Paying Agent shall return all unclaimed funds to the
Property Trustee and upon removal of a Paying Agent such Paying Agent shall also
return all funds in its possession to the Property Trustee. The provisions of
Sections 8.1, 8.3 and 8.6 shall apply to the Property Trustee also in its role
as Paying Agent, for so long as the Property Trustee shall act as Paying Agent
and, to the extent applicable, to any other paying agent appointed hereunder.
Any reference in this Agreement to the Paying Agent shall include any co-paying
agent unless the context requires otherwise.
SECTION 5.10. Ownership of Common Securities by Depositor. On the Closing
Date provided for in Section 2.5, the Depositor's predecessor acquired
beneficial and record ownership of the Common Securities. On or around the date
hereof, the Depositor acquired such Common Securities by operation of law
pursuant to a merger of Depositor's predecessor with and into the Depositor. To
the fullest extent permitted by law, any attempted transfer of the Common
Securities other than further to the aforementioned merger of Depositor's
predecessor with and into the Depositor, shall be void. The administrative
trustees of the Old Trust shall cause each Common Securities Certificate issued
to the Depositor to contain a legend stating "THIS CERTIFICATE IS NOT
TRANSFERABLE".
SECTION 5.11. Global Securities; Non-Global Securities; Common Securities
Certificate.
(a) Each Global Certificate authenticated under this Trust Agreement shall
be registered in the name of the Clearing Agency designated by the Depositor for
such Global Certificate or a nominee thereof and delivered to such Clearing
Agency or a nominee thereof or custodian therefor,
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and each such Global Certificate shall constitute a Preferred Security for all
purposes of this Trust Agreement.
(b) If a Global Certificate is to be exchanged for Certificated Preferred
Securities or canceled in whole, it shall be surrendered by or on behalf of the
Clearing Agency, its nominee or custodian to the Property Trustee, as Securities
Registrar, for exchange or cancellation as provided in this Article 5. If any
Global Certificate is to be exchanged for Certificated Preferred Securities or
cancelled in part, or if another Preferred Security is to be exchanged in whole
or in part for a beneficial interest in any Global Certificate, in each case, as
provided in Section 5.4, then either (i) such Global Certificate shall be so
surrendered for exchange or cancellation as provided in this Article 5 or (ii)
the principal amount thereof shall be reduced or increased by an amount equal to
the portion thereof to be so exchanged or cancelled, or equal to the principal
amount of such Certificated Preferred Security to be so exchanged for a
beneficial interest therein, as the case may be, by means of an appropriate
adjustment made on the records of the Property Trustee, as Securities Registrar,
whereupon the Property Trustee, in accordance with the Applicable Procedures,
shall instruct the Clearing Agency or its authorized representative to make a
corresponding adjustment to its records. Upon any such surrender or adjustment
of a Global Certificate, the Property Trustee shall, subject to Section 5.4 and
as otherwise provided in this Article 5, authenticate and deliver any Preferred
Securities issuable in exchange for such Global Certificate (or any portion
thereof) to or upon the order of, and registered in such names as may be
directed by, the Clearing Agency or its authorized representative. Upon the
request of the Property Trustee in connection with the occurrence of any of the
events specified in the preceding paragraph, the Depositor shall promptly make
available to the Property Trustee a reasonable supply of Preferred Securities
that are not in the form of Global Certificates. The Property Trustee shall be
entitled to rely upon any order, direction or request of the Clearing Agency or
its authorized representative which is given or made pursuant to this Article 5
if such order, direction or request is given or made in accordance with the
Applicable Procedures.
(c) Every Preferred Security authenticated and delivered upon registration
of transfer of, or in exchange for or in lieu of, a Global Certificate or any
portion thereof, whether pursuant to this Article 5 or otherwise, shall be
authenticated and delivered in the form of, and shall be, a Global Certificate,
unless such Preferred Security is registered in the name of a Person other than
the Clearing Agency for such Global Certificate or a nominee thereof.
(d) The Clearing Agency or its nominee, as registered owner of a Global
Certificate, shall be the holder of such Global Certificate for all purposes
under the Trust Agreement and the Preferred Securities, and owners of beneficial
interests in a Global Certificate shall hold such interests pursuant to the
Applicable Procedures. Accordingly, any such Owner's beneficial interest in a
Global Certificate will be shown only on, and the transfer of such interest
shall be effected only through, records maintained by the Clearing Agency or its
nominee or its participants and such owners of beneficial interests in a Global
Certificate will not be considered the owners or holders of such Global
Certificate for any purpose of this Trust Agreement or the Preferred Securities.
(e) A single Common Securities Certificate representing the Common
Securities was issued to Depositor's predecessor and shall be retained by the
Depositor in the form of a definitive Common Securities Certificate.
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SECTION 5.12. Notices to Clearing Agency. To the extent that a notice or
other communication to the Owners is required under this Trust Agreement, unless
and until Definitive Preferred Securities Certificates shall have been issued to
Owners pursuant to Section 5.13, the Trustees shall give all such notices and
communications specified herein to be given to Owners to the Clearing Agency,
and shall have no obligations to provide notices directly to the Owners.
SECTION 5.13. Definitive Preferred Securities Certificates.
Notwithstanding any other provision in this Trust Agreement other than as
provided for in Section 5.4(b)(vi), no Global Certificate may be exchanged in
whole or in part for Preferred Securities registered, and no transfer of a
Global Certificate in whole or in part may be registered, in the name of any
Person other than the Clearing Agency for such Global Certificate or a nominee
thereof unless (i) such Clearing Agency (A) has notified the Depositor that it
is unwilling or unable to continue as Clearing Agency for such Global
Certificate or (B) has ceased to be a clearing agency registered as such under
the Securities Exchange Act of 1934, as amended, and in either case the Trust
and the Depositor thereupon fails to appoint a successor Clearing Agency, (ii)
the Trust and the Depositor, at their option, notify the Property Trustee in
writing that it elects to cause the issuance of the Preferred Securities in
certificated form or (iii) there shall have occurred and be continuing an Event
of Default or any event which after notice or lapse of time or both would be an
Event of Default. In all cases, Certificated Preferred Securities delivered in
exchange for any Global Certificate or beneficial interests therein will be
registered in the names, and issued in any approved denominations, requested by
or on behalf of the Clearing Agency (in accordance with its customary
procedures).
SECTION 5.14. Rights of Securityholders. The legal title to the Trust
Property is vested exclusively in the Property Trustee (in its capacity as such)
in accordance with Section 2.9, and the Securityholders shall not have any right
or title therein other than the undivided beneficial interest in the assets of
the Trust conferred by their Trust Securities and they shall have no right to
call for any partition or division of property, profits or rights of the Trust
except as described below. The Trust Securities shall be personal property
giving only the rights specifically set forth therein and in this Trust
Agreement. The Trust Securities shall have no preemptive or similar rights and,
when issued and delivered to Securityholders against payment of the purchase
price therefor, will be fully paid and nonassessable by the Trust. The Holders
of the Trust Securities, in their capacities as such, shall be entitled to the
same limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware.
SECTION 5.15. Restrictive Legends. (a) The Restricted Global Certificate
and the Certificated Preferred Securities shall bear the following legend (the
"Restricted Securities Legend") unless the Depositor determines otherwise in
accordance with applicable law:
"THE SECURITIES EVIDENCED HEREBY AND THE COMMON STOCK ISSUABLE UPON THEIR
CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933 (THE
"SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT (A) BY ANY INITIAL INVESTOR THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT, (1) TO A PERSON WHO
THE TRANSFEROR REASONABLY
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BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER ACQUIRING FOR ITS OWN ACCOUNT OR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION COMPLYING WITH RULE
144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 904 OF REGULATION S
UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (4)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR (B) BY ANY INITIAL INVESTOR
THAT IS A QUALIFIED INSTITUTIONAL BUYER OR BY ANY SUBSEQUENT INVESTOR, AS SET
FORTH IN CLAUSE (A) ABOVE OR TO AN INSTITUTION THAT IS AN ACCREDITED INVESTOR
WITHIN THE MEANING OF RULE 501(A)(1), (2), (3) OR (7) IN A TRANSACTION EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND, IN EACH CASE (A)
AND (B), IN COMPLIANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE
UNITED STATES AND OTHER JURISDICTIONS. SECURITIES OWNED BY AN INITIAL INVESTOR
THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER MAY NOT BE HELD IN BOOK-ENTRY FORM
AND MAY NOT BE TRANSFERRED WITHOUT CERTIFICATION THAT THE TRANSFER COMPLIES WITH
THE FOREGOING RESTRICTIONS, AS PROVIDED IN THE TRUST AGREEMENT REFERRED TO
BELOW."
(b) The Regulation S Preferred Securities shall bear the following legend
(the "Regulation S Legend") unless the Depositor determines otherwise in
accordance with the applicable law:
"THE SECURITIES EVIDENCED HEREBY AND THE COMMON STOCK ISSUABLE UPON CONVERSION
THEREOF (COLLECTIVELY, THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT AND MAY NOT BE OFFERED, SOLD OR DELIVERED IN THE UNITED STATES OR
TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON, UNLESS SUCH SECURITIES
ARE REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS THEREOF IS AVAILABLE."
ARTICLE 6
ACT OF SECURITYHOLDERS; MEETINGS; VOTING
SECTION 6.1. Limitations on Voting Rights.
(a) Except as provided in this Section, in Section 8.9 and 10.2 and in the
Indenture and as otherwise required by law, no Holder of Preferred Securities
shall have any right to vote or in any manner otherwise control the
administration, operation and management of the Trust or the obligations of the
parties hereto, nor shall anything herein set forth, or contained in the terms
of the Trust Securities Certificates, be construed so as to constitute the
Securityholders from time to time as partners or members of an association.
(b) Subject to Section 8.2 hereof, if an Event of Default with respect to
the Preferred Securities has occurred and been subsequently cured, waived or
otherwise eliminated, the provisions of Section 6.1(b)(ii) hereof shall apply.
During (x) the period commencing on the date
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of the occurrence of an Event of Default with respect to the Preferred
Securities and ending on the date when such Event of Default is cured, waived or
otherwise eliminated, or (y) any period not described in either the preceding
sentence or the preceding clause (x), the provisions of Section 6.1(b)(i) shall
apply.
(i) The holders of a majority in aggregate liquidation amount of the
Preferred Securities will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Property
Trustee or to exercise any trust or power conferred upon the Property
Trustee under the Trust Agreement, including the right to direct the
Property Trustee to exercise the remedies available to it as a holder of
the Debentures but excluding the right to direct the Property Trustee to
consent to an amendment, modification or termination of the Indenture
(which shall be as provided below). So long as any Debentures are held by
the Property Trustee, the Trustees shall not (A) direct the time, method
and place of conducting any proceeding for any remedy available to the
Debenture Trustee, or executing any trust or power conferred on the
Debenture Trustee with respect to such Debentures, (B) waive any past
default which is waivable under Section 5.13 of the Indenture, (C) exercise
any right to rescind or annul a declaration that the principal of all the
Debentures shall be due and payable or (D) consent to any amendment,
modification or termination of the Indenture or the Debentures, where such
consent shall be required, without, in each case, obtaining the prior
approval of the Holders of a majority in aggregate Liquidation Amount of
all Outstanding Preferred Securities (except in the case of clause (D),
which consent, in the event that no Event of Default shall occur and be
continuing, shall be of the Holders of all Trust Securities, voting
together as a single class); provided, however, that where a consent under
the Indenture would require the consent of each holder of Debentures
affected thereby, no such consent shall be given by the Property Trustee
without the prior written consent of each Holder of Preferred Securities.
The Trustees shall not revoke any action previously authorized or approved
by a vote of the Holders of the Preferred Securities, except by a
subsequent vote of the Holders of the Preferred Securities. The Property
Trustee shall notify all Holders of record of the Preferred Securities of
any notice of default received from the Debenture Trustee with respect to
the Debentures. In addition to obtaining the foregoing approvals of the
Holders of the Preferred Securities, prior to taking any of the foregoing
actions, the Trustees shall, at the expense of the Depositor, obtain an
Opinion of Counsel experienced in such matters to the effect that the Trust
will not be classified as an association taxable as a corporation or
partnership for United States Federal income tax purposes on account of
such action.
(ii) Subject to Section 8.2 of this Trust Agreement and only after the
Event of Default with respect to the Preferred Securities has been cured,
waived, or otherwise eliminated the holders of a majority in aggregate
liquidation amount of the Common Securities will have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Property Trustee or to exercise any trust or power
conferred upon the Property Trustee under the Trust Agreement, including
the right to direct the Property Trustee to exercise the remedies available
to it as a holder of the Debentures but excluding the right to direct the
Property Trustee to consent to an amendment, modification or termination of
the Indenture (which shall be as provided
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below). So long as any Debentures are held by the Property Trustee, the
Trustees shall not (A) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, or executing
any trust or power conferred on the Debenture Trustee with respect to such
Debentures, (B) waive any past default which is waivable under Section 5.13
of the Indenture, (C) exercise any right to rescind or annul a declaration
that the principal of all the Debentures shall be due and payable or (D)
consent to any amendment, modification or termination of the Indenture or
the Debentures, where such consent shall be required, without, in each
case, obtaining the prior approval of the Holders of a majority in
aggregate Liquidation Amount of all Common Securities (except in the case
of clause (D), which consent, in the event that no Event of Default shall
occur and be continuing, shall be of the Holders of all Trust Securities,
voting together as a single class); provided, however, that where a consent
under the Indenture would require the consent of each holder of Debentures
affected thereby, no such consent shall be given by the Property Trustee
without the prior written consent of each Holder of Common Securities. The
Trustees shall not revoke any action previously authorized or approved by a
vote of the Holders of the Common Securities, except by a subsequent vote
of the Holders of the Common Securities. The Property Trustee shall notify
all Holders of record of the Common Securities of any notice of default
received from the Debenture Trustee with respect to the Debentures. In
addition to obtaining the foregoing approvals of the Holders of the Common
Securities, prior to taking any of the foregoing actions, the Trustees
shall, at the expense of the Depositor, obtain an Opinion of Counsel
experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation or partnership for
United States Federal income tax purposes on account of such action.
(c) If any proposed amendment to the Trust Agreement provides for, or
the Trustees otherwise propose to effect the dissolution, winding-up or
termination of the Trust, other than pursuant to the terms of this Trust
Agreement, then the Holders of Outstanding Preferred Securities as a class will
be entitled to vote on such amendment or proposal and such amendment or proposal
shall not be effective except with the approval of the Holders of a majority in
aggregate Liquidation Amount of the Outstanding Preferred Securities.
SECTION 6.2. Notice of Meetings. Notice of all meetings of the Holders of
the Preferred Securities, stating the time, place and purpose of the meeting,
shall be given by the Property Trustee pursuant to Section 10.8 to each
Preferred Securityholder of record, at its registered address, at least 15 days
and not more than 90 days before the meeting. At any such meeting, any business
properly before the meeting may be so considered whether or not stated in the
notice of the meeting. Any adjourned meeting may be held as adjourned without
further notice.
SECTION 6.3. Meetings of Preferred Security-holders. No annual meeting of
Securityholders is required to be held. The Administrative Trustees, however,
shall call a meeting of Securityholders to vote on any matter upon the written
request of the Preferred Securityholders of record of 25% of the Preferred
Securities (based upon their Liquidation Amount) and the Administrative Trustees
or the Property Trustee may, at any time in their discretion, call a meeting of
the Holders of Preferred Securities to vote on any matters as to which such
Holders are entitled to vote. Holders of record of 50% of the Preferred
Securities (based upon their Liquidation Amount), present in person or by proxy,
shall constitute a quorum at any meeting of Securityholders. If a
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a quorum is present at a meeting, an affirmative vote by the Holders of record
of Preferred Securities present, in person or by proxy, holding more than a
majority of the Preferred Securities (based upon their Liquidation Amount) held
by Holders of record of Preferred Securities present, either in person or by
proxy, at such meeting shall constitute the action of the Securityholders,
unless this Trust Agreement requires a greater number of affirmative votes.
SECTION 6.4. Voting Rights. Securityholders shall be entitled to one vote
for each $50 of Liquidation Amount represented by their Trust Securities in
respect of any matter as to which such Securityholders are entitled to vote.
Notwithstanding that holders of Preferred Securities are entitled to vote or
consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by the Depositor, the Trustees or any
affiliate of any Trustee shall, for purposes of such vote or consent, be treated
as if such Preferred Securities were not outstanding.
SECTION 6.5. Proxies, Etc. At any meeting of Securityholders, any
Securityholders entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Administrative Trustees, or with such other officer or agent of the
Trust as the Administrative Trustees may direct, for verification prior to the
time at which such vote shall be taken. Pursuant to a resolution of the
Property Trustee, proxies may be solicited in the name of the Property Trustee
or one or more officers of the Property Trustee. Only Securityholders of record
shall be entitled to vote. When Trust Securities are held jointly by several
Persons, any one of them may vote at any meeting in person or represented by
proxy in respect of such Trust Securities, but if more than one of them shall be
present at such meeting in person or by proxy, and such joint owners or their
proxies so present disagree as to any vote to be cast, such vote shall not be
received in respect of such Trust Securities. A proxy purporting to be executed
by or on behalf of a Securityholder shall be deemed valid unless challenged at
or prior to its exercise, and the burden of proving invalidity shall rest on the
challenger. No proxy shall be valid more than three years after its date of
execution.
SECTION 6.6 Securityholder Action by Written Consent. Any action which
may be taken by Securityholders at a meeting may be taken without a meeting if
Securityholders holding more than a majority of all Outstanding Trust Securities
(based upon their Liquidation Amount) entitled to vote in respect of such action
(or such larger proportion thereof as shall be required by any express provision
of this Trust Agreement) shall consent to the action in writing.
SECTION 6.7. Record Date for Voting and Other Purposes. For the purposes
of determining the Securityholders who are entitled to notice of and to vote at
any meeting or by written consent, or to participate in any Distribution on the
Trust Securities in respect of which a record date is not otherwise provided for
in this Trust Agreement, or for the purpose of any other action, the Property
Trustee may from time to time fix a date, not more than 90 days prior to the
date of any meeting of Securityholders or the payment of Distributions or other
action, as the case may be, as a record date for the determination of the
identity of the Securityholders of record for such purposes.
SECTION 6.8. Acts of Securityholders. Any request, demand, authorization,
direction, notice, consent, waiver or other action provided or permitted by this
Trust Agreement to be given, made or taken by Securityholders or Owners may be
embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Securityholders or Owners in person or by
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an agent duly appointed in writing; and, except as otherwise expressly provided
herein, such action shall become effective when such instrument or instruments
are delivered to an Administrative Trustee. Such instrument or instruments (and
the action embodied therein and evidence thereby) are herein sometimes referred
to as the "Act" of the Securityholders or Owners signing such instrument or
instruments. Proof of execution of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Trust
Agreement and (subject to Section 8.1) conclusive in favor of the Trustees, if
made in the manner provided in this Section. The fact and date of the execution
by any Person of any such instrument or writing may be proved by the affidavit
of a witness of such execution or by a certificate of a notary public or other
officer authorized by law to take acknowledgements of deeds, certifying that the
individual signing such instrument or writing acknowledged to him the execution
thereof. Where such execution is by a signer acting in a capacity other than his
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of his authority. The fact and date of the execution of any
such instrument or writing, or the authority of the Person executing the same,
may also be proved in any other manner which any Trustee receiving the same
deems sufficient. The ownership of Preferred Securities shall be proved by the
Securities Register. Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Securityholder of any Trust Security shall
bind every future Securityholder of the same Trust Security and the
Securityholder of every Trust Security issued upon the registration of transfer
thereof or in exchange therefor or in lieu thereof in respect of anything done,
omitted or suffered to be done by the Trustees or the Trust in reliance thereon,
whether or not notation of such action is made upon such Trust Security. Without
limiting the foregoing, a Securityholder entitled hereunder to take any action
hereunder with regard to any particular Trust Security may do so with regard to
all or any part of the Liquidation Amount of such Trust Security or by one or
more duly appointed agents each of which may do so pursuant to such appointment
with regard to all or any part of such Liquidation Amount. If any dispute shall
arise between the Securityholders and the Administrative Trustees or among such
Securityholders or Trustees with respect to the authenticity, validity or
binding nature of any request, demand, authorization, direction, consent, waiver
or other Act of such Securityholder or Trustee under this Article 6, then the
determination of such matter by the Property Trustee shall be conclusive with
respect to such matter. Upon the occurrence and continuation of an Event of
Default, the holders of Preferred Securities shall rely on the enforcement by
the Property Trustee of its rights as holder of the Debentures against the
Depositor. If the Property Trustee fails to enforce its rights as holder of the
Debentures after a request therefor by a holder of Preferred Securities, such
holder may proceed to enforce such rights directly against the Depositor.
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of the Depositor to pay
interest or principal on the Debentures on the date such interest or principal
is otherwise payable (or in the case of redemption, on the Redemption Date),
then a holder of Preferred Securities shall have the right to institute a
proceeding directly against the Depositor, for enforcement of payment to such
holder of the principal amount of or interest on Debentures having a principal
amount equal to the aggregate Liquidation Amount of the Preferred Securities of
such holder after the respective due date specified in the Debentures (a "Direct
Action"). In connection with any such Direct Action, the rights of the Depositor
will be subrogated to the rights of any holder of the Preferred Securities to
the extent of any payment made by the Depositor to such holder of Preferred
Securities as a result of such Direct Action. A Securityholder may institute a
legal proceeding directly against the Depositor under the Guarantee to enforce
its rights under the
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Guarantee without first instituting a legal proceeding against the Guarantee
Trustee (as defined in the Guarantee), the Trust or any Person or entity.
SECTION 6.9. Inspection of Records. Upon reasonable notice to the
Administrative Trustees and the Property Trustee, the records of the Trust shall
be open to inspection by Securityholders during normal business hours for any
purpose reasonably related to such Securityholder's interest as a
Securityholder.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES
SECTION 7.1. Representations and Warranties of the Property Trustee and
the Delaware Trustee. The Property Trustee and the Delaware Trustee, each
severally on behalf of and as to itself, hereby represents and warrants for the
benefit of the Depositor and the Securityholders that (each such representation
and warranty made by the Property Trustee and the Delaware Trustee being made
only with respect to itself):
(a) the Property Trustee is a banking corporation duly organized, validly
existing and in good standing under the laws of the State of New York;
(b) the Delaware Trustee is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware;
(c) each of the Property Trustee and the Delaware Trustee has full
corporate power, authority and legal right to execute, deliver and perform its
obligations under this Trust Agreement and has taken all necessary action to
authorize the execution, delivery and performance by it of this Trust Agreement;
(d) this Trust Agreement has been duly authorized, executed and delivered
by each of the Property Trustee and the Delaware Trustee and constitutes the
valid and legally binding agreement of the Property Trustee and the Delaware
Trustee enforceable against it in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles; (e) the execution, delivery and performance by
each of the Property Trustee and the Delaware Trustee of this Trust Agreement
have been duly authorized by all necessary corporate or other action on the part
of the Property Trustee and the Delaware Trustee and does not require any
approval of stockholders of the Property Trustee or the Delaware Trustee and
such execution, delivery and performance will not (i) violate either of the
Property Trustee's or the Delaware Trustee's charter or by-laws, (ii) violate
any provision of, or constitute, with or without notice or lapse of time, a
default under, or result in the creation or imposition of any Lien on any
properties included in the Trust Property pursuant to the provisions of, any
indenture, mortgage, credit agreement, license or other agreement or instrument
to which the Property Trustee or the Delaware Trustee is a party or by which it
is bound, or (iii) violate any law, governmental rule or regulation of the
United States or the State of Delaware, as the case may be, governing the
banking, corporate, or
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trust powers of the Property Trustee or the Delaware Trustee (as appropriate in
context) or any order, judgment or decree applicable to the Property Trustee or
the Delaware Trustee;
(f) neither the authorization, execution or delivery by the Property
Trustee or the Delaware Trustee of this Trust Agreement nor the consummation of
any of the transactions by the Property Trustee or the Delaware Trustee (as
appropriate in context) contemplated herein or therein requires the consent or
approval of, the giving of notice to, the registration with or the taking of any
other action with respect to, any governmental authority or agency under any
existing Federal law governing the banking, corporate or trust powers of the
Property Trustee or the Delaware Trustee, as the case may be, under the laws of
the United States or the State of Delaware;
(g) there are no proceedings pending or, to the best of each of the
Property Trustee's and the Delaware Trustee's knowledge, threatened against or
affecting the Property Trustee or the Delaware Trustee in any court or before
any governmental authority, agency or arbitration board or tribunal which,
individually or in the aggregate, would materially and adversely affect the
Trust or would question the right, power and authority of the Property Trustee
or the Delaware Trustee, as the case may be, to enter into or perform its
obligations as one of the Trustees under this Trust Agreement.
SECTION 7.2. Representations and Warranties of Depositor. The Depositor
hereby represents and warrants for the benefit of the Securityholders that:
(a) the Trust Securities Certificates issued on the Closing Date on behalf
of the Trust have been duly authorized and will have been duly and validly
executed, issued and delivered by the Trustees pursuant to the terms and
provisions of, and in accordance with the requirements of, this Trust Agreement
and the Securityholders will be, as of such date, entitled to the benefits of
this Trust Agreement; and
(b) there are no taxes, fees or other governmental charges payable by the
Trust (or the Trustees on behalf of the Trust) under the laws of the State of
Delaware or any political subdivision thereof in connection with the execution,
delivery and performance by the Property Trustee or the Delaware Trustee, as the
case may be, of this Trust Agreement.
ARTICLE 8
THE TRUSTEES
SECTION 8.1. Certain Duties and Responsibilities.
(a) The duties and responsibilities of the Trustees shall be as provided by
this Trust Agreement and, in the case of the Property Trustee, by the Trust
Indenture Act. The Property Trustee, before the occurrence of any Event of
Default and after the curing or waiving of all Events of Default that may have
occurred, shall undertake to perform only such duties and obligations as are
specifically set forth in this Trust Agreement and the Trust Indenture Act and
no implied covenants shall be read into this Trust Agreement against the
Property Trustee. In case an Event of Default has occurred (that has not been
cured or waived pursuant to Section 8.2) of which a
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responsible officer of the Property Trustee has actual knowledge, the Property
Trustee shall exercise such rights and powers vested in it by this Trust
Agreement and the Trust Indenture Act, and use the same degree of care and skill
in its exercise, as a prudent individual would exercise or use under the
circumstances in the conduct of his or her own affairs. Notwithstanding the
foregoing, no provision of this Trust Agreement shall require the Trustees to
expend or risk their own funds or otherwise incur any financial liability in the
performance of any of their duties hereunder, or in the exercise of any of their
rights or powers, if they shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it. Whether or not therein expressly so provided,
every provision of this Trust Agreement relating to the conduct or affecting the
liability of or affording protection to the Trustees shall be subject to the
provisions of this Section. Nothing in this Trust Agreement shall be construed
to release the Administrative Trustees from liability for their own grossly
negligent action, their own grossly negligent failure to act, or their own
willful misconduct. To the extent that, at law or in equity, an Administrative
Trustee has duties (including fiduciary duties) and liabilities relating thereto
to the Trust or to the Securityholders, such Administrative Trustee shall not be
liable to the Trust or to any Securityholder for such Administrative Trustee's
good faith reliance on the provisions of this Trust Agreement. The provisions of
this Trust Agreement, to the extent that they restrict the duties and
liabilities of the Administrative Trustees otherwise existing at law or in
equity, are agreed by the Depositor and the Securityholders to replace such
other duties and liabilities of the Administrative Trustees.
(b) All payments made by the Property Trustee or a Paying Agent in respect
of the Trust Securities shall be made only from the revenue and proceeds from
the Trust Property and only to the extent that there shall be sufficient revenue
or proceeds from the Trust Property to enable the Property Trustee or a Paying
Agent to make payments in accordance with the terms hereof. Each
Securityholder, by its acceptance of a Trust Security, agrees that it will look
solely to the revenue and proceeds from the Trust Property to the extent legally
available for distribution to it as herein provided and that the Trustees are
not personally liable to it for any amount distributable in respect of any Trust
Security or for any other liability in respect of any Trust Security. This
Section 8.1(b) does not limit the liability of the Trustees expressly set forth
elsewhere in this Trust Agreement or, in the case of the Property Trustee, in
the Trust Indenture Act.
(c) No provision of this Trust Agreement shall be construed to relieve the
Property Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, except that:
(i) the Property Trustee shall not be liable for any error of judgment
made in good faith by an authorized officer of the Property Trustee, unless
it shall be proved that the Property Trustee was negligent in ascertaining
the pertinent facts;
(ii) the Property Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance with
the direction of the Holders of a majority Liquidation Amount of the Trust
Securities relating to the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or exercising
any trust or power conferred upon the Property Trustee under this Trust
Agreement;
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(iii) the Property Trustee's sole duty with respect to the custody,
safekeeping and physical preservation of the Debentures and the Payment
Account shall be to deal with such property as fiduciary assets, subject to
the protections and limitations on liability afforded to the Property
Trustee under this Trust Agreement and the Trust Indenture Act;
(iv) The Property Trustee shall not be liable for any interest on any
money received by it except as it may otherwise agree with the Depositor
and money held by the Property Trustee need not be segregated from other
funds held by it except in relation to the Payment Account maintained by
the Property Trustee pursuant to Section 3.1 and except to the extent
otherwise required by law; and
(v) the Property Trustee shall not be responsible for monitoring the
compliance by the Administrative Trustees or the Depositor with their
respective duties under this Trust Agreement, nor shall the Property
Trustee be liable for the default or misconduct of the Administrative
Trustees or the Depositor.
SECTION 8.2. Notice of Defaults.
(a) Within ten days after the occurrence of any Event of Default actually
known to the Property Trustee, the Property Trustee shall transmit, in the
manner and to the extent provided in Section 10.8, notice of such Event of
Default to the holders of Preferred Securities, the Administrative Trustees and
the Depositor, unless such Event of Default shall have been cured or waived,
provided that, except for a default in the payment of principal of (or premium,
if any) or interest on any of the Debentures, the Property Trustee shall be
protected in withholding such notice if and so long as the Board of Directors,
the executive committee, or a trust committee of directors and/or responsible
officers of the Property Trustee in good faith determines that the withholding
of such notice is in the interests of the Holders of the Preferred Securities.
(b) Within ten days after the receipt of notice of the Depositor's exercise
of its right to extend the interest payment period for the Debentures pursuant
to the Indenture, the Property Trustee shall transmit, in the manner and to the
extent provided in Section 10.8, notice of such exercise to the Securityholders,
unless such exercise shall have been revoked.
(c) The Holders of a majority in liquidation amount of Preferred Securities
may, by vote, on behalf of the Holders of all of the Preferred Securities, waive
any past Event of Default in respect of the Preferred Securities and its
consequences, provided that, if the underlying Debenture Event of Default:
(i) is not waivable under the Indenture, the Event of Default under
the Trust Agreement shall also not be waivable; or
(ii) requires the consent or vote of greater than a majority in
principal amount of the holders of the Debentures (a "Super Majority") to
be waived under the Indenture, the Event of Default under the Trust
Agreement may only be waived by the vote of the Holders of the same
proportion in liquidation amount of the Preferred Securities that the
relevant
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Super Majority represents of the aggregate principal amount of the
Debentures outstanding. The provisions of Section 6.1(b) and this Section
8.2(c) shall be in lieu of (S) 316(a)(1)(B) of the Trust Indenture Act and
such (S) 316(a)(1)(B) of the Trust Indenture Act is hereby expressly
excluded from this Trust Agreement and the Preferred Securities, as
permitted by the Trust Indenture Act. Upon such waiver, any such default
shall cease to exist, and any Event of Default with respect to the
Preferred Securities arising therefrom shall be deemed to have been cured,
for every purpose of this Trust Agreement, but no such waiver shall extend
to any subsequent or other default or an Event of Default with respect to
the Preferred Securities or impair any right consequent thereon. Any waiver
by the Holders of the Preferred Securities of an Event of Default with
respect to the Preferred Securities shall also be deemed to constitute a
waiver by the Holders of the Common Securities of any such Event of Default
with respect to the Common Securities for all purposes of this Trust
Agreement without any further act, vote, or consent of the Holders of the
Common Securities.
(d) The Holders of a majority in liquidation amount of the Common
Securities may, by vote, on behalf of the Holders of all of the Common
Securities, waive any past Event of Default with respect to the Common
Securities and its consequences provided that, if the underlying Debenture
Event of Default:
(i) is not waivable under the Indenture, except where the Holders of
the Common Securities are deemed to have waived such Event of Default under
the Declaration as provided below in this Section 8.2(d), the Event of
Default under the Trust Agreement shall also not be waivable; or
(ii) requires the consent or vote of a Super Majority to be waived,
except where the Holders of the Common Securities are deemed to have waived
such Event of Default under the Trust Agreement as provided below in this
Section 8.2(d), the Event of Default under the Trust Agreement may only be
waived by the vote of the Holders of the same proportion in liquidation
amount of the Common Securities that the relevant Super Majority represents
of the aggregate principal amount of the Debentures outstanding; provided
further, that each Holder of Common Securities will be deemed to have
waived any such Event of Default and all Events of Default with respect to
the Common Securities and its consequences until all Events of Default with
respect to the Preferred Securities have been cured, waived or otherwise
eliminated, and until such Events of Default have been so cured, waived or
otherwise eliminated, the Property Trustee will be deemed to be acting
solely on behalf of the Holders of the Preferred Securities and only the
Holders of the Preferred Securities will have the right to direct the
Property Trustee in accordance with the terms of the Securities. The
provisions of Section 6.1(b) and this Section 8.2(d) shall be in lieu of
(S)316(a)(1)(B) of the Trust Indenture Act and such (S)316(a)(1)(B) of the
Trust Indenture Act is hereby expressly excluded from this Trust Agreement
and the Preferred Securities, as permitted by the Trust Indenture Act.
Subject to the foregoing provisions of this Section 8.2(d), upon such
waiver, any such default shall cease to exist and any Event of Default with
respect to the Common Securities arising therefrom shall be deemed to have
been cured for every purpose of this Trust Agreement, but no such waiver
shall extend to any subsequent or
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other default or Event of Default with respect to the Common Securities or
impair any right consequent thereon.
(e) A waiver of an Event of Default under the Indenture by the Property
Trustee at the direction of the Holders of the Preferred Securities, constitutes
a waiver of the corresponding Event of Default under this Trust Agreement. The
foregoing provisions of this Section 8.2(e) shall be in lieu of (S) 316(a)(1)(B)
of the Trust Indenture Act and such (S) 316(a)(1)(B) of the Trust Indenture Act
is hereby expressly excluded from this Trust Agreement and the Preferred
Securities, as permitted by the Trust Indenture Act.
SECTION 8.3. Certain Rights of Property Trustee. Subject to the
provisions of Section 8.1:
(a) The Property Trustee may rely and shall be protected in acting or
refraining from acting in good faith upon any resolution, Opinion of Counsel,
certificate, written representation of a Holder or transferee, certificate of
auditors or any other certificate, statement, instrument, opinion, report,
notice, request, consent, order, appraisal, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;
(b) if no Event of Default has occurred and is continuing and, (i) in
performing its duties under this Trust Agreement the Property Trustee is
required to decide between alternative courses of action or (ii) in construing
any of the provisions in this Trust Agreement the Property Trustee finds the
same ambiguous or inconsistent with any other provisions contained herein or
(iii) the Property Trustee is unsure of the application of any provision of this
Trust Agreement, then, except as to any matter as to which the Holders of
Preferred Securities are entitled to vote under the terms of this Trust
Agreement, the Property Trustee shall deliver a notice to the Depositor
requesting written instructions of the Depositor as to the course of action to
be taken and the Property Trustee shall take such action, or refrain from taking
such action, as the Property Trustee shall be instructed in writing to take, or
to refrain from taking, by the Depositor; provided, however, that if the
Property Trustee does not receive such instructions of the Depositor within ten
Business Days after it has delivered such notice, or such reasonably shorter
period of time set forth in such notice (which to the extent practicable shall
not be less than two Business Days), it may, but shall be under no duty to, take
or refrain from taking such action not inconsistent with this Trust Agreement as
it shall deem advisable and in the best interests of the Securityholders, in
which event the Property Trustee shall have no liability except for its own bad
faith, negligence or willful misconduct;
(c) any direction or act of the Depositor or the Administrative Trustees
contemplated by this Trust Agreement shall be sufficiently evidenced by an
Officers' Certificate;
(d) whenever in the administration of this Trust Agreement, the Property
Trustee shall deem it desirable that a matter be established before undertaking,
suffering or omitting any action hereunder, the Property Trustee (unless other
evidence is herein specifically prescribed) may, in the absence of bad faith on
its part, request and rely upon an Officers' Certificate and an Opinion of
Counsel which, upon receipt of such request, shall be promptly delivered by the
Depositor or the Administrative Trustees;
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(e) the Property Trustee shall have no duty to accomplish any recording,
filing or registration of any instrument (including any financing or
continuation statement or any filing under tax or securities laws) or any
rerecording, refiling or reregistration thereof;
(f) the Property Trustee may consult with counsel (which counsel may be
counsel to the Depositor or any of its Affiliates, and may include any of its
employees) and the advice of such counsel or any Opinion of Counsel shall be
full and complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon and in
accordance with such advice; and the Property Trustee shall have the right at
any time to seek instructions concerning the administration of this Trust
Agreement from any court of competent jurisdiction;
(g) the Property Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Trust Agreement at the request or
direction of any of the Securityholders pursuant to this Trust Agreement, unless
such Securityholders shall have offered to the Property Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
(h) the Property Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolutions, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval, bond,
debenture, note or other evidence of indebtedness or other paper or document,
unless requested in writing to do so by Holders of record of 25% or more of the
Preferred Securities (based upon their Liquidation Amount), but the Property
Trustee may make such further inquiry or investigation into such facts or
matters as it may see fit;
(i) the Property Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through its agents or
attorneys or an Affiliate, provided that the Property Trustee shall be
responsible for its own negligence or recklessness with respect to selection of
any agent or attorney appointed by it hereunder;
(j) whenever in the administration of this Trust Agreement the Property
Trustee shall deem it desirable to receive instructions with respect to
enforcing any remedy or right or taking any other action hereunder, the Property
Trustee (i) may request instructions from the Holders of the Trust Securities,
which instructions may only be given by the Holders of the same proportion in
Liquidation Amount of the Trust Securities as would be entitled to direct the
Property Trustee under the terms of the Trust Securities in respect of such
remedy, right or action, (ii) may refrain from enforcing such remedy or right or
taking such other action until such instructions are received, and (iii) shall
be protected in acting in accordance with such instructions; and
(k) except as otherwise expressly provided by this Trust Agreement, the
Property Trustee shall not be under any obligation to take any action that is
discretionary under the provisions of this Trust Agreement. No provision of this
Trust Agreement shall be deemed to impose any duty or obligation on the Property
Trustee to perform any act or acts or exercise any right, power, duty or
obligation conferred or imposed on it, in any jurisdiction in which it shall be
illegal, or in which the Property Trustee shall be unqualified or incompetent in
accordance with applicable law, to perform any such act or acts, or to exercise
any such right, power, duty or
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obligation. No permissive power or authority available to the Property Trustee
shall be construed to be a duty.
SECTION 8.4. Not Responsible for Recitals or Issuance of Securities. The
recitals contained herein and in the Trust Securities Certificates shall not be
taken as the statements of the Trustees, and the Trustees do not assume any
responsibility for their correctness. The Trustees shall not be accountable for
the use or application by the Depositor of the proceeds of the Debentures.
SECTION 8.5. May Hold Securities. Except as provided in the definition of
the term "Outstanding" in Article 1, any Trustee or any other agent of any
Trustee or the Trust, in its individual or any other capacity, may become the
owner or pledgee of Trust Securities and, subject to Section 8.8 and 8.12, may
otherwise deal with the Trust with the same rights it would have if it were not
a Trustee or such other agent.
SECTION 8.6. Compensation; Indemnity; Fees.
The Depositor agrees:
(a) to pay the Trustees from time to time reasonable compensation for
all services rendered by them hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(b) except as otherwise expressly provided herein, to reimburse the
Trustees upon request for all reasonable expenses, disbursements and
advances incurred or made by the Trustees in accordance with any provision
of this Trust Agreement (including the reasonable compensation and the
expenses and disbursements of its agents and counsel), except any such
expense, disbursement or advance as may be attributable to its negligence
or bad faith;
(c) to the fullest extent permitted by applicable law, to indemnify
and hold harmless (i) each Trustee, (ii) any Affiliate of any Trustee,
(iii) any officer, director, shareholder, employee, representative or agent
of any Trustee, and (iv) any employee or agent of the Trust or its
Affiliates (referred to herein as an "Indemnified Person") from and against
any loss, damage, liability, tax, penalty, expense or claim of any kind or
nature whatsoever incurred by such Indemnified Person by reason of the
creation, operation or termination of the Trust or any act or omission
performed or omitted by such Indemnified Person in good faith on behalf of
the Trust and in a manner such Indemnified Person reasonably believed to be
within the scope of authority conferred on such Indemnified Person by this
Trust Agreement, except that no Indemnified Person shall be entitled to be
indemnified in respect of any loss, damage or claim incurred by such
Indemnified Person by reason of negligence or willful misconduct with
respect to such acts or omissions; and
(d) no Trustee may claim any lien or charge on any Trust Property as a
result of any amount due pursuant to this Section 8.6.
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SECTION 8.7. Property Trustee Required; Eligibility of Trustees.
(a) There shall at all times be a Property Trustee hereunder with respect
to the Trust Securities. The Property Trustee shall be a Person that is
eligible pursuant to the Trust Indenture Act to act as such and has a combined
capital and surplus of at least $50,000,000. If any such Person publishes
reports of condition at least annually, pursuant to law or to the requirements
of its supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such person shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Property Trustee with respect to the
Trust Securities shall cease to be eligible in accordance with the provisions of
this Section, it shall resign immediately in the manner and with the effect
hereinafter specified in this Article.
(b) There shall at all times be one or more Administrative Trustees
hereunder with respect to the Trust Securities. Each Administrative Trustee
shall be either a natural person who is at least 21 years of age or a legal
entity that shall act through one or more persons authorized to bind that
entity.
(c) There shall at all times be a Delaware Trustee with respect to the
Trust Securities. The Delaware Trustee shall either be (i) a natural person who
is at least 21 years of age and a resident of the State of Delaware or (ii) a
legal entity with its principal place of business in the State of Delaware
and that otherwise meets the requirements of applicable Delaware law that shall
act through one or more persons authorized to bind such entity.
SECTION 8.8. Conflicting Interests. If the Property Trustee has or shall
acquire a conflicting interest within the meaning of the Trust Indenture Act,
the Property Trustee shall either eliminate such interest or resign, to the
extent and in the manner provided by, and subject to the provisions of, the
Trust Indenture Act and this Trust Agreement.
SECTION 8.9. Resignation and Removal; Appointment of Successor.
(a) Subject to Sections 8.9(b) and 8.9(c), Trustees (the "Relevant
Trustee") may be appointed or removed without cause at any time: (i) until the
issuance of any Trust Securities, by written instrument executed by the
Depositor; and (ii) after the issuance of any Securities, by vote of the Holders
of a majority in liquidation amount of the Common Securities voting as a class.
(b) The Trustee that acts as Property Trustee shall not be removed in
accordance with Section 8.9(a) until a successor possessing the qualifications
to act as a Property Trustee under Section 8.7 (a "Successor Property Trustee")
has been appointed and has accepted such appointment by instrument executed by
such Successor Property Trustee and delivered to the Trust, the Depositor and
the removed Property Trustee.
(c) The Trustee that acts as Delaware Trustee shall not be removed in
accordance with Section 8.9(a) until a successor possessing the qualifications
to act as Delaware Trustee under Section 8.7 (a "Successor Delaware Trustee")
has been appointed and has accepted such appointment by instrument executed by
such Successor Delaware Trustee and delivered to the Trust, the Depositor and
the removed Delaware Trustee.
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(d) A Trustee appointed to office shall hold office until his, her or its
successor shall have been appointed or until his, her or its death, removal,
resignation, dissolution or liquidation. Any Trustee may resign from office
(without need for prior or subsequent accounting) by an instrument in writing
signed by the Trustee and delivered to the Depositor and the Trust, which
resignation shall take effect upon such delivery or upon such later date as is
specified therein; provided, however, that:
(i) No such resignation of the Trustee that acts as the Property
Trustee shall be effective:
(1) until a Successor Property Trustee has been appointed and has
accepted such appointment by instrument executed by such Successor
Property Trustee and delivered to the Trust, the Sponsor and the
resigning Property Trustee; or
(2) until the assets of the Trust have been completely liquidated
and the proceeds thereof distributed to the holders of the Securities;
and
(ii) no such resignation of the Trustee that acts as the Delaware
Trustee shall be effective until a Successor Delaware Trustee has been
appointed and has accepted such appointment by instrument executed by such
Successor Delaware Trustee and delivered to the Trust, the Depositor and
the resigning Delaware Trustee.
(e) The Holders of the Common Securities shall use their best efforts to
promptly appoint a Successor Property Trustee or Successor Delaware Trustee, as
the case may be, if the Property Trustee or the Delaware Trustee delivers an
instrument of resignation in accordance with Section
8.9(d).
(f) If no Successor Property Trustee or Successor Delaware Trustee shall
have been appointed and accepted appointment as provided in this Section 8.9
within 60 days after delivery pursuant to this Section 8.9 of an instrument
of resignation or removal, the Property Trustee or Delaware Trustee resigning or
being removed, as applicable, may petition any court of competent jurisdiction
for appointment of a Successor Property Trustee or Successor Delaware Trustee.
Such court may thereupon, after prescribing such notice, if any, as it may deem
proper and prescribe, appoint a Successor Property Trustee or Successor Delaware
Trustee, as the case may be.
(g) No Property Trustee or Delaware Trustee shall be liable for the acts or
omissions to act of any Successor Property Trustee or Successor Delaware
Trustee, as the case may be.
(h) The Property Trustee shall give notice of each resignation and each
removal of a Trustee and each appointment of a successor Trustee to all
Securityholders in the manner provided in Section 10.8 and shall give notice to
the Depositor. Each notice shall include the name of the successor Relevant
Trustee and the address of its Corporate Trust Office if it is the Property
Trustee.
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(i) Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee or a Delaware Trustee who is
a natural person dies or becomes, in the opinion of the Depositor, incompetent
or incapacitated, the vacancy created by such death, incompetence or incapacity
may be filled by (a) the unanimous act of the remaining Administrative Trustees
if there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirement
for Administrative Trustees or the Delaware Trustee, as the case may be, set
forth in Section 8.7).
(j) The indemnity provided to a Trustee under Section 8.6 shall survive any
Trustee's resignation or removal.
SECTION 8.10. Acceptance of Appointment by Successor. In case of the
appointment hereunder of a successor Trustee, such successor Trustee so
appointed shall execute, acknowledge and deliver to the Trust and to the
retiring Trustee an instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee; but, on the request of the
Depositor or the successor Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Trustee; but, on the
request of the Depositor or the successor Trustee, such retiring Trustee shall,
upon payment of its charges, execute and deliver an instrument transferring to
such successor Trustee all the rights, powers and trusts of the retiring Trustee
and if the Property Trustee is the resigning Trustee shall duly assign, transfer
and deliver to the successor Trustee all property and money held by such
retiring Property Trustee hereunder. In case of the appointment hereunder of a
successor Relevant Trustee, the retiring Relevant Trustee and each successor
Relevant Trustee shall execute and deliver an amendment hereto wherein each
successor Relevant Trustee shall accept such appointment and which (a) shall
contain such provisions as shall be necessary or desirable to transfer and
confirm to, and to vest in, each successor Relevant Trustee all the rights,
powers, trusts and duties of the retiring Relevant Trustee and (b) shall add to
or change any of the provisions of this Trust Agreement as shall be necessary to
provide for or facilitate the administration of the trusts hereunder by more
than one Relevant Trustee, it being understood that nothing herein or in such
amendment shall constitute such Relevant Trustees co-trustees and upon the
execution and delivery of such amendment the resignation or removal of the
retiring Relevant Trustee shall become effective to the extent provided therein
and each such successor Relevant Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Relevant Trustee; but, on request of the Trust or any successor
Relevant Trustee, such retiring Relevant Trustee shall duly assign, transfer and
deliver to such successor Relevant Trustee all Trust Property, all proceeds
thereof and money held by such retiring Relevant Trustee hereunder.
Upon request of any such successor Relevant Trustee, the Trust shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Relevant Trustee all such rights, powers and trusts
referred to in the first or second preceding paragraph, as the case may be. No
successor Relevant Trustee shall accept its appointment unless at the time of
such acceptance such successor Relevant Trustee shall be qualified and eligible
under this Article.
SECTION 8.11. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee
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that is not a natural person may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which such Relevant Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of such Relevant Trustee, shall be the successor of such Relevant Trustee
hereunder, provided such corporation shall be otherwise qualified and eligible
under this Article, without the execution or filing of any paper or any further
act on the part of any of the parties hereto.
SECTION 8.12. Preferential Collection of Claims Against Depositor or
Trust. If and when the Property Trustee shall be or become a creditor of the
Depositor or the Trust (or any other obligor upon the Debentures or the Trust
Securities), the Property Trustee shall be subject to and shall take all actions
necessary in order to comply with the provisions of the Trust Indenture Act
regarding the collection of claims against the Depositor or Trust (or any such
other obligor).
SECTION 8.13. Reports by Property Trustee.
(a) To the extent required by the Trust Indenture Act, within 60 days after
December 31 of each year commencing with December 31, 1996 the Property Trustee
shall transmit to all Securityholders in accordance with Section 10.8 and to the
Depositor, a brief report dated as of such December 31 with respect to:
(i) its eligibility under Section 8.7 or, in lieu thereof, if to the
best of its knowledge it has continued to be eligible under said Section, a
written statement to such effect;
(ii) a statement that the Property Trustee has complied with all of
its obligations under this Trust Agreement during the twelve-month period
(or, in the case of the initial report, the period since the Closing Date)
ending with such December 31 or, if the Property Trustee has not complied
in any material respects with such obligations, a description of such
noncompliance; and
(iii) any change in the property and funds in its possession as
Property Trustee since the date of its last report and any action taken by
the Property Trustee in the performance of its duties hereunder which it
has not previously reported and which in its opinion materially affects
the Trust Securities.
(b) In addition, the Property Trustee shall transmit to Securityholders
such reports concerning the Property Trustee and its actions under this Trust
Agreement as may be required pursuant to the Trust Indenture Act at the times
and in the manner provided pursuant thereto.
(c) A copy of such report shall, at the time of such transmissions to
Holders, be filed by the Property Trustee with each national securities exchange
or self-regulatory organization upon which the Trust Securities are listed, with
the Commission and with the Depositor.
SECTION 8.14. Reports to the Property Trustee. The Depositor and the
Administrative Trustees on behalf of the Trust shall provide to the Property
Trustee such documents, reports and information as required by Section 314 of
the Trust Indenture Act (if any)
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and the compliance certificate required by Section 314(a) of the Trust Indenture
Act in the form, in the manner and at the times required by Section 314 of the
Trust Indenture Act.
SECTION 8.15. Evidence of Compliance with Conditions Precedent. Each of
the Depositor and the Administrative Trustees on behalf of the Trust shall
provide to the Property Trustee such evidence of compliance with any conditions
precedent, if any, provided for in this Trust Agreement that relate to any of
the matters set forth in Section 314(c) of the Trust Indenture Act. Any
certificate or opinion required to be given by an officer pursuant to Section
314(c)(1) of the Trust Indenture Act shall be given in the form of an Officers'
Certificate.
SECTION 8.16. Number of Trustees.
(a) The number of Trustees shall be five, provided that the Holder of all
of the Common Securities by written instrument may increase or decrease the
number of Administrative Trustees. The Property Trustee and the Delaware
Trustee may be the same Person.
(b) If a Trustee ceases to hold office for any reason and the number of
Administrative Trustees is not reduced pursuant to Section 8.16(a), or if the
number of Trustees is increased pursuant to Section 8.16(a), a vacancy shall
occur.
(c) The death, resignation, retirement, removal, bankruptcy, incompetence
or incapacity to perform the duties of a Trustee shall not operate to annul the
Trust. Whenever a vacancy in the number of Administrative Trustees shall occur,
until such vacancy is filled by the appointment of an Administrative Trustee in
accordance with Section 8.9, the Administrative Trustees in office, regardless
of their number (and notwithstanding any other provision of this Agreement),
shall have all the powers granted to the Administrative Trustees and shall
discharge all the duties imposed upon the Administrative Trustees by this
Trust Agreement.
SECTION 8.17. Delegation of Power.
(a) Any Administrative Trustee may, by power of attorney consistent with
applicable law, delegate to any other natural person over the age of 21 his or
her power for the purpose of executing any documents contemplated in Section
2.7(a), including any registration statement or amendment thereof filed with the
Commission, or making any other governmental filing.
(b) The Administrative Trustees shall have power to delegate from time to
time to such of their number or to the Depositor the doing of such things and
the execution of such instruments either in the name of the Trust or the names
of the Administrative Trustees or otherwise as the Administrative Trustees may
deem expedient, to the extent such delegation is not prohibited by applicable
law or contrary to the provisions of the Trust, as set forth herein.
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ARTICLE 9
TERMINATION, LIQUIDATION AND MERGER
SECTION 9.1. Termination upon Expiration Date. Unless earlier terminated,
the Trust shall automatically terminate on November 25, 2041 (the "Expiration
Date"), following the distribution of the Trust Property in accordance with
Section 9.4.
SECTION 9.2. Early Termination. The first to occur of any of the
following events is an "Early Termination Event":
(a) the occurrence of a Bankruptcy Event in respect of, or the dissolution
or liquidation of, the Depositor;
(b) the occurrence of a Special Event except in the case of a Tax Event
following which the Depositor has elected (i) to pay any Additional Sums (in
accordance with Section 4.4) such that the net amount received by Holders of
Preferred Securities in respect of Distributions are not reduced as a result of
such Tax Event and the Depositor has not revoked any such election or failed to
make such payments or (ii) to redeem all or some of the Debentures pursuant to
Section 4.4(a);
(c) the redemption, conversion or exchange of all of the Trust Securities;
(d) an order for dissolution of the Trust shall have been entered by a
court of competent jurisdiction; and
(e) receipt by the Property Trustee of written notice from the Depositor at
any time (which direction is optional and wholly within the discretion of the
Depositor) of its intention to terminate the Trust and distribute the
Debentures in exchange for the Preferred Securities.
SECTION 9.3. Termination. The respective obligations and responsibilities
of the Trustees and the Trust created and continued hereby shall terminate upon
the latest to occur of the following: (a) the distribution by the Property
Trustee to Securityholders upon the liquidation of the Trust pursuant to Section
9.4, or upon the redemption of all of the Trust Securities pursuant to Section
4.2, of all amounts required to be distributed hereunder upon the final payment
of the Trust Securities; (b) the payment of all expenses owed by the Trust; and
(c) the discharge of all administrative duties of the Administrative Trustees,
including the performance of any tax reporting obligations with respect to the
Trust or the Securityholders.
SECTION 9.4. Liquidation.
(a) If an Early Termination Event specified in clause (a), (b), (d) or (e)
of Section 9.2 occurs or upon the Expiration Date, the Trust shall be liquidated
by the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder an aggregate principal amount
of Debentures equal to the aggregate Liquidation Amount of Trust Securities held
by such Holder, subject to Section 9.4(d). Notice of liquidation shall be given
by the Property Trustee by first-class mail, postage prepaid, mailed not later
than 30 nor more than 60 days prior to the Liquidation Date
55
<PAGE>
to each Holder of Trust Securities at such Holder's address as it appears in the
Securities Register. All notices of liquidation shall:
(i) state the Liquidation Date;
(ii) state that, from and after the Liquidation Date, the Trust
Securities will no longer be deemed to be Outstanding and any Trust
Securities Certificates not surrendered for exchange will be deemed to
represent an aggregate principal amount of Debentures equal to the
aggregate Liquidation Amount of Preferred Securities held by such Holder;
and
(iii) provide such information with respect to the mechanics by which
Holders may exchange Trust Securities Certificates for Debentures, or, if
Section 9.4(d) applies, receive a Liquidation Distribution, as the
Administrative Trustees or the Property Trustee shall deem appropriate.
(b) Except where Section 9.2(c) or 9.4(d) applies, in order to effect the
liquidation of the Trust and distribution of the Debentures to Securityholders,
the Property Trustee shall establish a record date for such distribution (which
shall be not more than 45 days prior to the Liquidation Date) and, either itself
acting as exchange agent or through the appointment of a separate exchange
agent, shall establish such procedures as it shall deem appropriate to effect
the distribution of Debentures in exchange for the Outstanding Trust Securities
Certificates.
(c) Except where Section 9.2(c) or 9.4(d) applies, after the Liquidation
Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii)
the Clearing Agency or its nominee, as the record holder of such Trust
Securities, will receive a registered global certificate or certificates
representing the Debentures to be delivered upon such distribution and (iii) any
Trust Securities Certificates not held by the Clearing Agency will be deemed to
represent an aggregate principal amount of Debentures equal to the aggregate
Liquidation Amount of Preferred Securities held by such Holders, and bearing
accrued and unpaid interest in an amount equal to the accrued and unpaid
Distributions on such Trust Securities until such certificates are presented to
the Property Trustee for transfer or reissuance.
(d) In the event that, notwithstanding the other provisions of this Section
9.4, whether because of an order for dissolution entered by a court of competent
jurisdiction or otherwise, distribution of the Debentures in the manner provided
herein is determined by the Property Trustee not to be practicable, the Trust
Property shall be liquidated, and the Trust shall be dissolved, wound-up or
terminated, by the Property Trustee in such manner as the Property Trustee
determines. In such event, on the date of the dissolution, winding up or other
termination of the Trust, Securityholders will be entitled to receive out of the
assets of the Trust available for distribution to Securityholders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to the Liquidation Amount per Trust Security plus accrued
and unpaid Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If, upon any such dissolution, winding-up or
termination, the Liquidation Distribution can be paid only in part because the
Trust has insufficient assets available to pay in full the aggregate Liquidation
Distribution, then, subject to the next succeeding sentence, the amounts payable
by the Trust on the Trust Securities shall be paid on a pro rata basis (based
upon Liquidation Amounts). The Holder of
56
<PAGE>
the Common Securities will be entitled to receive Liquidation Distributions upon
any such dissolution, winding-up or termination pro rata (determined as
aforesaid) with Holders of Preferred Securities, except that, if a Debenture
Event of Default has occurred and is continuing, the Preferred Securities shall
have a priority over the Common Securities.
SECTION 9.5. Mergers, Consolidations, Amalgamations or Replacements of the
Trust. The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other body, except pursuant
to this Section 9.5. At the request of the Depositor, with the consent of the
Administrative Trustees and without the consent of the Property Trustee, the
Delaware Trustee or the Holders of the Preferred Securities, the Trust may merge
with or into, consolidate, amalgamate, be replaced by or convey, transfer or
lease its properties and assets substantially as an entirety to a trust
organized as such under the laws of any State; provided, that (i) such successor
entity either (a) expressly assumes all of the obligations of the Trust with
respect to the Preferred Securities or (b) substitutes for the Preferred
Securities other securities having substantially the same terms as the Preferred
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Preferred Securities rank in priority with respect to
Distributions and payments upon liquidation, redemption and otherwise, (ii) the
Depositor expressly appoints a trustee of such successor entity possessing the
same powers and duties as the Property Trustee as the holder of the Debentures,
(iii) the Successor Securities are listed, or any Successor Securities will be
listed upon notification of issuance, on any national securities exchange or
other organization on which the Preferred Securities are then listed, if any,
(iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the Holders of the Preferred Securities (including any
Successor Securities) in any material respect, (vi) such successor entity has a
purpose identical to that of the Trust, (vii) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease the
Depositor has received an Opinion of Counsel to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the Holders of the
Preferred Securities (including any Successor Securities) in any material
respect (other than with respect to any dilution of the Holder's interest in the
new entity), (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease neither the Trust nor such successor
entity will be required to register as an investment company under the 1940 Act,
and (c) following such merger, consolidation, amalgamation or replacement, the
Trust or such successor entity will be treated as a grantor trust for United
States Federal income tax purposes and (viii) the Depositor or any permitted
successor or assignee owns all of the Common Securities of such successor entity
and guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee. Notwithstanding the
foregoing, the Trust shall not, except with the consent of Holders of 100% in
aggregate Liquidation Amount of the Preferred Securities, consolidate,
amalgamate, merge with or into, be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to any other entity or permit
any other entity to consolidate, amalgamate, merge with or into, or replace it
if such consolidation, amalgamation, merger, replacement, conveyance, transfer
or lease would cause the Trust or the
57
<PAGE>
successor entity to be classified as other than a grantor trust for United
States Federal income tax purposes.
ARTICLE 10
MISCELLANEOUS PROVISIONS
SECTION 10.1. Limitation of Rights of Securityholders. The death or
incapacity of any person having an interest, beneficial or otherwise, in Trust
Securities shall not operate to terminate this Trust Agreement, nor entitle the
legal representatives or heirs of such person or any Securityholder for such
person to claim an accounting, take any action or bring any proceeding in any
court for a partition or winding-up of the arrangements contemplated hereby, nor
otherwise affect the rights, obligations and liabilities of the parties hereto
or any of them.
SECTION 10.2. Amendment.
(a) This Trust Agreement may be amended from time to time by the Trustees
and the Depositor, without the consent of any Securityholders, (i) to cure any
ambiguity, correct or supplement any provision herein which may be inconsistent
with any other provision herein, or to make any other provisions with respect to
matters or questions arising under this Trust Agreement, which shall not be
inconsistent with the other provisions of this Trust Agreement, (ii) to modify,
eliminate or add to any provisions of this Trust Agreement to such extent as
shall be necessary to ensure that the Trust will be classified for United States
Federal income tax purposes as a grantor trust at all times that any Trust
Securities are Outstanding or to ensure that the Trust will not be required to
register as an "investment company" under the 1940 Act, or be classified as
other than a grantor trust for United States Federal income tax purposes, or
(iii) to comply with the requirements of the Commission in order to effect or
maintain the qualification of this Trust Agreement under the Trust Indenture
Act; provided, however, that in the case of clause (i), such action shall not
adversely affect in any material respect the interests of any Securityholder,
and any amendments of this Trust Agreement shall become effective when notice
thereof is given to the Securityholders.
(b) Except as provided in Section 10.2(c) hereof, any provision of this
Trust Agreement may be amended by the Trustees and the Depositor with (i) the
consent of Holders representing not less than a majority (based upon Liquidation
Amounts) of the Trust Securities then Outstanding, acting as a single class, and
(ii) receipt by the Trustees of an Opinion of Counsel to the effect that such
amendment or the exercise of any power granted to the Trustees in accordance
with such amendment will not affect the Trustee's status as a grantor trust for
United States Federal income tax purposes or the Trust's exemption from the
status of an "investment company" under the 1940 Act, provided, however, if any
amendment or proposal that would adversely affect the powers, preferences or
special rights of the Trust Securities, whether by way of amendment or
otherwise, would adversely affect only the Preferred Securities or only the
Common Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of a majority in liquidation amount of such class of
Trust Securities.
(c) In addition to and notwithstanding any other provision in this Trust
Agreement, without the consent of each affected Securityholder (such consent
being obtained in accordance
58
<PAGE>
with Section 6.3 or 6.6 hereof), this Trust Agreement may not be amended to (i)
change the amount or timing of any Distribution on the Trust Securities or
otherwise adversely affect the amount of any distribution required to be made in
respect of the Trust Securities as of a specified date or (ii) restrict the
right of a Securityholder to institute suit for the enforcement of any such
payment on or after such date; notwithstanding any other provision herein,
without the unanimous consent of the Securityholders (such consent being
obtained in accordance with Section 6.3 or 6.6 hereof), this paragraph (c) of
this Section 10.2 may not be amended.
(d) Notwithstanding any other provisions of this Trust Agreement, no
Trustee shall enter into or consent to any amendment to this Trust Agreement
which would cause the Trust to fail or cease to qualify for the exemption from
the status of an "investment company" under the 1940 Act or be classified as
other than a grantor trust for United States Federal income tax purposes.
(e) Notwithstanding anything in this Trust Agreement to the contrary,
without the consent of the Depositor, this Trust Agreement may not be amended in
a manner which imposes any additional obligation on the Depositor.
(f) In the event that any amendment to this Trust Agreement is made, the
Administrative Trustees shall promptly provide to the Depositor a copy of such
amendment.
(g) Neither the Property Trustee nor the Delaware Trustee shall be required
to enter into any amendment to this Trust Agreement which affects its own
rights, duties or immunities under this Trust Agreement. The Property Trustee
shall be entitled to receive an Opinion of Counsel and an Officers' Certificate
stating that any amendment to this Trust Agreement is in compliance with this
Trust Agreement.
SECTION 10.3. Separability. In case any provision in this Trust Agreement
or in the Trust Securities Certificates shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
SECTION 10.4. GOVERNING LAW. THIS TRUST AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND TRUSTEES WITH RESPECT
TO THIS TRUST AGREEMENT IN THE TRUST SECURITIES SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO ITS
CONFLICT OF LAWS PRINCIPLES AND EXCLUDING SECTIONS 3540 AND 3561 OF TITLE 12
THEREOF.
SECTION 10.5. Payments Due on Non-Business Day. If the date fixed for any
payment on any Trust Security shall be a day which is not a Business Day, then
such payment need not be made on such date but may be made on the next
succeeding day which is a Business Day except as otherwise provided in Section
4.1(a) and Section 4.2(d)), with the same force and effect as though made on the
date fixed for such payment, and no interest shall accrue thereon for the period
after such date.
SECTION 10.6. Successors. This Trust Agreement shall be binding upon and
shall inure to the benefit of any successor to the Depositor, the Trust or the
Relevant Trustee, including
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<PAGE>
any successor by operation of law. Except in connection with a consolidation,
merger or sale involving the Depositor that is permitted under Article 8 of the
Indenture and pursuant to which the assignee agrees in writing to perform the
Depositor's obligations hereunder, the Depositor shall not assign its
obligations hereunder.
SECTION 10.7. Headings. The Article and Section headings are for
convenience only and shall not affect the construction of this Trust Agreement.
SECTION 10.8. Reports, Notices and Demands. Any report, notice, demand or
other communications which by any provision of this Trust Agreement is required
or permitted to be given or served to or upon any Securityholder or the
Depositor may be given or served in writing by deposit thereof, first-class
postage prepaid, in the United States mail, hand delivery or facsimile
transmission, in each case, addressed, (a) in the case of a Holder of Preferred
Securities, to such Holder as such Holder's name and address may appear on the
Securities Register; and (b) in the case of the Holder of the Common Securities.
Any notice to Preferred Securityholders shall also be given to such Owners as
have, within two years preceding the giving of such notice, filed their names
and addresses with the Property Trustee for that purpose. Such notice, demand
or other communication to or upon a Securityholder shall be deemed to have been
sufficiently given, or made, for all purposes, upon hand delivery, mailing or
transmission. Any notice, demand or other communication which by any provision
of this Trust Agreement is required or permitted to be given or served to or
upon the Trust, the Property Trustee, the Delaware Trustee or the Administrative
Trustees shall be given in writing addressed (until another address is published
by the Trust) as follows: (a) with respect to the Property Trustee, to IBJ
Schroder Bank & Trust Company, One State Street, 11th Floor, New York, New York
10004, Attention: Corporate Trust & Agency Department, (b) with respect to the
Delaware Trustee, to Delaware Trust Capital Management, Inc., 300 Delaware
Avenue, 9th Floor, Wilmington, Delaware 19801, Attention: Corporate Trust
Administration, with a copy of any such notice to the Property Trustee at its
address above, and (c) with respect to the Administrative Trustees, to them at
the address for notices to the Depositor, marked "Attention: Secretary". Such
notice, demand or other communication to or upon the Trust or the Property
Trustee shall be deemed to have been sufficiently given or made only upon actual
receipt of the writing by the Trust or the Property Trustee.
SECTION 10.9. Agreement Not to Petition. Each of the Trustees and the
Depositor agrees for the benefit of the Securityholders that, until at least one
year and one day after the Trust has been terminated in accordance with Article
9, it shall not file, or join in the filing of, a petition against the Trust
under any bankruptcy, insolvency, reorganization or other similar law
(including, without limitation, the United States Bankruptcy Code)
(collectively, "Bankruptcy Laws") or otherwise join in the commencement of any
proceeding against the Trust under any Bankruptcy Law. In the event the
Depositor takes action in violation of this Section 10.9, the Property Trustee
agrees, for the benefit of Securityholders, that, at the expense of the
Depositor, it shall file an answer with the bankruptcy court or otherwise
properly contest the filing of such petition by the Depositor against the Trust
or the commencement of such action and raise the defense that the Depositor has
agreed in writing not to take such action and should be stopped and precluded
therefrom and such other defenses, if any, as counsel for the Trustee or the
Trust may assert. The provisions of this Section 10.9 shall survive the
termination of this Trust Agreement.
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SECTION 10.10. Trust Indenture Act; Conflict with Trust Indenture Act.
(a) This Trust Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Trust Agreement and shall, to
the extent applicable, be governed by such provisions.
(b) The Property Trustee shall be the only Trustee which is the trustee for
the purposes of the Trust Indenture Act.
(c) If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Trust Agreement by any
of the provisions of the Trust Indenture Act, such required provision shall
control. If any provision of this Trust Agreement modifies or excludes any
provision of the Trust Indenture Act which may be so modified or excluded, the
latter provision shall be deemed to apply to this Trust Agreement as so modified
or to be excluded, as the case may be.
(d) The application of the Trust Indenture Act to this Trust Agreement
shall not affect the nature of the Trust Securities as equity securities
representing undivided beneficial interests in the assets of the Trust.
SECTION 10.11. ACCEPTANCE OF TERMS OF TRUST AGREEMENT, GUARANTEE AND
INDENTURE. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST
THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR BENEFICIAL OWNER (INCLUDING THE
ACCEPTANCE OF ANY DISTRIBUTION ON OR AFTER THE DATE HEREOF), WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND
AGREEMENT TO SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE
INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER
AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE
BINDING, OPERATIVE AND EFFECTIVE AS THE TRUST AND SUCH SECURITYHOLDER AND SUCH
OTHERS.
SECTION 10.12. Counterparts. This Trust Agreement may contain more than
one counterpart of the signature page and this Trust Agreement may be executed
by the affixing of the signature of each of the Trustees to one of such
counterpart signature pages. All of such counterpart signature pages shall be
read as though one, and they shall have the same force and effect as though
all of the signers had signed a single signature page.
ARTICLE 11
REGISTRATION RIGHTS
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<PAGE>
SECTION 11.1. Registration Rights. The Holders of the Preferred
Securities, the Debentures and the Guarantee and the shares of Common Stock of
the Depositor issuable upon conversion of the Debentures and/or the Preferred
Securities (collectively, the "Registrable Securities") are entitled to the
benefits of a Registration Rights Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to
be duly executed as of the day and year first above written.
HMC MERGER CORPORATION
as Depositor
By:______________________________
Name:
Title:
IBJ SCHRODER BANK & TRUST COMPANY,
as Property Trustee
By:______________________________
Name:
Title:
DELAWARE TRUST CAPITAL MANAGEMENT,
INC., as Delaware Trustee
By:______________________________
Name:
Title:
_________________________________
Robert E. Parsons, Jr.,
as Administrative Trustee
_________________________________
Ed Walter
as Administrative Trustee
62
<PAGE>
_________________________________
Christopher G. Townsend,
as Administrative Trustee
63
<PAGE>
EXHIBIT A
CERTIFICATE OF TRUST
OF
HOST MARRIOTT FINANCIAL TRUST
A-1
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE
DEPOSITARY AGREEMENT
B-1
<PAGE>
EXHIBIT C
THE SECURITIES EVIDENCED HEREBY AND THE COMMON STOCK ISSUABLE UPON THEIR
CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933 (THE
"SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT (A) BY ANY INITIAL INVESTOR THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT, (1) TO A PERSON WHO
THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER ACQUIRING
FOR ITS OWN ACCOUNT OR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A
TRANSACTION COMPLYING WITH RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING
WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144
THEREUNDER (IF AVAILABLE) OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
OR (B) BY ANY INITIAL INVESTOR THAT IS A QUALIFIED INSTITUTIONAL BUYER OR BY ANY
SUBSEQUENT INVESTOR, AS SET FORTH IN CLAUSE (A) ABOVE OR TO AN INSTITUTION THAT
IS AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(A)(1), (2), (3) OR (7)
IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND, IN EACH CASE (A) AND (B), IN COMPLIANCE WITH ALL APPLICABLE SECURITIES LAWS
OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. SECURITIES OWNED BY
AN INITIAL INVESTOR THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER MAY NOT BE HELD
IN BOOK-ENTRY FORM AND MAY NOT BE TRANSFERRED WITHOUT CERTIFICATION THAT THE
TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS, AS PROVIDED IN THE TRUST
AGREEMENT REFERRED TO BELOW.
C-1
<PAGE>
THIS CERTIFICATE IS NOT TRANSFERABLE
Certificate Number Number of Common Securities
Certificate Evidencing Common Securities
of
Host Marriott Financial Trust
Common Securities
(liquidation amount $50 per Common Security)
Host Marriott Financial Trust, a statutory business trust formed under the
laws of the State of Delaware (the "Trust"), hereby certifies that Host Marriott
Corporation (the "Holder") is the registered owner of _________ common
securities of the Trust representing undivided beneficial interests in the
assets of the Trust (the "Common Securities"). In accordance with Section 5.10
of the Trust Agreement (as defined below) the Common Securities are not
transferable and any attempted transfer hereof shall be void. The designations,
rights, privileges, restrictions, preferences and other terms and provisions of
the Common Securities are set forth in, and this certificate and the Common
Securities represented hereby are issued and shall in all respects be subject to
the terms and provisions of, the Amended and Restated Trust Agreement of the
Trust dated as of December 2, 1996, as superseded by operation of law pursuant
to a merger by that certain Amended and Restated Agreement of Trust dated as of
December 29, 1998, as the same may be amended from time to time (the "Trust
Agreement") including the designation of the terms of the Common Securities as
set forth therein. The Holder is entitled to the benefits of the Common
Securities Guarantee Agreement entered into by Host Marriott Corporation, a
Delaware corporation, and IBJ Schroder Bank & Trust Company, as Guarantee
Trustee, dated as of December 2, 1996 (the "Guarantee"), to the extent provided
therein. The Trust will furnish a copy of the Trust Agreement and the Guarantee
to the Holder without charge upon written request to the Trust at its principal
place of business or registered office.
Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.
IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has
executed this certificate this ___ day of ________ 199_.
HOST MARRIOTT FINANCIAL TRUST
By:__________________________________
Name:
As Administrative Trustee
C-2
<PAGE>
PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Common Securities referred to in the within-mentioned
Trust Agreement.
Dated:_______________________
IBJ SCHRODER BANK & TRUST COMPANY,
as Property Trustee
By:___________________________________
Authorized Signatory
C-3
<PAGE>
EXHIBIT D
IF THE PREFERRED SECURITY IS TO BE A GLOBAL CERTIFICATE, INSERT - This Preferred
Security is a Book-Entry Preferred Securities Certificate within the meaning of
the Trust Agreement hereinafter referred to and is registered in the name of The
Depository Trust Company ("DTC") or a nominee of DTC. This Preferred Security
is exchangeable for Preferred Securities registered in the name of a person
other than DTC or its nominee only in the limited circumstances described in the
Trust Agreement and no transfer of this Preferred Security (other than a
transfer of this Preferred Security as a whole by DTC to a nominee of DTC or by
a nominee of DTC to DTC or another nominee of DTC) may be registered except in
limited circumstances.
Unless this Preferred Security is presented by an authorized representative of
DTC (55 Water Street, New York), to Host Marriott Financial Trust or its agent
for registration of transfer, exchange or payment, and any Preferred Security
issued is registered in the name of Cede & Co. or such other name as requested
by an authorized representative of DTC and any payment hereon is made to Cede &
Co. or to such other entity as is requested by an authorized representative of
DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.
Certificate Number Number of Preferred Securities
CUSIP NO.
Certificate Evidencing Preferred Securities
of
Host Marriott Financial Trust
6 3/4% Convertible Preferred Securities
(liquidation amount $50 per Preferred Security)
D-1
<PAGE>
Host Marriott Financial Trust, a statutory business trust formed under the
laws of the State of Delaware (the "Trust"), hereby certifies that ______ (the
"Holder") is the registered owner of __________ preferred securities of the
Trust representing an undivided beneficial interest in the assets of the Trust
and designated the Host Marriott Financial Trust 6 3/4% Convertible Preferred
Securities (liquidation amount $50 per Preferred Security) (the "Preferred
Securities"). The Preferred Securities are transferable on the books and
records of the Trust, in person or by a duly authorized attorney, upon surrender
of this certificate duly endorsed and in proper form for transfer as provided in
Section 5.4 of the Trust Agreement (as defined below). The designations,
rights, privileges, restrictions, preferences and other terms and provisions of
the Preferred Securities are set forth in, and this certificate and the
Preferred Securities represented hereby are issued and shall in all respects be
subject to the terms and provisions of, the Amended and Restated Trust Agreement
of the Trust dated as of December 2, 1996 as superseded by operation of law
pursuant to a merger by that certain Amended and Restated Agreement of Trust
dated as of December 29, 1998, as the same may be amended from time to time (the
"Trust Agreement") including the designation of the terms of Preferred
Securities as set forth therein. The Holder is entitled to the benefits of the
Guarantee Agreement entered into by Host Marriott Corporation, a Delaware
corporation, and IBJ Schroder Bank & Trust Company, as Guarantee Trustee, dated
as of December 2, 1996 (the "Guarantee"), to the extent provided therein. The
Trust will furnish a copy of the Trust Agreement and the Guarantee to the Holder
without charge upon written request to the Trust at its principal place of
business or registered office.
Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.
D-2
<PAGE>
IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has
executed this certificate this ___ day of ________ 199_.
HOST MARRIOTT FINANCIAL TRUST
By:__________________________________
Name:
An Administrative Trustee
PROPERTY TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
This is one of the Preferred Securities referred
to in the within-mentioned Trust Agreement.
Dated:____________________
IBJ SCHRODER BANK & TRUST COMPANY,
as Property Trustee
BY:___________________________________
Authorized Signatory
D-3
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred
Security to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
agent to transfer this Preferred Security Certificate on the books of the Trust.
The agent may substitute another to act for him or her.
Date:_______________
Signature:_________________
(Sign exactly as our name appears on the other side of this Preferred Security
Certificate)
D-4
<PAGE>
TO BE ATTACHED TO GLOBAL CERTIFICATE
SCHEDULE A
The initial liquidation amount of this Global Certificate shall be $______.
The following increases or decreases in the liquidation amount of this Global
Certificate have been made:
<TABLE>
<CAPTION>
Amount of increase
in Liquidation
Amount of this Liquidation Amount
Global Certificate of this Global Signature of
including upon Amount of decrease Certificate authorized officer
exercise of in Liquidation following such of Trustee or
over-allotment Amount of this decrease or Securities
Date Made option Global Certificate increase Custodian
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
D-5
<PAGE>
EXHIBIT E -- Form of
Regulation S Certificate
REGULATION S CERTIFICATE
(For transfers pursuant to Sections 5.4(b)(i), (iii) and (v) of the Trust
Agreement)
Property Trustee
Attention: Corporate Trust Department
Re: 6 3/4% Convertible Quarterly Income Preferred
Securities of Host Marriott Financial Trust
(the "Securities")
Reference is made to the Amended and Restated Trust Agreement, dated as of
December 29, 1998 (the "Trust Agreement"), among HMC Merger Corporation (the
"Company"), IBJ Schroder Bank & Trust Company, Delaware Trust Capital
Management, Inc. and the Administrative Trustees named therein. Terms used
herein and defined in the Trust Agreement or in Regulation S or Rule 144 under
the U.S. Securities Act of 1933 (the "Securities Act") are used herein as so
defined.
This certificate relates to __________ shares of Securities, which are
evidenced by the following certificate(s) (the "Specified Securities"):
CUSIP No(s).___________________
CERTIFICATE No(s).______________________
The Person in whose name this certificate is executed below (the
"Undersigned") hereby certifies that either (i) it is the sole beneficial owner
of the Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so.
Such beneficial owner or owners are referred to herein collectively as the
"Owner". If the Specified Securities are represented by a Global Certificate,
they are held through the Clearing Agency participants in the name of the
Undersigned, as or on behalf of the Owner. If the Specified Securities are not
represented by a Global Certificate, they are registered in the name of the
Undersigned, as or on behalf of the Owner.
The Owner has requested that the Specified Securities be transferred to a
person (the "Transferee") who will take delivery in the form of a Regulation S
Security. In connection with such transfer, the Owner hereby certifies that,
unless such transfer is being effected pursuant to an effective registration
statement under the Securities Act, it is being effected in accordance with Rule
904 or Rule 144 under the Securities Act and with all applicable securities laws
of the states of the United States and other jurisdictions.
E-1
<PAGE>
Accordingly, the Owner hereby further certifies as follows:
(1) Rule 904 Transfers. If the transfer is being effected in accordance
with Rule 904:
(A) the Owner is not a distributor of the Securities, an affiliate of
the Company or any such distributor or a person acting on behalf of any of
the foregoing;
(B) the offer of the Specified Securities was not made to a person in
the United States;
(C) either:
(i) at the time the buy order was originated, the Transferee was
outside the United States or the Owner and any person acting
on its behalf reasonably believed that the Transferee was
outside the United States, or
(ii) the transaction is being executed in, on or through the
facilities of the Eurobond market, as regulated by the
Association of International Bond Dealers, or another
designated offshore securities market and neither the Owner
nor any person acting on its behalf knows that the
transaction has been prearranged with a buyer in the United
States;
(D) no directed selling efforts have been made in the United States
by or on behalf of the Owner or any affiliate thereof;
(E) if the Owner is a dealer in securities or has received a selling
concession, fee or other remuneration in respect of the Specified
Securities, and the transfer is to occur during the Restricted Period, then
the requirements of Rule 904(c)(1) have been satisfied; and
(F) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
(2) Rule 144 Transfers. If the transfer is being effected pursuant to
Rule 144:
(A) the transfer is occurring after a holding period of at least two
years (computed in accordance with paragraph (d) of Rule 144) has lapsed
since the Specified Securities were last acquired from the Trust or from an
affiliate of the Trust, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since the Specified Securities were last acquired
from the Trust or from an affiliate
E-2
<PAGE>
of the Trust, whichever is later, and the Owner is not, and during the
preceding three months has not been, an affiliate of the Trust.
This certificate and the statements contained herein are made for your benefit
and the benefit of the Trust and the Purchasers.
Dated:_____________________________
(Print the name of the Undersigned, as such term
is defined in the second paragraph of this
certificate)
By:____________________________________
Name:
Title:
(If the Undersigned is a corporation, partnership or
fiduciary, the title of the person signing on behalf of the
Undersigned must be stated.)
E-3
<PAGE>
EXHIBIT F
Form of Restricted
Securities Certificate
RESTRICTED SECURITIES CERTIFICATE
(For transfers pursuant to Sections 5.4(b)(ii), (iii), (iv) and (v) of the Trust
Agreement)
Property Trustee
Attention: Corporate Trust Department
Re: 6 3/4% Convertible Quarterly Income
Preferred Securities of Host Marriott
Financial Trust (the "Securities")
Reference is made to the Amended and Restated Trust Agreement, dated as of
December 29, 1998 (the "Trust Agreement"), among HMC Merger Corporation (the
"Company"), IBJ Schroder Bank & Trust Company, Delaware Trust Capital
Management, Inc. and the Administrative Trustees named therein. Terms used
herein and defined in the Trust Agreement or in Regulation S or Rule 144 under
the U.S. Securities Act of 1933 (the "Securities Act") are used herein as so
defined.
This certificate relates to ___________ shares of Securities, which are
evidenced by the following certificate(s) (the "Specified Securities"):
CUSIP No(s).__________________
CERTIFICATE No(s)._____________________
The Person in whose name this certificate is executed below (the
"Undersigned") hereby certifies that either (i) it is the sole beneficial owner
of the Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so.
Such beneficial owner or owners are referred to herein collectively as the
"Owner". If the Specified Securities are represented by a Global Certificate,
they are held through the Clearing Agency or participant in the name of the
Undersigned, as or on behalf of the Owner. If the Specified Securities are not
represented by a Global Certificate, they are registered in the name of the
Undersigned, as or on behalf of the Owner.
The Owner has requested that the Specified Securities be transferred to a
person (the "Transferee") who will take delivery in the form of a Restricted
Security. In connection with such transfer, the Owner hereby certifies that,
unless such transfer is being effected pursuant to an effective registration
statement under the Securities Act, it is being effected in accordance with Rule
144A or Rule 144 under the Securities Act and all applicable securities laws of
the states of the
F-1
<PAGE>
United States and other jurisdictions. Accordingly, the Owner hereby further
certifies as follows: (1) Rule 144A Transfers. If the transfer is being effected
in accordance with Rule 144A:
(A) the Specified Securities are being transferred to a person that
the Owner and any person acting on its behalf reasonably believe is a
"qualified institutional buyer" within the meaning of Rule 144A, acquiring
for its own account or for the account of a qualified institutional buyer;
and
(B) the Owner and any person acting on its behalf have taken
reasonable steps to ensure that the Transferee is aware that the Owner may
be relying on Rule 144A in connection with the transfer; and
(2) Rule 144 Transfers. If the transfer is being effected pursuant to
Rule 144:
(A) the transfer is occurring after a holding period of at least two
years (computed in accordance with paragraph (d) of Rule 144) has elapsed
since the Specified Securities were last acquired from the Trust or from an
affiliate of the Trust, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale, and notice
requirements of rule 144; or
(B) the transfer is occurring after a holding period of at least
three years has elapsed since the Specified Securities were last acquired
from the Trust or from an affiliate of the Trust, whichever is later, and
the Owner is not, and during the preceding three months has not been, an
affiliate of the Trust.
(3) Regulation S Transfers. If the transfer is being effected in
accordance with Regulation S:
(A) the transfer is being made to a person who is not a U.S. person;
or
(B) the transferee is not acquiring such Specified Securities for the
account or benefit of any U.S. person.
This certificate and the statements contained herein are made for your benefit
and benefit of the Trust and the Purchasers.
Dated:_________________________
(Print the name of the Undersigned, as such term
is defined in the second paragraph of this
certificate.)
By:___________________________________
Name:
Title:
F-2
<PAGE>
(If the Undersigned is a corporation, partnership or fiduciary, the title of the
person signing on behalf of the Undersigned must be stated.)
F-3
<PAGE>
EXHIBIT G
Form of Unrestricted
Securities Certificate
UNRESTRICTED SECURITIES CERTIFICATE
(For removal of Securities Act Legends pursuant to Section 5.4(c))
Property Trustee
Attention: Corporate Trust Department
Re: 6 3/4% Convertible Quarterly Income Preferred Securities
of Host Marriott Financial Trust (the "Securities")
Reference is made to the Amended and Restated Trust Agreement, dated as of
December 29, 1998 (the "Trust Agreement"), among HMC Merger Corporation (the
"Company"), IBJ Schroder Bank & Trust Company, Delaware Trust Capital
Management, Inc. and the Administrative Trustees named therein. Terms used
herein and defined in the Trust Agreement or in Regulation S or Rule 144 under
the U.S. Securities Act of 1933 (the "Securities Act") are used herein as so
defined.
This certificate relates to _______________ shares of Securities, which are
evidenced by the following certificate(s) (the "Specified Securities"):
CUSIP No(s).__________________
CERTIFICATE No(s)._____________________
The person in whose name this certificate is executed below (the
"Undersigned") hereby certifies that either (i) it is the sole beneficial owner
of the Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so.
Such beneficial owner or owners are referred to herein collectively as the
"Owner". If the Specified Securities are represented by a Global Certificate,
they are held through the Clearing Agency or participant in the name of the
Undersigned, as or on behalf of the Owner. If the Specified Securities are not
represented by a Global Certificate, they are registered in the name of the
Undersigned as or on behalf of the Owner.
G-1
<PAGE>
The Owner has requested that the Specified Securities be exchanged for
Securities bearing no Securities Act Legend pursuant to Section 5.4(c) of the
Trust Agreement. In connection with such exchange, the Owner hereby certifies
that the exchange is occurring after a holding period of at least three years
(computed in accordance with paragraph (d) of Rule 144) has elapsed since the
Specified Securities were last acquired from the Trust or from an affiliate of
the Trust, whichever is later, and the Owner is not, and during the preceding
three months has not been, an affiliate of the Trust. The Owner also
acknowledges that any future transfers of the Specified Securities must comply
with all applicable securities laws of the states of the United States and other
jurisdictions.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Trust and the Purchasers.
Dated:________________________
(Print the name of the Undersigned, as such term
is defined in the second paragraph of this
certificate.)
By:________________________________
Name:
Title:
(If the Undersigned is a corporation, partnership or fiduciary, the title of the
person signing on behalf of the Undersigned must be stated.)
G-2
<PAGE>
EXHIBIT H
NOTICE OF CONVERSION
To: IBJ Schroder Bank & Trust Company
as Property Trustee of
Host Marriott Financial Trust
The undersigned owner of these Preferred Securities hereby irrevocably exercises
the option to convert these Preferred Securities, or the portion below
designated, into Common Stock of HOST MARRIOTT CORPORATION (the "Host Marriott
Common Stock") in accordance with the terms of the Amended and Restated Trust
Agreement (the "Trust Agreement"), dated as of December 29, 1998, by Robert E.
Parsons, Jr., Ed Walter and Christopher G. Townsend, as Administrative Trustees,
Delaware Trust Capital Management, Inc., as Delaware Trustee, IBJ Schroder Bank
& Trust Company, as Property Trustee, HMC Merger Corporation, as Depositor, and
by the Holders, from time to time, of individual beneficial interests in the
Trust to be issued pursuant to the Trust Agreement. Pursuant to the
aforementioned exercise of the option to convert these Preferred Securities, the
undersigned hereby directs the Conversion Agent (as that term is defined in the
Trust Agreement) to (i) exchange such Preferred Securities for a portion of the
Debentures (as that term is defined in the Trust Agreement) held by the Trust
(at the rate of exchange specified in the terms of the Preferred Securities set
forth in the Trust Agreement) and (ii) immediately convert such Debentures on
behalf of the undersigned, into Host Marriott Common Stock (at the conversion
rate specified in the terms of the Preferred Securities set forth in the Trust
Agreement).
The undersigned does also hereby direct the Conversion Agent that the shares
issuable and deliverable upon conversion, together with any check in payment for
fractional shares, be issued in the name of and delivered to the undersigned,
unless a different name has been indicated in the assignment below. If shares
are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto.
Any holder, upon the exercise of its conversion rights in accordance with the
terms of the Trust Agreement and the Preferred Securities, agrees to be bound by
the terms of the Registration Rights Agreement relating to the Host Marriott
Common Stock issuable upon conversion of the Preferred Securities.
Date:___________, _____
in whole ____ in part ____
Number of Preferred Securities to be converted:
______________________
If a name or names other than the undersigned,
please indicate in the spaces below the name or
names in which the shares of Host Marriott Common
Stock are
H-1
<PAGE>
to be issued, along with the address or addresses
of such person or persons
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
Signature (for conversion only)
Please Print or Typewrite Name and Address, Including Zip Code, and Social
Security or Other Identifying Number
_______________________________________________________
_______________________________________________________
_______________________________________________________
Signature Guarantee:*_________________________
- ---------------
*(Signature must be guaranteed by an institution which is a member of the
following recognized Signature Guaranty Programs: (i) The Securities Transfer
Agent Medallion Program (STAMP); (ii) The New York Stock Exchange Medallion
Program (MSP); (iii) the Stock Exchange Medallion Program (SEMP); or (iv) in
such other guarantee programs acceptable to the Trustee.)
H-2
<PAGE>
Exhibit 10.4
FIRST AMENDMENT AND WAIVER
--------------------------
FIRST AMENDMENT AND WAIVER (this "Amendment"), dated as of November
25, 1998, among HOST MARRIOTT CORPORATION, a Delaware corporation ("Host
Marriott"), HOST MARRIOTT HOSPITALITY, INC., a Delaware corporation
("Hospitality"), HMH PROPERTIES, INC., a Delaware corporation ("HMH"), HOST
MARRIOTT, L.P., a Delaware limited partnership (the "Operating Partnership"),
HMC CAPITAL RESOURCES CORP., a Delaware corporation ("CRC"), the lenders (the
"Banks") party to the Credit Agreement referred to below, WELLS FARGO BANK,
NATIONAL ASSOCIATION, THE BANK OF NOVA SCOTIA and CREDIT LYONNAIS NEW YORK
BRANCH, as Co-Arrangers (the "Co-Arrangers"), and BANKERS TRUST COMPANY, as
Arranger and Administrative Agent (the "Administrative Agent"). Unless
otherwise defined herein, all capitalized terms used herein and defined in the
Credit Agreement are used herein as so defined.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Host Marriott, Hospitality, HMH, the Operating Partnership,
CRC, the Banks, the Co-Arrangers and the Administrative Agent are parties to a
Credit Agreement, dated as of June 19, 1997 and amended and restated as of
August 5, 1998 (the "Credit Agreement");
WHEREAS, the parties hereto wish to amend the Credit Agreement, and
waive certain provisions thereunder, all as herein provided; and
WHEREAS, subject to the terms and conditions of this Amendment, the
parties hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. Notwithstanding anything to the contrary contained in Section
3.02(d) of the Credit Agreement, the Banks hereby agree that HMH may issue up to
$500,000,000 of Indebtedness pursuant to Section 9.04(xi) of the Credit
Agreement (as modified pursuant to Section 3 of this Amendment) on or prior to
December 31, 1998 without any requirement to repay outstanding Term Loans
pursuant to such Section 3.02(d).
2. Section 9.03(a) of the Credit Agreement is hereby amended by
deleting the words "shall not be less than $100,000,000" appearing in sub-clause
(II) of the proviso to clause (vi) of such Section 9.03(a) and inserting the
words "shall not exceed $100,000,000" in lieu thereof.
3. Notwithstanding anything to the contrary contained in Section
9.04(xi) of the Credit Agreement or in the definition of "Permitted Refinancing
Indebtedness" appearing in Section 11.01 of the Credit Agreement, the Banks
hereby agree that HMH may issue up to $500,000,000 of additional senior notes
<PAGE>
(the "Additional Senior Notes") on or prior to December 31, 1998 and on terms
and conditions (other than interest rates) no less favorable to HMH than those
set forth in the Senior Note Documents and that such indebtedness shall
constitute "Permitted Refinancing Indebtedness" incurred pursuant to such
Section 9.04(xi) so long as the Net Debt proceeds therefrom are used to
refinance Indebtedness otherwise permitted to be refinance pursuant to Section
9.04(xi) on or prior to June 30, 1999, it being understood and agreed, however,
(i) to the extent that the Net Debt Proceeds from the Additional Senior Notes
are not so used by June 30, 1999, such Indebtedness will be deemed to have been
incurred under (and will otherwise reduce the then available basket under)
Section 9.04(xii) of the Credit Agreement without any requirement by Holdings or
the borrower to demonstrate pro forma covenant compliance at such time and (ii)
--- -----
that until the earlier of (x) such time as all of the Net Debt Proceeds from the
Additional Senior Notes are used to effect a permitted refinancing as described
above and (y) June 30, 1999, Holdings and the Borrower will ensure that there is
sufficient availability to incur the Additional Senior Notes (or the portion
thereof not theretofore used to effect such a refinancing) under Section
9.04(xii) of the Credit Agreement.
4. In the event (and only in the event) that more than $350,000,000
of Additional Series Notes are issued on or prior to December 31, 1998, Section
9.08 of the Credit Agreement shall be amended by deleting clause (b) thereof in
its entirety and inserting the following new clause (b) in lieu thereof:
"(b) Holdings and the Borrower will not permit the Unsecured Interest
Coverage Ratio (i) for the Test Period ended closet to September 30, 1998
to be less than 2.00:1.00, and (ii) for any Test Period ending thereafter
to be less than 2.00:1.00."
5. In the event (and only in the event) that more than $350,000,000
of Additional Senior Notes are issued on or prior to December 31, 1998, Section
9.09 of the Credit Agreement shall be deleted in its entirety and the following
new Section 9.09 shall be inserted in lieu thereof:
"9.09 Minimum Fixed Charge Coverage Ratio. Holdings and the Borrower
-----------------------------------
will not permit the Consolidated Fixed Charge Coverage Ratio (i) for the
Test period ended closest to September 30, 1998 to be less than 1.50:1.00,
(ii) for the Test Period ending closest to December 31, 1998 to be less
than 1.45:1.00 and (iii) for any Test Period ending thereafter to be less
than 1.50:1.00."
6. Section 13.07 of the Credit Agreement is hereby amended by
inserting the following new clause (c) at the end thereof:
"(c) Notwithstanding anything to the contrary contained in this
Agreement, for purposes of determining compliance with Sections 9.08(b) and
9.09 only in respect of the Test Period ending closest to March 31, 1999,
to
2
<PAGE>
the extent that the Blackstone Acquisition, and Partnership Roll-Up
and/or any refinancing of Indebtedness of Holdings or any of its
Subsidiaries occurs after the last day of such Test Period and on or before
April 1, 1999, such transactions shall be treated as having occurred on the
first day of such Test Period."
7. (a) Sections 1, 2 and 3 of this Amendment shall become effective
on the date (the "First Amendment Effective Date") when Host Marriott,
Hospitality, HMH, CRC, the Operating Partnership and the Required Banks shall
have signed a counterpart hereof (whether the same or different counterparts)
and shall have delivered (including by way of facsimile transmission) the same
to the Administrative Agent at the Notice Office and (b) Sections 4, 5 and 6 of
this Amendment shall become effective on the date when Host Marriott,
Hospitality, HMH, CRC, the Operating Partnership and the Supermajority Banks
shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at the Notice Office.
8. In order to induce the Banks to enter into this Amendment, each
Credit Party hereto hereby represents and warrants that (i) the representations,
warranties and agreements contained in Section 7 of the Credit Agreement are
true and correct in all material respects on and as of the First Amendment
Effective Date, after giving effect to this Amendment and (ii) there exists no
Default or Event of Default on the First Amendment Effective Date, after giving
effect to this Agreement.
9. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
10. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the US Borrower and the Administrative Agent.
11. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
12. From and after the First Amendment Effective Date, all references
in the Credit Agreement and in the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.
* * *
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
HOST MARRIOTT CORPORATION
By:_____________________________
Title:
HOST MARRIOTT HOSPITALITY, INC.
By:_____________________________
Title:
HMH PROPERTIES, INC.
By:_____________________________
Title:
HOST MARRIOTT, L.P.
By: HMC Real Estate LLC its General Partners
By:_____________________________
Title:
HMC CAPITAL RESOURCES CORP.
By:_____________________________
Title:
4
<PAGE>
Exhibit 10.5
SECOND AMENDMENT AND CONSENT TO CREDIT AGREEMENT
------------------------------------------------
SECOND AMENDMENT AND CONSENT TO CREDIT AGREEMENT (this "Amendment"),
dated as of December 17, 1998, among HOST MARRIOTT CORPORATION, a Delaware
corporation ("Host Marriott"), HOST MARRIOTT HOSPITALITY, INC., a Delaware
corporation ("Hospitality"), HOST MARRIOTT, L.P., a Delaware limited partnership
(the "Operating Partnership"), HMC CAPITAL RESOURCES CORP., a Delaware
corporation ("CRC"), the lenders (the "Banks") party to the Credit Agreement
referred to below, WELLS FARGO BANK, NATIONAL ASSOCIATION, THE BANK OF NOVA
SCOTIA and CREDIT LYONNAIS NEW YORK BRANCH, as Co-Arrangers (the "Co-
Arrangers"), and BANKERS TRUST COMPANY, as Arranger and Administrative Agent
(the "Administrative Agent"). Unless otherwise defined herein, all capitalized
terms used herein and defined in the Credit Agreement are used herein as so
defined.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Host Marriott, Hospitality, HMH Properties, Inc. (a Delaware
corporation which has merged into the Operating Partnership pursuant to the HMH
Merger), the Operating Partnership, CRC, the Banks, the Co-Arrangers and the
Administrative Agent are parties to a Credit Agreement, dated as of June 19,
1997 and amended and restated as of August 5, 1998 (as amended, modified or
supplemented through, but not including, the date hereof, the "Credit
Agreement");
WHEREAS, the parties hereto wish to amend the Credit Agreement, and
waive certain provisions thereunder, all as herein provided; and
WHEREAS, subject to the terms and conditions set forth below, the
parties hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. Conditions Precedent to REIT Conversion. Section 6 of the Credit
---------------------------------------
Agreement is amended as follows:
(a) Subsidiaries Mergers. Schedule IV to the Credit Agreement
-------------------- -----------
shall be replaced in its entirety by Schedule IV attached hereto, and all
-----------
references in the Credit Agreement to Schedule IV (including, without
-----------
limitation, in Section 6.01 thereof) shall be deemed to be references to
Schedule IV attached hereto.
- -----------
(b) Hospitality Liquidation. All references in the Credit
-----------------------
Agreement (including, without limitation, in Section 6.03 thereof) to
"Hospitality Merger" shall instead be deemed to be references to "Hospitality
Liquidation" and all references to "Hospitality Merger Agreement and the other
Hospitality Merger
<PAGE>
Documents" and to "Hospitality Merger Documents" shall instead be deemed to be
references to "Hospitality Liquidation Documents," as each such term is defined
below in this Amendment.
(c) REIT Retained Assets.
--------------------
(i) The Credit Agreement is amended by attaching thereto a new
Schedule XI in the form of Schedule XI attached hereto, with Part I and Part II
- ----------- -----------
of such Schedule XI to list certain assets expected to be owned by Holdings from
-----------
and after the REIT Conversion Date and with Part III of such Schedule XI to list
-----------
certain assets to be contributed to SLC.
(ii) Section 6.04(b) of the Credit Agreement is amended as
follows:
(A) by adding the following words after the word
"Company" appearing in the second parenthetical in clause (ii) thereof:
"and the assets listed in Part III of Schedule XI";
-----------
(B) by adding the following parenthetical after the word
"Units" appearing in clause (iii) thereof:
"(including those equity interests in the Permitted REIT
Subsidiaries listed in Part I of Schedule XI)"; and
-----------
(C) by adding the following new clause (v) after clause
(iv) thereof and renumbering the existing clause (v) as clause (vi) thereof:
", (v) any or all of the assets listed in Part II of
Schedule XI".
- -----------
(d) Third Party Consents.
--------------------
(i) Lender Consents. The Credit Agreement is amended by
---------------
attaching thereto a new Schedule XII in the form of Schedule XII attached
------------ ------------
hereto, which Schedule XII lists certain Indebtedness of Holdings and its
------------
Subsidiaries which is not expected to be repaid in connection with the REIT
Transaction and with respect to which a required consent of the applicable
lender to one or more components of the REIT Transaction (each a "Lender
Consent") has not been obtained as of December 16, 1998.
(ii) Ground Leases. The Credit Agreement is amended by
-------------
attaching thereto a new Schedule XIII in the form of Schedule XIII attached
------------- -------------
hereto, which Schedule XIII lists ground leases with respect to certain Hotel
-------------
Properties with respect to which a required consent of the applicable landlord
to one
-2-
<PAGE>
or more components of the REIT Transaction (each a "Landlord Consent") has not
been obtained as of December 16, 1998.
(iii) Section 6.08(b) of the Credit Agreement is amended by
(i) deleting the third parenthetical appearing therein and replacing it with the
following new parenthetical:
"(other than (i) Lender Consents with respect to Indebtedness listed on
Schedule XII in an aggregate principal amount at any time not to exceed the
------------
Total Unutilized Revolving Loan Commitment at such time, (ii) (I) Landlord
Consents with respect to the ground leases listed in Part I of Schedule
--------
XIII, (II) until March 31, 1999, Landlord Consents with respect to the
----
ground leases listed in Part II of Schedule XIII and (III) until December
-------------
31, 1999, Landlord Consents with respect to the ground leases listed in
Part III of Schedule XIII and (iii) any other approvals and/or consents
-------------
relating to the REIT Transaction or the other transactions contemplated by
the REIT Transaction Documents where the failure to obtain the same, either
individually or in the aggregate, could not reasonably be expected to have
a material adverse effect on the REIT Transaction or on the business,
operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of Holdings, the Borrower, Holdings and its
Subsidiaries taken as a whole or the Borrower and its Subsidiaries taken as
a whole)";
and (ii) inserting the following new sentence at the end thereof:
"Each Principal Credit Party represents and warrants that the failure to
obtain any of the Lender Consents and/or Landlord Consents referred to
above in this Section 6.08(b) could not, either individually or in the
aggregate, reasonably be expected to have a material adverse effect on the
REIT Transaction or on the business, operations, property, assets,
liabilities, condition (financial or otherwise) or prospects of Holdings,
the Borrower, Holdings and its Subsidiaries taken as a whole or the
Borrower and its Subsidiaries taken as a whole."
(e) REIT Transaction. Notwithstanding anything to the contrary
----------------
contained in Section 6 or elsewhere in the Credit Agreement, Holdings and its
Subsidiaries shall be entitled to undertake any component of the REIT
Transaction (including, without limitation, the E&P Distribution) whether or not
all components of the REIT Transaction are ultimately completed and whether or
not the REIT Conversion and the REIT Conversion Date ever occur, although
Holdings and its Subsidiaries hereby covenant and agree to use all commercially
reasonable best efforts to effectuate the REIT Conversion once the SLC Spinoff
and the first part of the E&P Distribution have occurred.
-3-
<PAGE>
2. Representations and Warranties.
------------------------------
(a) Management Agreements, Franchise Agreements, Operating Leases,
-------------------------------------------------------------
Ground Leases; REIT Transaction. The representations and warranties contained
- -------------------------------
in Section 7.22, Section 7.24 or elsewhere in the Credit Agreement (other than
the representation and warranty contained in Section 6.08(b) thereof as modified
hereby) shall be deemed true and correct in all material respects at any time
made or deemed made notwithstanding (i) the failure to obtain any Lender Consent
as permitted by Section 6.08(b), (ii) the failure to obtain any Landlord
Consent as permitted by Section 6.08(b) and (iii) the failure to obtain any
other approval and/or consent as permitted by Section 6.08(b), in each case so
long as (A) no independent Default or Event of Default would otherwise occur
under Section 10.03, 10.04, 10.10, 10.11 or 10.13 of the Credit Agreement (as
modified hereby) as a result of the failure to obtain any Lender Consent, any
Landlord Consent and/or any such other approval and/or consent and (B) the
failure to obtain any Lender Consent, any Landlord Consent and/or any such other
approval and/or consent, either individually or in the aggregate, could not
reasonably be expected to have a material adverse effect on the REIT Transaction
or on the business, operations, property, assets, liabilities, condition
(financial or otherwise) or prospects of Holdings, the Borrower, Holdings and
its Subsidiaries taken as a whole or the Borrower and its Subsidiaries taken as
a whole.
(b) Status as a REIT. Section 7.25 of the Credit Agreement is
----------------
amended by replacing the words "in a position to qualify" therein with the words
"organized in conformity with the requirements for qualification".
3. Blackstone Acquisition. Schedule III to the Credit Agreement
---------------------- ------------
shall be replaced in its entirety by Schedule III attached hereto, and all
------------
references in the Credit Agreement to Schedule III shall be deemed to be
------------
references to Schedule III attached hereto.
------------
4. Indebtedness.
------------
(a) Section 9.04 of the Credit Agreement is amended by (i)
deleting the word "and" appearing at the end of clause (xi) thereof, (ii)
deleting the period appearing at the end of clause (xii) thereof and inserting a
semi-colon in lieu thereof and (iii) inserting the following new clauses (xiii),
(xiv) and (xv) immediately following clause (xii) thereof:
"(xiii) Contingent Obligations of the Borrower or any of its
Subsidiaries under an Operating Lease or any agreement entered into in
connection therewith, including, without limitation, the obligations listed
on Schedule XIV (to the extent such obligations constitute Contingent
------------
Obligations);
-4-
<PAGE>
(xiv) Contingent Obligations of the Borrower or any of its
Subsidiaries to Host REIT or any Subsidiary of Host REIT in respect of (I)
the QUIPs Debt or (II) Indebtedness of Host REIT incurred under the REIT
Transaction Documents; and
(xv) Contingent Obligations of the Borrower or any of its
Subsidiaries in respect of Indebtedness of any Subsidiary of the Borrower
otherwise permitted under this Section 9.04 to any mortgage lender of
Indebtedness with respect to any Hotel Property in an aggregate principal
amount not to exceed $50,000,000."
(b) The Credit Agreement is amended by inserting as Schedule XIV
------------
thereto a new Schedule XIV in the form of Schedule XIV attached hereto, which
------------ ------------
Schedule XIV lists certain obligations in respect of which the Borrower or any
- ------------
Subsidiary thereof may be liable under an Operating Lease or any agreement
entered into in connection therewith.
5. Unencumbered EBITDA Ratio. Section 9.12(b) of the Credit
-------------------------
Agreement is amended by changing the Unencumbered EBITDA Ratio applicable to the
Test Period corresponding to the fiscal quarter ending closest to December 31,
1998 from 0.425:1.00 to 0.40:1.00.
6. Business. Section 9.16 of the Credit Agreement is amended by
--------
deleting the first sentence of clause (b) thereof in its entirety and inserting
the following new sentence in lieu thereof:
"Notwithstanding anything to the contrary contained in this
Agreement, from and after the REIT Conversion Date, Holdings will not
engage in any business activities, will not have any significant assets
other than (i) any or all of the assets listed in Part I or Part II of
Schedule XI, (ii) the ownership of the OP Units of the Borrower (or
-----------
interests in Subsidiaries whose assets are OP Units, including, without
limitation, those Subsidiaries listed in Part I of Schedule XI) and (iii)
-----------
de minimis equity interests in Subsidiaries of the Borrower (other than a
Subsidiary Guarantor), and will not have any significant liabilities other
than (A) those under this Agreement, (B) those under the other Documents to
which it is a party, (C) pre-existing liabilities (including contingent
liabilities) of Holdings at the time of the REIT Conversion (which
liabilities will be assumed by the Operating Partnership but which may
still remain liabilities of Holdings) and (D) liabilities relating to the
assets set forth in Part I or Part II of Schedule XI."
-----------
7. Certain Lender Consent and Landlord Consent Matters.
---------------------------------------------------
(a) Default Under Other Agreements. Notwithstanding anything to
------------------------------
the contrary contained in Section 10.04 or elsewhere in the Credit
-5-
<PAGE>
Agreement, from and after the distribution of the SLC stock in the SLC Spinoff
and until March 31, 1999, (i) no failure to obtain a Lender Consent with respect
to any Indebtedness listed on Schedule XII attached hereto shall give rise to a
------------
Default or an Event of Default so long as (A) the aggregate principal amount of
such Indebtedness at any time does not exceed the Total Unutilized Revolving
Loan Commitment at such time, (B) no event of default shall have occurred under
the Senior Note Indenture as a result thereof, (C) the failure to obtain any
Lender Consent, either individually or in the aggregate, could not reasonably be
expected to have a material adverse effect on the REIT Transaction or on the
business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of Holdings, the Borrower, Holdings and its Subsidiaries
taken as a whole or the Borrower and its Subsidiaries taken as a whole, (D) such
Indebtedness shall not have become due prior to its stated maturity and shall
not have been declared due and payable, and shall not have been required to be
prepaid other than by a regularly scheduled required prepayment, prior to the
stated maturity thereof, unless the Borrower shall be able to satisfy all the
conditions precedent to the incurrence of additional Revolving Loans (assuming
the proceeds of such borrowing were used to repay such Indebtedness) for so long
as such condition exists and (E) the Borrower complies with its obligations
under paragraph 8(a) of this Amendment and (ii) no failure to obtain a Landlord
Consent which would result in an Event of Default relating to any Indebtedness
of Holdings or any of its Subsidiaries under Section 10.04 of the Credit
Agreement (prior to giving effect to this paragraph 7(a)(ii)) shall give rise to
a Default or an Event of Default so long as (A) such Indebtedness shall not have
become due prior to its stated maturity and shall not have been declared due and
payable, and shall not have been required to be prepaid other than by a
regularly scheduled required prepayment, prior to the stated maturity thereof,
(B) no lender in respect of such Indebtedness shall have taken any enforcement
action in respect thereof (other than delivery of a notice of default), (C) no
event of default shall have occurred under the Senior Note Indenture as a result
thereof and (D) the Borrower complies with its obligations under paragraph 8 of
this Amendment. Unless the Required Banks otherwise agree in writing, on April
1, 1999 the provisions of this paragraph 7(a) and the waivers effected hereby
shall cease to be of any further force or effect.
(b) Adjustment to EBITDA for Terminated Ground Leases.
-------------------------------------------------
Notwithstanding anything to the contrary contained in the Credit Agreement, the
following provisions shall apply with respect to those ground leases with
respect to which Landlord Consents are required but have not been obtained. If
any litigation commences with respect to any such ground lease as a result of
the failure to obtain the applicable Landlord Consent and a final judgment is
rendered against the Borrower or its applicable Subsidiary in such litigation
(whether or not such judgment is appealable) and the result of such judgment is
that the Borrower or its applicable Subsidiary either is required to pay damages
of $1,000,000 or more or the applicable ground lease is terminated and the
Borrower or its applicable Subsidiary must vacate the respective Hotel Property,
then:
-6-
<PAGE>
(i) if only one (1) such ground lease is subject to such an adverse
judgment, then for purposes of determining Consolidated EBITDA under the Credit
Agreement, fifty percent (50%) of the portion of such Consolidated EBITDA
attributable to all ground leases subject to any such litigation (whether or not
any adverse judgment has been rendered) shall be excluded from such calculation;
(ii) if two (2) such ground leases are subject to such an adverse
judgment, then for purposes of determining Consolidated EBITDA under the Credit
Agreement, seventy-five percent (75%) of the portion of such Consolidated EBITDA
attributable to all ground leases subject to any such litigation (whether or not
any adverse judgment has been rendered) shall be excluded from such calculation;
(iii) if three (3) such ground leases are subject to such an adverse
judgment, then for purposes of determining Consolidated EBITDA under the Credit
Agreement, all of such Consolidated EBITDA attributable to all ground leases
subject to any such litigation (whether or not any such adverse judgment has
been rendered) shall be excluded from such calculation; and
(iv) if it is determined in a final judgment of a court of competent
jurisdiction that the Borrower or its applicable Subsidiary must vacate a Hotel
Property or the Borrower or its applicable Subsidiary consents thereto in
writing, following the date on which any such final judgment is no longer being
appealed and all rights of appeal have been exhausted, then, in addition to the
provisions of the preceding clauses (i), (ii) or (iii), as applicable, one-
hundred percent (100%) of the portion of Consolidated EBITDA attributable to
such Hotel Property shall be excluded from the calculation of Consolidated
EBITDA under the Credit Agreement.
(c) Default Upon Termination of Ground Leases. Notwithstanding
-----------------------------------------
anything to the contrary contained in the Credit Agreement, upon the effective
termination of a ground lease listed on Schedule XIII and the loss by the
-------------
Borrower or its applicable Subsidiary of the right to the continued use of the
respective Hotel Property (as finally determined by a court of competent
jurisdiction and after such final judgment is no longer being appealed or all
rights of appeal have been exhausted or as otherwise consented to in writing by
the Borrower or such Subsidiary, as the case may be) as a result of a failure to
obtain the applicable Landlord Consent, it shall be an Event of Default if the
sum of:
(i) the amount of Consolidated EBITDA attributable to the Hotel
Property which was subject to such ground lease, determined for the most
recently ended Test Period; plus
(ii) the amount of Consolidated EBITDA attributable to each
other Hotel Property which was subject to a ground lease listed on
-7-
<PAGE>
Schedule XIII and which was effectively terminated or with respect to which the
- -------------
Borrower or its applicable Subsidiary lost the right to the continued use of the
respective Hotel Property (as finally determined by a court of competent
jurisdiction and after such final judgment is no longer being appealed or all
rights of appeal have been exhausted or as otherwise consented to in writing by
the Borrower or such Subsidiary, as the case may be) as a result of a failure to
obtain the applicable Landlord Consent, determined for each such Hotel Property
for the Test Period ending on the most recent March 31, June 30, September 30 or
December 31 occurring prior to the effective termination of such ground lease;
exceeds five percent (5%) of Consolidated EBITDA for the most recently ended
Test Period (without giving effect to any reduction in such Consolidated EBITDA
pursuant to paragraph 7(b) above).
8. Reserves under the Credit Agreement, etc..
-----------------------------------------
(a) Notwithstanding anything to the contrary contained in the
Credit Agreement, until such time as all of the Lender Consents have been
obtained and/or the Indebtedness in respect thereof has been repaid in full, the
Borrower shall not be permitted to incur any Revolving Loans under the Credit
Agreement to the extent that the amount of the Total Unutilized Revolving Loan
Commitment after giving effect to the incurrence of such Revolving Loans would
be less than (A) if prior to December 29, 1998, the lesser of (x) $600,000,000
and the amount necessary to repay in full all Indebtedness in respect of which
Lender Consents have not been so obtained and (B) if on or after December 29,
1998, the amount necessary to repay in full all Indebtedness in respect of which
Lender Consents have not been so obtained (although the Borrower shall be
permitted to incur Revolving Loans the proceeds of which are used to repay all
or any part of any such Indebtedness). In addition, (I) within 10 days after the
last day of each month, commencing with the month ending December 31, 1998, the
Borrower covenants and agrees to deliver to the Administrative Agent a status
report identifying those Lender Consents which have theretofore been obtained as
well as those Lender Consents which still need to be obtained and (II) together
with each delivery of a Notice of Borrowing pursuant to Section 1.03 of the
Credit Agreement, a status report showing the information set forth in the
preceding clause (I) as well as the amount of the Total Unutilized Revolving
Loan Commitment at such time, in each case until such time as all Lender
Consents have been obtained or the underlying Indebtedness has been repaid in
full.
(b) Within 10 days after the last day of each month, commencing with
the month ending December 31, 1998, the Borrower covenants and agrees to deliver
to the Administrative Agent a status report identifying those Landlord Consents
which have theretofore been obtained as well as those Landlord Consents which
still need to be obtained until such time as all Landlord Consents (other than
those listed in Part I of Schedule XIII) have been obtained.
-------------
-8-
<PAGE>
9. Definitions. Section 11.01 of the Credit Agreement is amended as
-----------
follows:
(a) Deletion of Hospitality Merger, etc.. The following
------------------------------------
definitions shall be deleted from Section 11.01 of the Credit Agreement in their
entirety:
(i) Hospitality Merger;
(ii) Hospitality Merger Agreement; and
(iii) Hospitality Merger Documents
(b) Addition of Hospitality Liquidation, etc.. The following new
-----------------------------------------
definitions shall be inserted into Section 11.01 of the Credit Agreement in the
correct alphabetical order:
"Hospitality Liquidation" shall mean the liquidation of
Hospitality into Host Marriott in accordance with applicable law and the
Hospitality Liquidation Documents.
"Hospitality Liquidation Documents" shall mean all agreements
and documents related to the Hospitality Liquidation.
(c) SLC. The definition of "SLC" is amended in its entirety as
---
follows (and the definition of "SLC" appearing in Section 6.04(a) shall be
deemed to be modified accordingly):
"SLC" shall mean Crestline Capital Corporation (formerly known
as HMC Senior Communities, Inc.).
(d) E&P Distribution. The definition of "E&P Distribution" is
----------------
amended in its entirety as follows:
"E&P Distribution" shall mean, collectively, one or more
distributions to the shareholders of Host Marriott and/or Host REIT of
cash, securities or other property, with a cumulative aggregate value up to
the amount estimated in good faith by Host Marriott or Host REIT from time
to time as being necessary to assure that Host Marriott and Host REIT have
distributed the accumulated earnings and profits (as referenced in Section
857(a)(2)(B) of the Code) of Host Marriott as of the last day of the first
taxable year for which Host REIT's election to be taxed as a real estate
investment trust is effective. Notwithstanding any other provision of this
Agreement to the contrary, the E&P Distribution may include shares of
common stock or redeemable preferred stock of Host REIT (and the Borrower
-9-
<PAGE>
may issue OP Units corresponding to such shares), and, if redeemable
preferred stock is issued in connection with the E&P Distribution, Host
REIT shall be permitted to redeem (and within 60 days after the issuance
thereof shall redeem) such redeemable preferred shares (and Borrower shall
be permitted to redeem the corresponding OP Units) in accordance with the
terms thereof, provided that the amount of such redemption obligation
--------
actually paid in cash shall be included in the limit on the portion of the
E&P Distribution payable in cash as set forth in Section 9.03(b).
(e) Permitted REIT Subsidiary. The definition of "Permitted REIT
-------------------------
Subsidiary" is amended in its entirety as follows:
"Permitted REIT Subsidiary" shall mean those entities listed in
Part I of Schedule XI or a Wholly-Owned Subsidiary of Holdings established
-----------
or existing solely for the purpose of holding de minimis equity interests
in Subsidiaries of the Borrower or OP Units.
(f) REIT Transaction. The definition of "REIT Transaction" is amended
----------------
as follows:
(i) clause (vii) thereof shall be deleted in its entirety and
replaced by the following new clause (vii):
"the acquisition by the Operating Partnership and its
Subsidiaries of substantially all of the assets of Holdings and its
Subsidiaries other than any or all of the assets listed on Schedule XI and
-----------
the assets constituting the SLC Spinoff and the E&P Distribution"; and
(ii) the following words shall be added at the end thereof:
"for its first taxable year commencing after the REIT
Conversion Date."
(g) Subsidiary. The definition of "Subsidiary" is amended in its
----------
entirety as follows:
"Subsidiary" shall mean, as to any Person, (i) any corporation
more than 50% of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of such
corporation (irrespective of whether or not at the time stock of any class
or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time owned by such
Person and/or one or more Subsidiaries of such Person, (ii) any
partnership, limited liability company, association, joint venture or other
entity (other than a corporation) in which such Person and/or one or more
Subsidiaries of
-10-
<PAGE>
such Person has more than a 50% equity interest at the time and (iii) any
partnership in which such Person or one or more Subsidiaries of such Person
is, at the time, a general partner and which is controlled by such Person
in a manner sufficient to permit its financial statements to be
consolidated with the financial statements of such Person in conformance
with generally accepted accounting principles and the financial statements
of which are so consolidated, provided that the term Subsidiary shall
include for all purposes of this Agreement any Non-Controlled Entity
(including its Subsidiaries for this purpose) if the Borrower has elected
to treat such Non-Controlled Subsidiary as a Subsidiary under this
Agreement, but only so long as the terms of the organizational documents of
any such Non-Controlled Entity expressly require that at any time that an
Event of Default exists and is continuing, such Non-Controlled Entity will
pay, and will cause each of its Subsidiaries to pay, on a quarterly basis,
the maximum amount of cash Dividends that such Non-Controlled Entity and/or
any such Subsidiary is permitted to pay under applicable law and under
contractual restrictions contained in any agreement or instrument
evidencing, securing or relating to Indebtedness for borrowed money to
which such Non-Controlled Entity or any Subsidiary thereof is a party or by
which any of its assets are subject or bound and which is permitted to be
incurred under this Agreement (although each such Non-Controlled Entity or
any Subsidiary thereof may retain, and not pay as a Dividend, cash in an
amount that such Non-Controlled Entity or such Subsidiary reasonably
determines is necessary to meet its current liabilities and expenses as
well as to make current anticipated Capital Expenditures). An election
pursuant to this definition with respect to any Non-Controlled Entity shall
be made on not less than ten Business Days prior written notice to the
Administrative Agent and may not be made to the extent that a Default or an
Event of Default then exists or would result from such an election.
(h) Addition of Definitions of Landlord Consent and Lender Consent.
--------------------------------------------------------------
The following new definitions shall be inserted into Section 11.01 of the Credit
Agreement in the correct alphabetical order:
"Landlord Consent" shall have the meaning provided in paragraph
1(d)(ii) of the Second Amendment and Consent, dated as of December 17,
1998, to this Agreement.
"Lender Consent" shall have the meaning provided in paragraph
1(d)(i) of the Second Amendment and Consent, dated as of December 17, 1998,
to this Agreement.
10. Effective Date. This Amendment shall become effective on the
--------------
date (the "Second Amendment Effective Date") when (i) Host Marriott,
Hospitality, CRC, the Operating Partnership and the Required Banks shall have
signed a
-11-
<PAGE>
counterpart hereof (whether the same or different counterparts) and shall have
delivered (including by way of facsimile transmission) the same to the
Administrative Agent at the Notice Office and (ii) Host Marriott and/or the
Borrower shall have paid to each Bank that has signed a counterpart to this
Amendment and delivered the same to the Administrative Agent at the Notice
Office on or prior to 12:00 Noon (New York time) on December 17, 1998 an
amendment fee equal to 7.5 basis points on the amount of each such Bank's
outstanding Term Loans and Revolving Loan Commitment on December 17, 1998.
11. Bring-Down of Representations and Warranties; No Default. In
--------------------------------------------------------
order to induce the Banks to enter into this Amendment, each Credit Party party
hereto represents and warrants that (i) the representations, warranties and
agreements contained in Section 7 of the Credit Agreement are true and correct
in all material respects on and as of the Second Amendment Effective Date, after
giving effect to this Amendment, and (ii) there exists no Default or Event of
Default on the Second Amendment Effective Date, after giving effect to this
Amendment.
12. Scope of Amendment. This Amendment is limited as specified and
------------------
shall not constitute a modification, acceptance or waiver of any other provision
of the Credit Agreement or any other Credit Document.
13. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Administrative Agent.
14. Governing Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
-------------
THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAW OF THE STATE OF NEW YORK.
15. Amendment to Credit Agreement. From and after the Second
-----------------------------
Amendment Effective Date, all references in the Credit Agreement and in the
other Credit Documents to the Credit Agreement shall be deemed to be references
to the Credit Agreement as modified hereby.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.
-12-
<PAGE>
HOST MARRIOTT CORPORATION
By:
-----------------------------
Title:
HOST MARRIOTT HOSPITALITY, INC.
By:
-----------------------------
Title:
HOST MARRIOTT, L.P.
By: HMC Real Estate LLC,
its General Partner
By:
-----------------------------
Title:
HMC CAPITAL RESOURCES CORP.
By:
-----------------------------
Title:
-13-
<PAGE>
BANKERS TRUST COMPANY,
Individually and as Arranger and
Administrative Agent
By:
-----------------------------
Title:
WELLS FARGO BANK, NATIONAL ASSOCIATION, Individually
and as Co-Arranger
By:
-----------------------------
Title:
THE BANK OF NOVA SCOTIA,
Individually and as Co-Arranger
By:
-----------------------------
Title:
CREDIT LYONNAIS NEW YORK BRANCH, Individually and as
Co-Arranger
By:
-----------------------------
Title:
BARCLAYS BANK PLC
By:
-----------------------------
Title:
CITICORP USA, INC.
By:
-----------------------------
Title:
-14-
<PAGE>
NATIONSBANK, N.A.
By:
-----------------------------
Title:
SOCIETE GENERALE, SOUTHWEST AGENCY
By:
-----------------------------
Title:
THE BANK OF NEW YORK
By:
-----------------------------
Title:
DEUTSCHE BANK AG NEW YORK BRANCH AND/OR CAYMAN
ISLAND BRANCH
By:
-----------------------------
Title:
By:
-----------------------------
Title:
DLJ CAPITAL FUNDING, INC.
By:
-----------------------------
Title:
-15-
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By:
-----------------------------
Title:
AMSOUTH BANK
By:
-----------------------------
Title:
BANK OF AMERICA NT&SA
By:
-----------------------------
Title:
RIGGS BANK N.A.
By:
-----------------------------
Title:
BANK OF HAWAII
By:
-----------------------------
Title:
FIRST AMERICAN BANK TEXAS, S.S.B.
By:
-----------------------------
Title:
-16-
<PAGE>
FIRST COMMERCIAL BANK, NEW YORK AGENCY
By:
-----------------------------
Title:
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By:
-----------------------------
Title:
THE INTERNATIONAL COMMERCIAL BANK OF CHINA,
NEW YORK AGENCY
By:
-----------------------------
Title:
CHANG HWA COMMERCIAL BANK, LTD., NEW YORK BRANCH
By:
-----------------------------
Title:
CONSECO LIFE INSURANCE COMPANY
By:
-----------------------------
Title:
-17-
<PAGE>
BANK LEUMI USA
By:
-----------------------------
Title:
By:
-----------------------------
Title:
KZH-CNC CORPORATION
By:
-----------------------------
Title:
ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN AG
By:
-----------------------------
Title:
By:
-----------------------------
Title:
-18-
<PAGE>
Exhibit 10.6
THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT
----------------------------------------------
THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT (this "Amendment"),
dated as of March 15, 1999, among HOST MARRIOTT CORPORATION, a Maryland
corporation ("Host REIT"), as successor by merger to Host Marriott Corporation,
a Delaware corporation, HOST MARRIOTT, L.P., a Delaware limited partnership (the
"Operating Partnership"), the lenders (the "Banks") party to the Credit
Agreement referred to below, WELLS FARGO BANK, NATIONAL ASSOCIATION, THE BANK OF
NOVA SCOTIA and CREDIT LYONNAIS NEW YORK BRANCH, as Co-Arrangers (the "Co-
Arrangers"), and BANKERS TRUST COMPANY, as Arranger and Administrative Agent
(the "Administrative Agent"). Unless otherwise defined herein, all capitalized
terms used herein and defined in the Credit Agreement are used herein as so
defined.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Host REIT, the Operating Partnership, the Banks, the Co-
Arrangers and the Administrative Agent are parties to a Credit Agreement, dated
as of June 19, 1997 and amended and restated as of August 5, 1998 (as amended,
modified or supplemented through, but not including, the date hereof, the
"Credit Agreement");
WHEREAS, the parties hereto wish to amend the Credit Agreement, and
waive certain provisions thereunder, all as herein provided; and
WHEREAS, subject to the terms and conditions set forth below, the
parties hereto agree as follows;
NOW, THEREFORE, it is agreed:
1. For the purpose of allowing the Borrower to continue to directly
own (A) limited partnership interests in each of (i) HMC AP LP, (ii) HMC
Charlotte LP, (iii) HMC Toronto Airport LP and (iv) HMC Toronto EC LP, and (B)
managing limited liability company interests in each of (i) HMC AP GP LLC, (ii)
HMC Charlotte GP LLC, (iii) HMC Toronto Airport GP LLC and (iv) HMC Toronto EC
GP LLC, all of which entities are not Look-Through Subsidiaries, the Banks
hereby waive Section 8.11(b) of the Credit Agreement to the extent, but only to
the extent, necessary for such allowances.
2. Section 7 of the Second Amendment and Consent to Credit Agreement,
dated as of December 17, 1998, among Host REIT, the Operating Partnership, the
Banks, the Co-Arrangers and the Administrative Agent (the "Second Amendment") is
amended, to the extent, but only to the extent, necessary to extend the time by
which (i) Toronto Eaton Centre must obtain a Lender Consent (as defined in the
Second Amendment), by (a) changing the date "March 31, 1999" appearing therein
to "April 30, 1999" and (b) changing the date "April 1, 1999"
<PAGE>
appearing therein to "May 1, 1999", (ii) New Jersey Park Ridge must obtain a
Landlord Consent (as defined in the Second Amendment), by (x) changing the date
"March 31, 1999" appearing therein to "December 31, 1999" and (y) changing the
date "April 1, 1999" appearing therein to "January 1, 2000" and (iii) Virginia
Key Bridge must obtain a Landlord Consent (as defined in the Second Amendment)
in connection with the Ground Lease with John E. Fowler and the Pear G. Fowler
Foundation, by (x) changing the date "March 31, 1999" appearing therein to
"April 30, 1999" and (y) changing the date "April 1, 1999" appearing therein to
"May 1, 1999".
3. Section 9.01(vii) of the Credit Agreement is amended by deleting
clause (vii) thereof in its entirety and inserting the following new clause
(vii) in lieu thereof:
"(vii) to the extent that the respective Indebtedness is permitted to
be incurred at such time pursuant to Section 9.04(xii), Liens securing
Permitted Non-Recourse Indebtedness incurred by any Specified Subsidiary as
and to the extent permitted by the definition of "Permitted Non-Recourse
Indebtedness;".
4. Section 9.02(vii) of the Credit Agreement is amended by deleting
the number "$100,000,000" appearing in sub-clause (v)(B) thereof and inserting
the number "$150,000,000" in lieu thereof.
5. (A) Section 9.04(xi) of the Credit Agreement is amended by (i)
deleting the word "or" at the end of the sub-clause (x) therein and inserting a
comma in lieu thereof and (ii) inserting after the words "Section 9.04(x))" in
sub-clause (y) therein the following words: "or (z) to refinance up to
$250,000,000 of Permitted Refinancing Indebtedness that is incurred after March
15, 1999 and on or before June 30, 2000 and is secured by the New York Marriott
Marquis Hotel but only to the extent that such Permitted Refinancing
Indebtedness does not constitute intercompany Indebtedness among or between
Holdings or any of its Subsidiaries".
(B) Section 9.04(xii) of the Credit Agreement is amended by
deleting the proviso in sub-clause (iii) thereof and inserting the following new
proviso in lieu thereof:
"provided, however, that up to $400,000,000 in aggregate outstanding
-----------------
principal amount of such Indebtedness at any time (less the aggregate
principal amount of all Excess Permitted Refinancing Indebtedness
outstanding at such time) may be secured Indebtedness in the form of
Permitted Non-Recourse Indebtedness, Capitalized Lease Obligations,
Construction Loans (although such Construction Loans may not exceed
$150,000,000 in aggregate principal amount outstanding at any time), and/or
purchase money Indebtedness in respect of equipment and materials, and".
-2-
<PAGE>
(C) Section 9.04 of the Credit Agreement is further amended by (i)
inserting "(i)" immediately before the words "in no event" appearing in the last
sentence thereof and (ii) inserting the following words at the end of such last
sentence:
"and (ii) in no event shall the aggregate outstanding
principal amount of all Excess Permitted Refinancing Indebtedness incurred
pursuant to clause (xi) above, when added to the aggregate outstanding
principal amount of all Indebtedness incurred pursuant to clause (xii)
above, exceed $1,200,000,000 at any time outstanding".
6. Section 9.08 of the Credit Agreement is amended by deleting clause
(a) thereof in its entirety and inserting the following new clause (a) in lieu
thereof:
"(a) Holdings and the Borrower will not permit the
Consolidated Interest Coverage Ratio for any Test Period (i) ending on or
prior to the last day of Holdings' fiscal quarter ending closest to June
30, 2000, to be less than 2.25:1.00, (ii) ending after such date and on or
prior to the last day of Holdings' fiscal quarter ending closest to
December 31, 2000, to be less than 2.30:1.00, (iii) ending after such date
and on or prior to the last day of Holding's fiscal quarter ending closest
to June 30, 2001, to be less than 2.375:1.00 and (iv) ending after such
date, to be less than 2.50:1.00."
7. The Credit Agreement is amended by deleting Section 9.11 thereof
in its entirety and inserting the following new Section 9.11 in lieu thereof:
"9.11 Maximum Total Leverage Ratio. Holdings and the Borrower will
-----------------------------
not permit the Total Leverage Ratio at any time during a period set forth below
to be greater than the ratio set forth opposite such period below:
Period Ratio
------ -----
Effective Date through but not
including the last day of Holdings'
fiscal quarter ending closest to
September 30, 2000 5.50:1.00
The last day of Holdings' fiscal
quarter ending closest to September
30, 2000 through but not including
the last day of Holdings' fiscal
quarter ending closest to March 31,
2001 5.25:1.00
-3-
<PAGE>
The last day of Holdings' fiscal
quarter ending closest to March 31,
2001 through but not including the
last day of Holdings' fiscal quarter
ending closest to September 30, 2001 5.00:1.00
The last day of Holdings' fiscal
quarter ending closest to September 30,
2001 through but not including the last
day of Holdings' fiscal quarter
ending closest to March 31, 2002 4.75:1.00
Thereafter 4.50:1.00;
provided, however, that in the event of any issuance by Holdings, the Borrower
- -----------------
or any of its Subsidiaries of capital stock or other equity securities, for each
$50,000,000 (or portion thereof) of Net Equity Proceeds (other than Net Equity
Proceeds received from Holdings, the Borrower or any of its Subsidiaries) in
excess of the first $150,000,000 of Net Equity Proceeds (other than Net Equity
Proceeds received from Holdings, the Borrower or any of its Subsidiaries) in the
aggregate received after March 15, 1999, the maximum permitted Total Leverage
Ratio, for each period set forth above, will be reduced by 0.0375 (with such
reduction to be effective 45 days after each such issuance), provided further,
----------------
that in no event will the maximum permitted Total Leverage Ratio at any time
during a period set forth above be reduced to below the ratio set forth opposite
the period below which encompasses the corresponding period (or portion thereof)
set forth above:
Period Ratio
------ -----
Effective Date through but not
including the last day of Holdings'
fiscal quarter ending closest to
June 30, 1999 5.50:1.00
The last day of Holdings' fiscal
quarter ending closest to June 30,
1999 through but not including the
last day of Holdings' fiscal quarter
ending closest to December 31, 1999 5.25:1.00
The last day of Holdings' fiscal
-4-
<PAGE>
quarter ending closest to December
31, 1999 through but not including
the last day of Holdings' fiscal
quarter ending closest to June 30,
2000 5.00:1.00
The last day of Holdings' fiscal
quarter ending closest to June 30,
2000 through but not including
the last day of Holdings' fiscal
quarter ending closest to March 31,
2002 4.75:1.00
Thereafter 4.50:1.00"
8. Section 9.12 of the Credit Agreement is amended by deleting clause
(b) thereof in its entirety and inserting the following new clause (b) in lieu
thereof:
"(b) Unencumbered EBITDA Ratio. Holdings and the Borrower will
--------------------------
not permit the Unencumbered EBITDA Ratio for any Test Period ending on the last
day of a fiscal quarter of Holdings set forth below to be less than the ratio
opposite such fiscal quarter below:
Fiscal Quarter Ending Ratio
--------------------- -----
Closest To
----------
September 30, 1998 0.425:1.00
December 31, 1998 0.425:1.00
March 31, 1999 0.425:1.00
June 30, 1999 0.475:1.00
September 30, 1999 0.50:1.00
December 31, 1999 0.50:1.00
March 31, 2000 0.50:1.00
June 30, 2000 0.50:1.00
September 30, 2000 0.50:1.00
December 31, 2000 0.50:1.00
March 31, 2001 0.50:1.00
June 30, 2001 0.50:1.00
September 30, 2001 0.55:1.00
December 31, 2001 0.55:1.00
-5-
<PAGE>
March 31, 2002 0.55:1.00
June 30, 2002 0.55:1.00
September 30, 2002 0.60:1.00
December 31, 2002 0.60:1.00
March 31, 2003 0.60:1.00
June 30, 2003 0.60:1.00"
9. Section 9.14(vii) of the Credit Agreement is amended by adding
after the words "the Specified Subsidiary" the following words: "or Specified
Subsidiaries".
10. Section 11.01 of the Credit Agreement is amended as follows:
(a) The definition of "Consolidated Interest Expense" is amended
by deleting the date "June 30, 2000" appearing therein and inserting the date
"June 30, 2001" in lieu thereof.
(b) The definition of "Consolidated Total Debt" is amended by
inserting the following text immediately after the words "Permitted Non-Recourse
Indebtedness," appearing therein:
"plus, without duplication, the maximum amount available to be
drawn under all letters of credit, bankers acceptances and similar
obligations issued for the account of the Borrower or any of its
Subsidiaries and all unpaid drawings or reimbursement obligations in
respect thereof,".
(c) The definition of "Excess Cash Flow" is amended by inserting
the following text immediately after the words "Refinancing Transaction"
appearing in the second parenthetical of clause (b)(ii) thereof:
", repayments to the extent made with Indebtedness, Insurance
Proceeds or Condemnation Proceeds, equity issuances or capital
contributions or Net Sale Proceeds".
(d) The definition of "Permitted Non-Recourse Indebtedness" is
amended in its entirety as follows:
"Permitted Non-Recourse Indebtedness" shall mean, with respect
to any Specified Subsidiary, Indebtedness permitted to be incurred by such
Specified Subsidiary pursuant to Section 9.04(xii), which Indebtedness (i)
shall be secured only by the Real Property, including any fixtures,
furniture, equipment and other personal property related thereto and the
-6-
<PAGE>
revenues and proceeds derived therefrom, of the Specified Subsidiary that
has incurred such Indebtedness, (ii) shall be made expressly non-recourse
to Holdings and its other Subsidiaries (subject to customary limited
recourse for such customary exceptions as fraud, intentional misconduct,
intentional misrepresentation, misapplication of proceeds, environmental
liabilities and similar matters) and (iii) shall have (A) a final maturity
date of not earlier than August 5, 2004, (B) a remaining amortization
schedule based upon a schedule of no less than 20 years and (C) a market
rate of interest."
(e) The definition of "Permitted Refinancing Indebtedness" is amended
by:
(i) adding after the words "Existing Indebtedness" therein the
following words: ", up to $250,000,000 of Indebtedness that is incurred
after March 15, 1999 and on or before June 30, 2000 and is secured by the
New York Marriott Marquis Hotel (but only to the extent that such Permitted
Refinancing Indebtedness does not constitute intercompany Indebtedness
among or between Holdings or any of its Subsidiaries)";
(ii) deleting clause (i) of the proviso thereof in its entirety
and inserting the following new clause (i) in lieu thereof:
"(i) the principal amount (or accreted value, if applicable)
of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the
Indebtedness so Refinanced (plus any additional amount or value
pursuant to the proviso at the end of this definition) plus (x) the
reasonable costs and fees associated therewith, (y) (A) up to an
additional $25,000,000 of Indebtedness that is incurred after March
15, 1999 and on or before June 30, 2000 and is secured by the New York
Marriott Marquis Hotel and (B) up to an additional $25,000,000 of
Indebtedness that is incurred after March 15, 1999 and on or before
May 31, 2002 and is secured by the Harbor Beach Resort, less, in
either case, any such Indebtedness that is also intercompany
Indebtedness permitted pursuant to Section 9.04(iv) or (v), and (z) up
to an additional $400,000,000 in aggregate principal amount of such
Permitted Refinancing Indebtedness (less the aggregate principal
amount of secured Indebtedness incurred pursuant to the proviso in
sub-clause (iii) of Section 9.04(xii) and outstanding at such time) of
the Borrower and its Subsidiaries (such additional Permitted
Refinancing Indebtedness referred to in this sub-clause (z), the
"Excess Permitted Refinancing Indebtedness");";
(iii) inserting the following words before the semi-colon at the
end of clause (ii) of the proviso thereof:
-7-
<PAGE>
", provided that the remaining amortization schedule with
respect to up to $4,250,000 in aggregate principal amount of Permitted
Refinancing Indebtedness relating to the Harbor Beach Resort that is
incurred from Marriott International, Inc. may be based upon a
remaining amortization schedule of no less than 8 years";
(iv) deleting clause (iv) of the proviso thereof in its entirety
and inserting the following new clause (iv) in lieu thereof:
"(iv) no Permitted Refinancing Indebtedness shall have
different obligors, or greater guarantees or security, than the
Indebtedness being Refinanced (except that, (x) from and after the
REIT Conversion Date, such Permitted Refinancing Indebtedness may be
incurred by the Borrower and/or one or more Subsidiary Guarantors so
long as such Permitted Refinancing Indebtedness is unsecured, except
as otherwise permitted by Section 9.01(iv), and (y) in connection with
the simultaneous Refinancing of individual Indebtedness of all of the
Subsidiaries that each own a Designated Hotel securing all or any part
of the Indebtedness to be Refinanced, such Subsidiaries (or their
successors in a merger contemplated by Section 9.02(xi) or (xii)) may
jointly incur Permitted Refinancing Indebtedness, which Indebtedness
may be secured and cross-collateralized only by one or more of the
Designated Hotels and shall otherwise be expressly non-recourse to
Holdings and its other Subsidiaries (subject to customary limited
recourse for such customary exceptions as fraud, intentional
misconduct, intentional misrepresentation, misapplication of proceeds,
environmental liabilities and similar matters)) and"; and
(v) adding the following words to the end of clause (v) of the
proviso thereof:
"; provided further that if the principal amount (or
accreted value, if applicable) of the Permitted Refinancing
Indebtedness described in (iv)(y) above is secured and cross-
collateralized by less than all of the Designated Hotels, then the
aggregate principal amount (or accreted value, if applicable) of all
of the Indebtedness that, in one or more instances, is secured by a
Designated Hotel immediately prior to the incurrence of such Permitted
Refinancing Indebtedness and is prepaid at the same time that such
Permitted Refinancing Indebtedness is incurred shall be deemed to be
Indebtedness that is Refinanced in connection with such Permitted
Refinancing Indebtedness)".
(f) The definition of "Specified Indebtedness for Borrowed Money"
is amended by inserting the following proviso at the end thereof:
-8-
<PAGE>
"; provided further, that Specified Indebtedness for Borrowed
----------------
Money shall not include (A) up to $250,000,000 of Permitted Refinancing
Indebtedness that is incurred after March 15, 1999 by a Subsidiary of the
Borrower that is not a Subsidiary Guarantor and is secured by the New York
Marriott Marquis and (B) up to $105,000,000 of Permitted Refinancing
Indebtedness that is incurred after March 15, 1999 by a Subsidiary of the
Borrower that is not a Subsidiary Guarantor and is secured by the Harbor
Beach Resort, less, in either case, any such Indebtedness that is also
intercompany Indebtedness permitted pursuant to Section 9.04(iv) or (v)."
(g) The definition of "Specified Subsidiary" is deleted and the
following new definition of "Specified Subsidiary" is inserted in lieu thereof:
"Specified Subsidiary" shall mean any Subsidiary of the Borrower
so long as such Subsidiary has no material assets other than the single
Hotel Property to be encumbered with Permitted Non-Recourse Indebtedness
incurred by such Subsidiary pursuant to Section 9.04(xii).
(h) The following new definitions shall be inserted into Section 11.01
of the Credit Agreement in the correct alphabetical order:
(i) "Construction Loan" shall mean Indebtedness incurred by a
Specified Subsidiary pursuant to Section 9.04(xii) to finance the
construction or development of a new Hotel or the expansion or renovation
of a then existing Hotel, which Indebtedness (in either case) may only be
secured by such Hotel.
(ii) "Designated Hotel" shall mean each of the following Hotels:
New York Marriott Marquis; Hyatt Regency, Burlingame; Hyatt Regency,
Cambridge; Hyatt Regency, Reston; Swissotel, Atlanta; Swissotel, Boston;
Swissotel, Chicago; and Swissotel, New York.
(iii) "Excess Permitted Refinancing Indebtedness" shall have the
meaning provided in Section 11.01 in the definition of "Permitted
Refinancing Indebtedness".
11. The Banks hereby agree that the Borrower and its Subsidiaries
may, in connection with the incurrence of the Permitted Refinancing Indebtedness
referred to in clause (iv)(y) of the definition of "Permitted Refinancing
Indebtedness", establish special purpose Subsidiaries for the sole purpose of
owning (and whose sole material assets shall constitute) individual Designated
Hotels and that (i) such Subsidiaries shall not be required to enter into the
Subsidiaries Guaranty if prohibited from doing so by the terms of the Permitted
Refinancing Indebtedness secured by the Designated Hotels (but only so long as
such prohibitions are in effect, after which time such Subsidiaries shall be
required to
-9-
<PAGE>
enter into the Subsidiaries Guaranty to the extent and in the manner required by
Section 8.18(d)) of the Credit Agreement and (ii) notwithstanding anything to
the contrary in Sections 9.02 or 9.05 of the Credit Agreement, the Borrower and
its Subsidiaries may contribute individual Designated Hotels to such special
purpose Subsidiaries.
12. Effective Date. This Amendment shall become effective on the
--------------
date (the "Third Amendment Effective Date") when (i) Host REIT, the Operating
Partnership and the Required Banks shall have signed a counterpart hereof
(whether the same or different counterparts) and shall have delivered (including
by way of facsimile transmission) the same to the Administrative Agent at the
Notice Office, provided that Sections 6 and 7 of this Amendment shall become
effective on the date when Host REIT, the Operating Partnership and the
Supermajority Banks shall have signed a counterpart hereof (whether the same or
different counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at the Notice Office and (ii)
the Borrower shall have paid to each Bank that has signed a counterpart of this
Amendment and delivered the same to the Administrative Agent at the Notice
Office on or prior to 1:00 p.m. (New York time) on March 26, 1999 an amendment
fee equal to 25 basis points on the amount of each such Bank's outstanding Terms
Loans and Revolving Loan Commitment on March 26, 1999.
13. Bring-Down of Representations and Warranties; No Default. In
--------------------------------------------------------
order to induce the Banks to enter into this Amendment, each Credit Party party
hereto represents and warrants that (i) the representations, warranties and
agreements contained in Section 7 of the Credit Agreement are true and correct
in all material respects on and as of the Third Amendment Effective Date, both
before and after giving effect to this Amendment, and (ii) there exists no
Default or Event of Default on the Third Amendment Effective Date, both before
and after giving effect to this Amendment.
14. Scope of Amendment. This Amendment is limited as specified and
------------------
shall not constitute a modification, acceptance or waiver of any other provision
of the Credit Agreement or any other Credit Document.
15. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Administrative Agent.
16. Governing Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
-------------
THE PARTIES HEREUNDER SHALL BE CONSTRUED IN
-10-
<PAGE>
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
17. Amendment to Credit Agreement. From and after the Third
-----------------------------
Amendment Effective Date, all references in the Credit Agreement and in the
other Credit Documents to the Credit Agreement shall be deemed to be references
to the Credit Agreement as modified hereby.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.
HOST MARRIOTT CORPORATION
By:____________________________
Title:
HOST MARRIOTT, L.P.
By: Host Marriott Corporation,
its General Partner
By:____________________________
Title:
-11-
<PAGE>
Exhibit 10.7
HOST MARRIOTT, L.P.
EXECUTIVE DEFERRED COMPENSATION PLAN
As amended and restated effective January 1, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I DEFINITIONS................................................. 2
1.1 Administrator............................................... 2
1.2 Benefit Allocation Agreement................................ 2
1.3 Code........................................................ 2
1.4 Company..................................................... 2
1.5 Committee................................................... 2
1.6 Compensation................................................ 2
1.7 Contribution Date........................................... 2
1.8 Deferral Percentage......................................... 2
1.9 Deferred Compensation....................................... 2
1.10 Deferred Compensation Reserve............................... 2
1.11 Director.................................................... 3
1.12 Effective Date.............................................. 3
1.13 Election.................................................... 3
1.14 Election Year............................................... 3
1.15 Employee.................................................... 3
1.16 Host Marriott Corporation................................... 3
1.17 Participant................................................. 3
1.18 Plan........................................................ 4
1.19 Retirement and Savings Plan................................. 4
1.20 Subsidiary.................................................. 4
1.21 Termination of Services..................................... 4
ARTICLE II PARTICIPANT ELECTIONS....................................... 5
2.1 Deferred Compensation Reserve............................... 5
2.2 Annual Elections............................................ 5
2.3 Form of Election............................................ 5
ARTICLE III PARTICIPANT ACCOUNTS 7
3.1 Individual Accounts......................................... 7
3.2 Company Accruals............................................ 7
3.3 Crediting of Earnings....................................... 8
3.4 Accounts Do Not Result in Property Rights................... 8
3.5 Tax-Qualified Plans......................................... 8
3.6 Non Assignment of Interests................................. 8
-i-
<PAGE>
ARTICLE IV DISTRIBUTIONS............................................... 9
4.1 Commencement of Distribution................................ 9
4.2 Beneficiaries............................................... 10
4.3 Emergency Distributions..................................... 10
4.4 Discharge of Obligation For Payment......................... 10
ARTICLE V ADMINISTRATION.............................................. 12
5.1 Administrator............................................... 12
5.2 Expenses.................................................... 12
5.3 Acceleration of Payments.................................... 12
5.4 Indemnification............................................. 12
5.5 Administration of Directors Plan............................ 12
ARTICLE VI MISCELLANEOUS............................................... 13
6.1 Disclaimer of Rights........................................ 13
6.2 No Trust Created............................................ 13
6.3 Amendment or Termination of Plan............................ 13
6.4 Effect of Plan.............................................. 13
6.5 Severability................................................ 13
6.6 Applicable Law.............................................. 14
ARTICLE VII SPECIAL RULES FOR PRE-EFFECTIVE DATE EMPLOYEES.............. 15
7.1 Governing Rules............................................. 15
-ii-
<PAGE>
HOST MARRIOTT, L.P.
EXECUTIVE DEFERRED COMPENSATION PLAN
PREAMBLE
--------
WHEREAS, Host Marriott Corporation sponsors the Host Marriott Corporation
Executive Deferred Compensation Plan; and
WHEREAS, HMC intends to enter into certain transactions pursuant to a plan
to reorganize its business operations so that it will qualify as a real estate
investment trust ("Host REIT Conversion"); and
WHEREAS, as part of the Host REIT Conversion, (i) Host Marriott Corporation
will transfer its liabilities, including but not limited to liabilities relating
to employee benefits to Host Marriott, L.P. and (ii) Host Marriott Corporation
will merge with and into HMC Merger Corporation (to be renamed Host Marriott
Corporation); and
WHEREAS, pursuant to the Contribution Agreement, Host Marriott Corporation
and Host Marriott, L.P. have also agreed to enter into an agreement allocating
responsibilities with respect to employee compensation, benefits, labor, and
certain other employment matters pursuant to the terms and conditions set forth
in the Employee Benefits and Other Employment Matters Allocation Agreement (the
"Allocation Agreement"); and
WHEREAS, pursuant to the Allocation Agreement, Host Marriott Corporation
shall transfer to Host Marriott, L.P. sponsorship of the Host Marriott
Corporation Executive Deferred Compensation Plan (the "Plan") and all
liabilities and obligations for accrued benefits (including any earnings
attributable to such benefits) for Retained Individuals and Retained Employees,
effective as of Contribution Date (as such terms are defined in the Allocation
Agreement) and the name of the Plan shall be changed to the Host Marriott, L.P.
Executive Deferred Compensation Plan (the "Plan"); and
NOW, THEREFORE, set forth herein are the terms of two plans, the Host
Marriott L.P. Executive Deferred Compensation Plan (the "Executive Plan") and
the Host Marriott, L.P. Non-Employee Directors Deferred Compensation Plan (the
"Director Plan") (individually, the "Plan", collectively the "Plans").
1
<PAGE>
ARTICLE I
DEFINITIONS
For purposes of this Plan, unless the context requires otherwise, the
following words and phrases, when used herein with initial capital letters,
shall have the meanings indicated:
1.1 "Administrator" means the person appointed by the Committee pursuant
-------------
to Article 5.1 of this Plan to administer this Plan.
1.2 "Benefit Allocation Agreement" means the Employee Benefits &
----------------------------
Other Employment Matters Allocation Agreement entered into between Host Marriott
Corporation, Host Marriott, L.P. and Crestline Capital Corporation in connection
with the Host REIT Conversion.
1.3 "Code" shall refer to the Internal Revenue Code of 1986, as
----
amended, or any successor statute, including the regulations issued thereunder.
1.4 "Company" shall refer, with respect to the Executive Plan, to Host
-------
Marriott, L.P. and any Subsidiary that (a) elects to join the Plan, and (b)
obtains the consent of the Committee to do so, and with respect to the Director
Plan, Host Marriott Corporation..
1.5 "Committee" means the Compensation Policy Committee appointed by the
---------
Board of Directors of Host Marriott Corporation.
1.6 "Compensation" means: (a) for purposes of the Executive Plan,
------------
all wages or salary, overtime, cash bonus, annual leave, sick leave, funeral
leave and holiday pay payable by the Company to an Employee, benefits under the
Host Marriott, L.P. Flexible Benefits Plan, and "Flexible Compensation" as
defined in Section 5.1 of the Retirement Plan, all without regard to any
Elections made by the Employee to defer such amounts under the Plan or in
accordance with any other plan or agreement with the Company, but excluding any
and all other forms of compensation and (b) for purposes of the Director Plan,
all directors' fees payable by the Company to a non-employee director of Host
Marriott Corporation.
1.7 "Contribution Date" means the Contribution Date as defined in the
-----------------
Benefit Allocation Agreement.
1.8 "Deferral Percentage" means the percentage of a Participant's
-------------------
Compensation for the Election Year to be deferred in accordance with an Election
pursuant to Article II of the Plan.
1.9 "Deferred Compensation" means Compensation with respect to which
---------------------
a Participant has made an Election to defer receipt thereof in accordance with
Article II of the Plan, and Section 401(k) Contributions, if any, elected in
accordance with Article V of the Retirement and Savings Plan.
1.10 "Deferred Compensation Reserve" means the book reserve reflecting
-----------------------------
the total aggregate amounts credited to the individual accounts of Participants
under Article III of the Plan.
2
<PAGE>
1.11 "Director" means a member of the Board of Directors of Host
--------
Marriott Corporation.
1.12 "Effective Date" means the Contribution Date.
--------------
1.13 "Election" means an election made by a Participant in accordance
--------
with Article II of this Plan.
1.14 "Election Year" means the fiscal year of the Company for which a
-------------
Participant earns Compensation with respect to which the Participant makes an
Election pursuant to Article II of the Plan.
1.15 "Employee" means any individual employed by the Company and any
--------
Retained Employee or Retained Individual as such terms are defined in the
Allocation Agreement.
1.16 "Host Marriott Corporation" means Host Marriott Corporation, a
Delaware corporation for the period before the Contribution Date (as such term
is defined in the Allocation Agreement) and Host Marriott Corporation, a
Maryland corporation, for the period beginning on or after the Contribution
Date.
1.17 "Participant" means:
-----------
(a) For purposes of the Executive Plan,
(i) All Employees of the Company who are notified by the
Administrator that they are eligible to participate in this Plan and (A) whose
annual base salary plus cash bonus before any Election under this Plan exceeds
$120,000, or such other amount designated by the Committee; or (B) who have
three years of service with the Company, are bonus-eligible and whose annual
base salary before any Election under this Plan exceeds $75,000, or such other
amount designated by the Committee; or (C) who are select management employees
of an acquired company who are covered by a deferred compensation program of
such acquired company;
(ii) All Employees who participated in the Retirement and
Savings Plan (or with respect to the Election Year beginning on the Effective
Date, the Host Marriott Corporation (HMC) Retirement and Savings Plan and Trust)
during the immediately preceding calendar year, and were subject to a reduction
during such year in the amounts allocable to their "Company Contribution
Accounts" in the Retirement and Savings Plan (or with respect to the Election
Year, the Host Marriott Corporation (HMC) Retirement and Savings Plan and Trust)
for such year as a result of Section 401(m) of the Code;
(iii) All Employees who participated in the Retirement and
Savings Plan during the current fiscal year of the Company and who have
Compensation in excess of the limits set forth under Section 401(a)(17) of the
Code, provided such Employees have not made an election to participate for the
--------
current year under paragraph (a) of this section;
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(iii) Former Participants, terminated Participants, and their
beneficiaries, as appropriate to the context.
(b) For purposes of the Director Plan,
(i) All non-employee Directors of Host Marriott Corporation;
and
(ii) Former Directors and their beneficiaries, as appropriate
to the context.
1.18 "Plan" means the Host Marriott L.P. Executive Deferred
----
Compensation Plan or the Host Marriott, L.P. Director Deferred Compensation
Plan, as appropriate to the context.
1.19 "Retirement and Savings Plan" means the Host Marriott, L.P.
---------------------------
Retirement and Savings Plan and Trust.
1.20 "Subsidiary" means either (a) a member of a controlled group of
----------
corporations of which the Company is a member, or (b) an unincorporated trade or
business which is under common control by or with the Company as determined in
accordance with Section 414(c) of the Code. For purposes hereof, a "controlled
group of corporations" shall have the meaning set forth in Section 1563(a) of
the Code, determined without regard to Sections 1563(a)(4) and (e)(3)(C) of the
Code.
1.21 "Termination of Services" means:
-----------------------
(a) For purposes of the Executive Plan:
(i) termination of employment with the Company in any of
the following circumstances:
(A) Where the Employee voluntarily resigns or retires;
(B) Where the Employee is discharged;
(C) Where the Employee is totally and permanently
disabled and thereby unable to perform the usual duties of his employment with
the Company, as determined by the Administrator in accordance with standards set
forth in the Retirement and Savings Plan; or
(D) Where the Employee dies;
(b) For purposes of the Director Plan, the date the Participant
ceases to be a member of the Board of Directors of Host Marriott Corporation.
4
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ARTICLE II
PARTICIPANT ELECTIONS
2.1 Deferred Compensation Reserve. The Company shall establish and
maintain a book reserve (the "Deferred Compensation Reserve"), to which it shall
credit the total aggregate amount designated by Participants each year in
Elections pursuant to Section 2.3(d).
2.2 Annual Elections.
(a) Each Participant shall have the option to designate in an
Election in the form prescribed in Section 2.3 an amount or a percentage of such
Participant's Compensation for any Election Year to be credited to the Deferred
Compensation Reserve; provided, however, that the Committee shall have the right
to approve or disapprove such Election by any Participant, in whole or in part,
in the sole discretion of the Administrator.
(b) Elections shall be made on or before the last business day of the
fiscal year immediately preceding the Election Year. Notwithstanding the
foregoing, a Participant may make an Election during the Election Year with
respect to Compensation earned for any subsequent payroll period of the Company
that begins during the remainder of the Election Year, provided such Election is
made within 30 days of notification by the Administrator of the Participant's
eligibility to participate in the Plan.
(c) Except as provided in Section 4.3, an Election shall be
irrevocable with respect to all Compensation earned during an Election Year.
Notwithstanding the foregoing, an Election made as to an Election Year shall not
remain in effect with respect to Compensation earned for any subsequent year.
2.3 Form of Election.
(a) Each Election shall be made on a form provided by the
Administrator within the period described in Section 2.2(b), and shall designate
either (i) a Deferral Percentage; (ii) a fixed dollar amount of the
Participant's Compensation for the Election Year to be deferred; (iii) a fixed
dollar amount of the Participant's Compensation for the Election Year to be paid
currently; or (iv) any combination of these methods with the consent of the
Administrator acting in his or her sole discretion; provided, however, that a
Participant who is also a participant in the Host Marriott Corporation Non-
Employee Directors' Deferred Stock Compensation Plan for the concurrent Election
Year may only designate a Deferral Percentage. Such Elections shall designate a
distribution commencement date and manner of distribution in accordance with
Section 4.1; provided, however, that such distribution commencement date shall
be no later or earlier than the respective dates specified in Section 4.1(a).
If no designation is received by the Administrator within the prescribed time
period, the Administrator shall elect the time and manner of distribution and
notify the Participant of such selection.
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(b) Each Participant shall be entitled to Deferred Compensation for
the Election Year in an amount determined as follows: (i) if the Participant
elects a Deferral Percentage in accordance with paragraph (a)(i) of this
section, an amount equal to the product of such Deferral Percentage times the
Participant's total Compensation for each pay period of the Election Year; (ii)
if the Participant elects to designate a fixed dollar amount to be deferred in
accordance with paragraph (a)(ii) of this section, the amount so deferred; (iii)
if the Participant elects to designate a fixed dollar amount to be paid
currently in accordance with paragraph (a)(iii) of this section, the amount by
which such Participant's total Compensation for the Election Year exceeds such
fixed dollar amount; or (iv) if the Participant elects a combination of the
above in accordance with paragraph (a)(iv) of this section, the appropriate
amount shall be determined by the Administrator based on the above principles.
(c) Deferred Compensation shall first be credited to the
Participant's "Section 401(k) Contribution Account" in the Retirement and
Savings Plan to the extent designated by the Participant as "Section 401(k)
Contributions" in accordance with the terms of the Retirement and Savings Plan,
or to such lesser extent permitted by law provided the amount so designated
corresponds to the maximum amount permissible under Sections 401(k)(3), 402(g)
or 415 of the Code, as amended.
(d) The difference between the total amount determined under
paragraph (b) of this section and the amount determined under paragraph (c) of
this section shall be credited to the Deferred Compensation Reserve on behalf of
the Participant. In addition, there shall also be credited to the Deferred
Compensation Reserve on behalf of Participants described in Section 1.17(a)(iii)
the difference between (i) the total amount of "After-tax Savings" plus "Section
401(k) Contributions" in the Retirement and Savings Plan elected by each such
Participant for the current fiscal year, and (ii) the amount of "After-tax
Savings" and "Section 401(k) Contributions" permitted to be contributed to the
Retirement and Savings Plan for the current fiscal year on behalf of each such
Participant under the Compensation limits set forth in Section 401(a)(17) of the
Code. The preceding sentence shall be applied after first taking into account
limitations under Section 401(m) of the Code on such amounts.
(e) For purposes of this Section 2.3, Participants eligible to make
Elections provided herein shall include only Participants described in Sections
1.17(a)(i) and (b)(i), and shall exclude all other Participants. Participants
described in Section 1.17(a)(i)(B) shall be entitled to make Elections only with
respect to an amount of Compensation not exceeding such Participant's bonus for
a year during which a timely Election is made as provided herein. In addition
to any other Election permitted under this Section 2.3, each Participant
described in Section 1.17(a)(i)(C) shall also be entitled to make an Election to
have Deferred Compensation credited to his or her account in this Plan in an
amount equal to the amount which such Participant agrees to forfeit under a
deferred compensation plan of an acquired company.
6
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ARTICLE III
PARTICIPANT ACCOUNTS
3.1 Individual Accounts. The Administrator shall establish and maintain
records reflecting each Participant's interest in the Deferred Compensation
Reserve to which the Administrator shall credit Deferred Compensation in
accordance with each Participant's Election pursuant to Section 2.3(d), Company
Accruals pursuant to Section 3.2, Forfeiture Accruals pursuant to Section 3.3,
and earnings pursuant to Section 3.4.
3.2 Company Accruals. The Company shall credit to the Deferred
Compensation Reserve on behalf of each Participant an amount ("Company
Accruals") each Election Year which shall be determined in the following manner:
(a) The Administrator shall determine for the Election Year the
ratio for allocating "Company Contributions" under Section 6.4 of the Retirement
Plan.
(b) The Administrator shall then determine for each Participant in
this Plan an amount equal to six percent (6%) of the Participant's total
Compensation for the Election Year, or, if less, the sum of (i) the
Participant's Deferred Compensation for the Election Year (as determined under
Section 2.3(b)) and (ii) the amount of the Participant's After-Tax Basic Savings
contributed to the Retirement Plan for the Election Year in accordance with
Section 4.2 of the Retirement Plan. The Committee may in its sole discretion
limit the dollar amount of a Participant's Deferred Compensation taken into
account for purposes of this Section 3.2 based on uniform standards, provided
that the Administrator notifies such Participant of such limitation on or prior
to the due date for Elections under Section 2.2(b).
(c) The amount determined in paragraph (b) of this section shall be
reduced by subtracting (i) the amount credited to the Participant as "Combined
Basic Savings" in the Retirement and Savings Plan for the Election Year.
(d) The Administrator shall then allocate to the Deferred
Compensation Reserve on behalf of each Participant the product of (i) the ratio
determined in accordance with paragraph (a) of this section, times (ii) the
amount determined in accordance with paragraph (c) of this section.
(e) The Administrator shall allocate to the Deferred Compensation
Reserve on behalf of each Participant described in Section 1.13(b) the amount of
any reduction of allocations to the "Company Contribution Accounts" of such
Participants under Section 6.7 of the Retirement and Savings Plan as of the same
date such amounts would have been allocated under the Retirement and Savings
Plan but for such reduction; provided however, as of the same date such amounts
would have been allocated under the Retirement and Savings Plan but for such
reduction, that in no event shall an amount be credited to a Participant's
account herein under this paragraph (e) if an equivalent amount is distributed
currently to such Participant.
7
<PAGE>
(f) In addition to the foregoing, the Administrator shall allocate
to the Deferred Compensation Reserve on behalf of each Participant described in
Section 1.13(b)(ii) an amount equal to the difference between (i) the total
amount of allocations that would have been made to the "Company Contribution
Account" of such Participant in the Retirement and Savings Plan for the current
fiscal year in the absence of the Compensation limits set forth in Section
401(a)(17) of the Code, and (ii) the amount permitted to be allocated under such
Compensation limi t
(g) Company Accruals under this Section 3.2 shall be allocated only
on behalf of Participants in the Plan (other than terminated Participants) as of
the last day of the fiscal year of the Company for which the allocation is made.
3.3 Crediting of Earnings. The Company shall credit earnings to the
Deferred Compensation Reserve in an amount determined as follows:
(a) Company contributions determined in accordance with Section 3.2
and earnings attributable thereto, along with forfeitures determined in
accordance with Section 3.3 and earnings attributable thereto, shall be credited
with earnings at the same rate and with the same frequency as earnings credited
to the "Stable Value Fund" described in the Retirement and Savings Plan.
(b) Deferred Compensation allocated to the Deferred Compensation
Reserve in accordance with Section 2.3(d), along with earnings attributable
thereto, shall be credited with earnings at the same rate and with the same
frequency as earnings credited to the "Stable Value Fund" described in the
Retirement and Savings Plan.
3.4 Accounts Do Not Result in Property Rights.
(a) The Deferred Compensation Reserve and the accounts maintained
thereunder on behalf of each Participant are for administrative purposes only,
and do not vest in the Participants any right, title or interest in such reserve
or such accounts, except as expressly set forth in this Plan.
(b) Title to and beneficial ownership of any assets, whether cash
or investments which the Company may designate to make payments of Deferred
Compensation hereunder, shall at all times remain in the Company, and no
Participant shall have any property interest whatsoever in any specific assets
of the Company.
3.5 Tax-Qualified Plans. Amounts credited to a Participant's account in
the Deferred Compensation Reserve shall not be deemed compensation to such
Participant for purposes of computing employer contributions or benefits under
any tax-qualified plan of deferred compensation maintained by the Company.
3.6 No Assignment of Interests. The rights of Participants or any
other persons to the payment of amounts from the Deferred Compensation Reserve
under this Plan shall not be assigned, transferred, pledged or encumbered except
by will or by the laws of descent and distribution.
8
<PAGE>
ARTICLE IV
DISTRIBUTIONS
4.1 Commencement of Distribution.
(a) Except as otherwise specified in paragraph (d) of this section
or Section 4.3, Deferred Compensation, Company Accruals, Forfeiture Accruals and
earnings thereon credited to a Participant's account shall become distributable
as soon as administratively feasible following notification to the Administrator
of such Participant's Termination of Services or death (whichever occurs first).
Distribution shall be made in the manner specified in paragraph (b) of this
section. Alternatively, a Participant may elect in accordance with Section
2.3(a) for distribution to commence prior to Termination of Services, but no
earlier than the beginning of the sixth (6th) fiscal year of the Company
following the Election Year for which such Deferred Compensation was earned, if
applicable, or otherwise in a single lump sum cash payment. Such distribution
prior to Termination of Services will be permitted only to the extent that it
relates to an Election Year or Years for which the amount deferred exceeds six
percent (6%) of the Participant's total Compensation for such Election Year, and
the amount so distributed will consist solely of the amount of such excess
inclusive of any earnings attributable thereto.
(b)(l) A Participant shall designate in an Election made in
accordance with Section 2.3 whether distribution of his account shall be made in
the form of (i) a single lump sum cash payment; (ii) annual cash installments
payable over a designated term not to exceed ten (10) years; or (iii) any other
manner of distribution requested by the Participant, with the consent of the
Administrator acting in his or her sole discretion. Notwithstanding the
foregoing, a Participant who is actively employed by the Company or serving on
the Company's Board of Directors shall be entitled to a change in the manner of
distribution of his account under paragraph (a) of this section as designated on
a form provided by the Administrator, with the consent of the Committee acting
in its sole discretion. An approved request for change shall become effective
on the first anniversary (the "Anniversary Date") of the date such request was
received by the Administrator, provided such request shall be invalid if the
Participant has a Termination of Services as described in Section 1.17 (but not
including Section 1.17(b) or (c)) prior to the Anniversary Date, or, as to
Deferred Compensation relating to any Election Year, if any amount of such
Deferred Compensation for an Election Year would otherwise become distributable
prior to the Anniversary Date. Notwithstanding the foregoing, a Participant who
has a Termination of Services as described in Section 1.17(b) or (c) may cancel
the request for change at his or her option as designated on a form provided by
the Administrator.
(b)(2) A Participant requesting a change pursuant to paragraph
(b)(l) of this section shall be prohibited from making an Election in accordance
with Section 2.3, and any Election previously made shall be ineffective, to the
extent such Election applies to the next Election Year beginning after the date
of the Participant's change request.
(b)(3) No earnings shall be credited under Section 3.4(a) on
amounts allocated to the Deferred Compensation Reserve under Section 3.2(e) for
the period from the date of a Participant's
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Termination of Services (or the date on which a Participant's status as a member
of the Company's Board of Directors ceases) until the date of the first
distribution of such amounts, in the event a change in the manner of
distribution of such amounts has been approved by the Committee as provided
above.
(c) If payment is deferred and paid in installments in accordance
with paragraph (b) of this section, the remaining balance in the Participant's
account shall continue to be credited with earnings as provided in Sections 3.1
and 3.4(b).
(d) Notwithstanding the foregoing, no distribution shall be made of
Company Accruals credited to a Participant's account under Section 3.2, of
Forfeiture Accruals credited under Section 3.3, or of earnings credited thereon
under Section 3.4(a), except to the extent such amounts would be vested if they
had been contributed on behalf of the Participant as Company contributions or
forfeitures under the Retirement Plan. For this purpose, such amounts shall be
deemed to vest in accordance with the schedule set forth in Section 7.3 of the
Retirement and Savings Plan, and nonvested amounts shall be forfeited if the
Participant terminates employment with the Company in circumstances in which the
Participant would not be fully vested under the Retirement and Savings Plan.
The Company shall have no further obligation to the Plan or to any Participant
for nonvested amounts forfeited hereunder.
4.2 Beneficiaries. Each Participant may designate a beneficiary on
a form provided by the Administrator to receive distributions made pursuant to
Section 4.1; provided, however, that the beneficiary designated by the
Participant under the Retirement Plan shall be deemed to be the beneficiary
under this Plan unless the Participant specifically designates otherwise. If no
beneficiary is designated under the Retirement and Savings Plan or under this
Plan, or if the beneficiary shall not survive the Participant, the Participant
shall be deemed to have designated the following beneficiaries (if then living)
in the following order of priority: (i) spouse; (ii) children; including adopted
children, in equal shares; (iii) parents, in equal shares; and (iv) the
Participant's estate.
4.3 Emergency Distributions. Notwithstanding the provisions of Section
4.1, the vested portion of a Participant's account may be distributed prior to
such Participant's Termination of Services, death, or other distribution date
elected by the Participant in the sole discretion of the Committee.
Distribution shall be made under this Section 4.3 only in cases of serious
financial emergency which is beyond the control of the Participant, as
determined by the Committee, and only if failure to make the distribution would
result in severe financial hardship to the Participant or beneficiary. Amounts
distributed under this Section 4.3 shall not exceed the amount needed to satisfy
such emergency and to pay all applicable taxes on the amount of the
distribution.
4.4 Discharge of Obligation For Payment. If the Administrator shall find
that any person to whom any payment is payable under this Plan is unable to care
for such person's affairs because of illness or accident, or is a minor, any
payment due (unless a prior claim therefor shall have been made by a duly
appointed guardian, committee or other legal representative) may be paid to the
spouse, a child, a parent, or a brother or sister, or to any person deemed by
the Administrator to have incurred expense for such person otherwise entitled to
payment, in such manner and
10
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proportions as the Administrator may determine. Any such payment shall be
complete discharge of the liabilities of the Company under this Plan.
11
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ARTICLE V
ADMINISTRATION
5.1 Administrator. The Committee shall appoint an Administrator who
shall be responsible for the management, operation and administration of the
Plan. The Administrator shall have full power and authority to interpret,
construe and administer this Plan and the Administrator's interpretations and
construction thereof, and actions hereunder, including any valuation of the
Deferred Compensation Reserve, or the amount or recipient of the payment to be
made therefrom, shall be binding and conclusive on all persons for all purposes.
The Company shall not be liable to any person for any action taken or omitted in
connection with the interpretation and administration of this Plan unless
attributable to willful misconduct or lack of good faith by the Company.
5.2 Expenses. The expenses of administering this Plan shall be borne by
the Company and shall not be charged against the Deferred Compensation Reserve.
5.3 Acceleration of Payments. Notwithstanding anything in this Plan to
the contrary, the Committee in its sole discretion may direct the Administrator
to pay any or all amounts credited to a Participant's account in a single lump
sum cash payment or accelerate payment of installments distributable under
Article IV of this Plan, in order to clear out small balances, terminate the
Plan, or otherwise to relieve costs of maintaining and administering the Plan.
5.4 Indemnification. To the extent permitted by applicable state law,
the Company shall indemnify and save harmless the Board of Directors and each
member or delegate thereof, each employee or delegate thereof, so long as it is
composed of individuals appointed by the Company, the Plan Administrator and
each employee or delegate thereof, against any and all expenses, liabilities and
claims, including legal fees to defend against such liabilities and claims,
arising out of their discharge of responsibilities under or incident to the
Plan, excepting only expenses and liabilities arising out of willful misconduct
or gross negligence. This indemnity shall not preclude such further indemnities
as may be available under insurance purchased by the Company or provided by the
Company under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, as such indemnities are permitted under state law.
Payments with respect to any indemnity and payment of expenses or fees under
this section shall be made only from assets of the Company and shall not be made
directly or indirectly from Trust assets.
5.5 Administration of Directors Plan. The Directors Plan shall be
administered solely in the State of Maryland. All actions with respect to
Directors will occur in the State of Maryland.
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ARTICLE VI
MISCELLANEOUS
6.1 Disclaimer of Rights. Nothing contained herein shall be construed as
conferring upon any Participant the right to continue in the employ or service
of or to maintain a relationship with the Company as an executive or in any
other capacity.
6.2 No Trust Created. Nothing contained in this Plan and no action taken
pursuant to the provisions of this Plan shall create or be construed to create a
trust of any kind, or a fiduciary relationship between the Company and any
person, including any Participant or any other person. Any amounts which may be
credited to the Deferred Compensation Reserve shall continue for all purposes to
be a part of the general funds of the Company and no person other than the
Company shall by virtue of the provisions of this Plan have any interest in such
funds. To the extent that any person acquires a right to receive payments from
the Company under this Plan, such right shall be no greater than the right of
any unsecured general creditor of the Company.
6.3 Amendment or Termination of Plan.
(a) The Board of Directors of the Company may amend or terminate
the Plan at any time and from time to time, and/or distribute all account
balances under the Plan, pursuant to written resolutions adopted by such Board
of Directors. In no event will any such amendment or termination of the Plan
have the effect of reducing the accrued account balance or then vested
percentage of any Participant under this Plan.
(b) If a determination is made by the Internal Revenue Service that
the account balance of any Participant is subject to current income taxation,
such account balance will be immediately distributed to the Participant or the
Participant's beneficiary to the extent of such taxable amount; provided,
however, that if the Participant is contesting the above mentioned determination
of the Internal Revenue Service, the Administrator may in his or her sole
discretion delay distribution until the determination is final.
(c) In the event the Retirement and Savings Plan is terminated, the
Committee may at its sole discretion distribute all account balances under this
Plan. Alternatively, in the event of such termination the Committee may at its
sole discretion establish another basis for crediting earnings under this Plan,
provided that any rate so credited shall not be less than the Company's
borrowing rate from time to time.
6.4 Effect of Plan. This Plan shall be binding upon and inure to the
benefit of the Company, its successors and assigns, and the Participants and
their heirs, beneficiaries, executors, administrators and legal representatives.
6.5 Severability. If any provision of this Plan shall for any reason be
invalid or unenforceable, the remaining provisions shall nevertheless remain in
full force and effect.
13
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6.6 Applicable Law. This Plan shall be construed in accordance with and
governed by the laws of the State of Maryland.
14
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ARTICLE VII
SPECIAL RULES FOR PRE-EFFECTIVE DATE EMPLOYEES
7.1 Governing Rules. Notwithstanding anything contained elsewhere in
this Plan to the contrary, the following rules shall apply to Employees who were
employed by Host Marriott Corporation on the date before the Effective Date.
(a) Any election in effect under the Host Marriott Corporation
Executive Deferred Compensation Plan, and the Host Marriott Corporation (HMC)
Retirement and Savings Plan and Trust (the "Prior Profit Sharing Plan") on the
date before the Effective Date shall continue to be effective under this Plan
for the Election Year beginning on or immediately after the Effective Date, and
any compensation taken into account under the Prior Profit Sharing Plan shall be
taken into account under this Plan for purposes of Articles II and IV for the
such Election Year.
(b) Any notification by the administrator under the Host Marriott
Corporation Executive Deferred Corporation Plan as in effect on or prior to the
Effective Date (the "Prior Plan") concerning eligibility to participate in such
plan for the 1999 year shall continue to be effective under this Plan for the
Election Year beginning on or after the Effective Date.
(c) Any service with Host Marriott Corporation prior to the
Effective Date shall be taken into account in determining service with the
Company for purposes of determining years of service under Section 1.17(a)(i).
(d) For purposes of Section 1.17(a)(iii), participation in the Plan
for the 1999 Election Year shall include participation in the Prior Plan for
such year.
(e) Any approved request in effect under the Prior Plan to change
the Participant's manner of distribution of his account shall continue to be
effective under this Plan as if such request had been approved under this Plan.
(f) Any beneficiary designation in effect under the Prior Plan on
the date before the Effective Date shall continue to be effective under this
Plan.
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CERTIFICATE OF SECRETARY
- --------------------------------------------------------------------------------
I, the undersigned secretary of Host Marriott Corporation (the
"Corporation") as General Partner of Host Marriott L.P., do hereby certify that
the attached copy of the Host Marriott, L.P. Executive Deferred Compensation
Plan (the "Executive Plan") and the Host Marriott, L.P. Non-Employee Director
Deferred Compensation Plan (the "Director Plan") is a true and correct copy of
the Plans and that there have been no amendments or modifications to the Plans
that are not reflected in this copy.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of Host Marriott
Corporation as of the 1st day of January, 1999.
------------------------------
Christopher G. Townsend
Secretary
<PAGE>
Exhibit 10.14
AMENDMENT NO. 5 DATED AS OF DECEMBER 18, 1998 TO
DISTRIBUTION AGREEMENT DATED AS OF SEPTEMBER 15, 1993
BETWEEN HOST MARRIOTT CORPORATION
AND MARRIOTT INTERNATIONAL, INC.
Host Marriott Corporation (f/k/a Marriott Corporation, "Host
Marriott"), Marriott International, Inc. ("MII") and Host Marriott Services
Corporation desire to adopt this Amendment to the Distribution Agreement between
Host Marriott and MII dated as of September 15, 1993 (the "Original Agreement,"
and, as amended hereby and by that certain Amendment No. 1 to the Original
Agreement dated as of December 29, 1995, that certain Amendment No. 2 to the
Original Agreement dated as of June 21, 1997, that certain Amendment No. 3 to
the Original Agreement dated as of March 3, 1998 and that certain proposed
Amendment No. 4 to the Original Agreement expected to be entered into after the
date hereof, the "Distribution Agreement").
WHEREAS, by letter dated December 10, 1998, Southeastern Asset
Management, Inc. ("Southeastern"), an investment advisor registered under
Section 203 of the Investment Advisers Act of 1940, advised Host Marriott that
approximately 135 accounts over which Southeastern has either investment
discretion, voting authority, or both, currently own in the aggregate 40,923,400
shares of Host Marriott Common Stock, or approximately 19.97% of the 204,954,447
shares of Host Marriott Common Stock outstanding on the record date for the Host
Marriott Special Meeting held on December 15, 1998 to approve the merger (the
"Merger") of Host Marriott with and into HMC Merger Corporation, a Maryland
corporation to be renamed "Host Marriott Corporation" ("Host REIT") after the
Merger;
WHEREAS, Host Marriott expects that, on the date hereof, its Board of
Directors will declare a special dividend (the "Special Dividend") to
stockholders of record on December 28, 1998 entitling such stockholders to elect
to receive such Special Dividend in the form of cash or Host Marriott Common
Stock; and
WHEREAS, the parties hereto desire to amend the Distribution Agreement
in connection with such Special Dividend.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties hereto hereby agree as follows:
1. Section 6.07 of the Distribution Agreement shall be amended by
adding and reserving for further Amendment subsections (j) and (k) and adding
subsection (l) as follows:
<PAGE>
(j) [Reserved for proposed Amendment No. 4]
(k) [Reserved for proposed Amendment No. 4]
(l) Notwithstanding anything contained in this Section 6.07 or any
other section of this Agreement, Southeastern Asset Management,
Inc. ("Southeastern"), an investment advisor registered under
Section 203 of the Investment Advisers Act of 1940, shall not be
deemed to have triggered the Right if such Right would otherwise
have been triggered until such time (if ever) as it becomes the
Beneficial Owner of a number of shares of Voting Stock in excess
of the sum (the "Maximum Number") of (i) 40,923,400 shares of
Voting Stock plus (ii) such number of shares of Voting Stock
actually acquired by Southeastern through accounts over which it
exercises investment discretion, voting authority or both as the
result of any election (or deemed election) to receive Voting
Stock in payment of the Special Dividend (or, prior to the date
of any such election or deemed election, such number of shares of
Voting Stock which it can elect to receive in payment of the
Special Dividend) declared by Host Marriott on December 18, 1998
to stockholders of record on December 28, 1998 (as the number
representing the sum of (i) and (ii) may be adjusted to give
effect to stock splits, stock dividends, subdivisions,
combinations, reclassifications or similar events, to the extent
appropriate), which dividend payment obligations will be assumed
by HMC Merger Corporation, a Maryland corporation ("Host REIT"),
in connection with the merger of Host Marriott with and into Host
REIT; provided, however, that if at any time after December 28,
-------- -------
1998, Southeastern shall be the Beneficial Owner of a number of
shares of Voting Stock representing less than 20% of the total
voting power of the then outstanding shares of Voting Stock and
if Southeastern shall become at any time thereafter the
Beneficial Owner of a number of shares of Voting Stock
representing 20% or more of the total voting power of the then
outstanding shares of Voting Stock, Southeastern shall thereupon
be deemed to have triggered the Right; provided further, that if
-------- -------
the number of shares of Voting Stock beneficially owned by
Southeastern is reduced to less than 20% of the total voting
power of the then outstanding Voting Stock as a result of
dispositions of Voting Stock in the ordinary course of trading
for its clients' accounts within a five (5) consecutive trading
day period, and Southeastern reacquires the beneficial ownership
of the number of shares so disposed, again in the ordinary course
-2-
<PAGE>
of trading for its clients' accounts, within twenty (20)
consecutive trading days immediately after such five (5) day
trading period, then such reacquisition (subject always to the
Maximum Number) shall not be deemed to have triggered the Right.
Nothing herein is intended to grant, or shall be construed as
granting, to Southeastern, any of its affiliates or any of
Southeastern's funds or accounts a waiver from the ownership
limit (or any provision thereof) under the Charter of Host REIT.
2. Except as specifically amended hereby, the Distribution Agreement
continues in full force and effect without modification and is hereby ratified
and confirmed in all respects.
3. This Amendment may be executed in any number of counterparts,
which, when taken together, shall constitute a single binding instrument.
[signatures appear on the following page]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No. 5 to be
duly executed and delivered as of December 18, 1998.
MARRIOTT INTERNATIONAL, INC.
By:________________________
Name:______________________
Title:_____________________
HOST MARRIOTT CORPORATION
By:________________________
Name:______________________
Title:_____________________
HOST MARRIOTT SERVICES CORPORATION
By:________________________
Name:______________________
Title:_____________________
The undersigned is executing this Amendment for the purpose of acknowledging and
consenting to the provisions hereof.
HMC MERGER CORPORATION
By:________________________
Name:______________________
Title:_____________________
-4-
<PAGE>
Exhibit 10.16
Amendment to the
Distribution Agreement
between
Host Marriott Corporation
and
Host Marriott Services Corporation
WHEREAS, Host Marriott Corporation ("Host Marriott") and Host Marriott
Services Corporation ("Services"), made and entered into a Distribution
Agreement (the "Agreement") as of December 22, 1995;
WHEREAS, Section 11.05 of the Agreement provides that the Agreement
may be amended in writing executed by the parties; and
WHEREAS, Host Marriott intends to enter into certain transactions
pursuant to a plan to reorganize its business operations so that effective as of
January 1, 1999 it will qualify as a "real estate investment trust" under
Sections 856 through 859 of the Internal Revenue Code of 1986, as amended ("Host
REIT Conversion"); and
WHEREAS, the Internal Revenue Code may limit certain payments that may
be received by Host Marriott after the Host REIT Conversion;
NOW, THEREFORE, BE IT
RESOLVED, that the Agreement be, and it hereby is, amended as follows:
1. Section 1.01 shall be amended by adding the following terms and
their definitions:
Code: the Internal Revenue Code of 1986, as amended.
-----
Host REIT Conversion: certain transactions entered into by Host
---------------------
Marriott pursuant to a plan to reorganize its business operations so that it
will qualify as a real estate investment trust as of January 1, 1999.
2. Article XI shall be amended by adding the following new Section
11.15 to the end:
Section 11.15 Limits on Payments to Host Marriott. This Section
-----------------------------------
11.15 shall become effective as of the Host REIT Conversion. Notwithstanding
any other provision of this Agreement to the contrary, the
<PAGE>
payments otherwise to be made by Services to Host Marriott under this Agreement
(the "Required Payments"), shall not exceed (i) the sum of (A) the maximum
amount that can be paid to Host Marriott in any taxable year without causing
Host Marriott to fail to meet the requirements of Code Sections 856(c)(2) and
(3), determined as if the payment of such amount did not constitute income
described in Code Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) ("Qualifying
Income"), as determined by independent accountants to Host Marriott, and (B) in
the event Host Marriott receives a letter from outside counsel (the
"Indemnification Payment Tax Opinion") indicating that Host Marriott has
received a ruling from the IRS holding that Host Marriott's receipt of the
Required Payments otherwise to be paid under this Agreement would either
constitute Qualifying Income or would be excluded from gross income of Host
Marriott within the meaning of Code Sections 856(c)(2) and (3) (the "REIT
Requirements") or that the receipt by Host Marriott of the remaining balance of
the Required Payments to be made under this Agreement following the receipt of
and pursuant to such ruling would not be deemed constructively received prior
thereto, the Required Payments less the amount otherwise paid or payable under
clause (A) above. Services' obligation to pay any unpaid portion of any Required
Payment shall terminate three years from the date such payment otherwise would
have been made but for this Section 11.15. In the event that Host Marriott is
not able to receive the full Required Payment that otherwise would be due under
this Agreement as and when such payments otherwise would be required to be made,
Services shall place the unpaid amount in escrow and shall not release any
portion thereof to Host Marriott unless and until Services, receives either one
of the following: (i) a letter from Host Marriott's independent accountants
indicating the maximum amount that can be paid at that time to Host Marriott
without causing Host Marriott to fail to meet the REIT Requirements or (ii) an
Indemnification Payment Tax Opinion, in either of which events Services shall
pay to Host Marriott the lesser of the unpaid Required Payments or the maximum
amount stated in the letter referred to in (i) above.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Agreement as of December 28, 1998.
HOST MARRIOTT CORPORATION
By:
--------------------------------
Name:
Title:
HOST MARRIOTT SERVICES
CORPORATION
By:
--------------------------------
Name:
Title:
3
<PAGE>
EXHIBIT 10.18
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement") is made and entered into as of
this ___ day of December, 1998 by and among HOST MARRIOTT CORPORATION, a
Delaware corporation ("HM Corporation"), HOST MARRIOTT, L.P., a Delaware limited
partnership ("HM Operating Partnership")(HM Corporation and HM Operating
Partnership being collectively referred to as the "HM Parties"), MARRIOTT
INTERNATIONAL, INC., a Delaware corporation ("Marriott International") and
MARRIOTT WORLDWIDE CORPORATION, a Maryland corporation ("MWC")(MWC and Marriott
International being collectively referred to as the "Marriott International
Parties")
RECITALS
A. HM Corporation, directly and through subsidiaries, is engaged as its
principal business in developing, purchasing, leasing, selling and owning, but
not managing, hotel properties which hotel properties are principally managed by
Marriott International and its subsidiaries and, as additional businesses, the
ownership of restaurants, real estate, office buildings and other real estate
(the "Development and Ownership Business"). Pursuant to its conversion to a
publicly-traded real estate investment trust, HM Corporation will be merged into
HMC Merger Corporation, a newly-formed Maryland corporation (the "Merger"). Upon
the effectiveness of the Merger, HMC Merger Corporation will be renamed Host
Marriott Corporation. In connection with the Merger, substantially all of the
Development and Ownership Business will be transferred to HM Operating
Partnership. HM Corporation will be the sole general partner of and have Control
(as defined herein) over HM Operating Partnership.
<PAGE>
B. Marriott International, directly and through its subsidiaries, is
engaged in the business of lodging operation, management and franchising, senior
living services management, timeshare resort development and operation, and food
and other products procurement and distribution (the "Management Business").
C. HM Corporation (previously known as Marriott Corporation) and
Marriott International are parties to that certain Assignment and License
Agreement dated as of October 8, 1993 (the "Assignment and License Agreement")
under which (i) Marriott Corporation assigned to Marriott International certain
trademark, service mark, trade name and related rights pursuant to Section 2 of
that agreement, and (ii) Marriott International licensed to Marriott Corporation
certain trade name and related rights pursuant to Section 3 of that agreement.
D. Effective upon the Merger, the parties desire to revoke and replace
those portions of the Assignment and License Agreement pursuant to which HM
Corporation was granted a license to use certain Marriott Marks, and to enter
into a new license agreement which shall provide the HM Parties certain limited
rights to use certain of the Marriott Marks in accordance with and subject to
the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions. As used herein, the following terms have the
-----------
meanings set forth below:
"Change of Control" shall mean any of the following: (i) any single
-----------------
Person or group of Persons acting in concert shall have elected a majority of
the board of directors of HM Corporation; (ii) any single Person or group of
Persons acting in
2
<PAGE>
concert, shall have acquired beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934), directly or indirectly, or shall have entered into a contract or
arrangement that, upon consummation, will result in its or their acquisition of,
the power to exercise, directly or indirectly, Control over HM Corporation or HM
Operating Partnership; (iii) HM Corporation ceases to be the sole general
partner of HM Operating Partnership; or (iv) the inability or loss of right of
HM Corporation to exercise Control over HM Operating Partnership.
"Control" shall mean the possession, direct or indirect, of the power
-------
to direct or cause the direction of the management and policies of a Person,
whether through ownership of securities, by contract or otherwise. For purposes
of this Agreement, acting as general partner of a partnership shall be
considered "Control" of such partnership.
"Development and Ownership Business" has the meaning set forth in
----------------------------------
Recital A.
"Dispute" has the meaning set forth in Section 6.
-------
"Expenses" has the meaning set forth in Section 6.
--------
"HM Corporation" has the meaning set forth in the first paragraph of
--------------
this Agreement. For purposes of its execution hereof, HM Corporation is signing
this Agreement in both its capacity as the successor and current party to the
Assignment and License Agreement and as the entity that has merged into HMC
Merger Corporation and is the sole general partner of HM Operating Partnership.
"HM Name" has the meaning set forth in Section 2.
-------
"HM Operating Partnership" has the meaning set forth in Recital A.
------------------------
"HM Parties" means HM Corporation and HM Operating Partnership.
----------
3
<PAGE>
"HM Subsidiaries" means the partnerships and corporations listed on
---------------
Exhibit A that have a Marriott Mark as a part of their partnership or corporate
name as of the date of this Agreement.
"Indemnified Party" has the meaning set forth in Section 6.
-----------------
"Indemnitor" has the meaning set forth in Section 6.
----------
"Infringing Marks" has the meaning set forth in Section 7.
----------------
"License" has the meaning set forth in Section 2.
-------
"LP Name" has the meaning set forth in Section 2.
-------
"Management Business" has the meaning set forth in Recital B.
-------------------
"Marriott International" has the meaning set forth in the first
----------------------
paragraph of this Agreement.
"Marriott International Parties" has the meaning set forth in the first
------------------------------
paragraph of this Agreement.
"Marriott International Indemnitee" has the meaning set forth in
---------------------------------
Section 6.
"Marriott Marks" means any name or mark owned by a Marriott
--------------
International Party, whether registered or unregistered, including but not
limited to CAMELBACK INN, COURTYARD, DESERT SPRINGS, FAIRFIELD, FORUM, MARQUIS,
MARRIOTT, or RESIDENCE INN.
"Person" means any individual, corporation, partnership, association,
------
trust company or other entity or organization, including any government entity
or authority.
"Subsidiary" means, with respect to any Person, (i) any corporation of
----------
which at least a majority in interest of the outstanding voting stock (having by
the terms thereof voting power under ordinary circumstances to elect a majority
of the directors of such corporation, irrespective of whether or not at the time
stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time,
directly or indirectly,
4
<PAGE>
owned or controlled by such Person, by one or more Subsidiaries of such Person,
or by such Person and one or more of its Subsidiaries, or (ii) any non-corporate
entity in which such Person, one or more Subsidiaries of such Person, or such
Person and one or more Subsidiaries of such Person, directly or indirectly, at
the date of determination thereof, has at least a majority ownership interest.
"Sub Names" means the names of those HM Subsidiaries and affiliates as
---------
identified on Exhibit A attached hereto that have a Marriott Mark as a part of
---------
their partnership or corporate name as of the date of this Agreement.
2. Revocation of Prior License and New License to HM Parties.
---------------------------------------------------------
a. Revocation of Prior License. Upon the effectiveness of the
---------------------------
Merger, the terms and conditions of the Assignment and License Agreement
relating to the granting of a license to HM Corporation to use the "Licensed
Marks"(as defined therein), including Section 3 thereof, are revoked and of no
further force or effect. In the event of any conflict between the terms of this
Agreement and the terms of the Assignment and License Agreement relating to the
use of the "Licensed Marks", the terms of this Agreement shall control.
b. License. Upon the effectiveness of the Merger, the Marriott
-------
International Parties hereby grant to the HM Parties a non-exclusive, royalty
free, and worldwide right and license to use certain of the Marriott Marks in
the following limited contexts and purposes, and subject to the conditions
described in Section 2.c below (the "License").
(1) Context. The License to use certain of the Marriott
-------
Marks is limited specifically to the following uses and contexts:
(i) For HM Corporation to use the "Marriott" name
as part of the corporate name "Host Marriott Corporation" (the "HM Name") and
for HM Operating Partnership to use the "Marriott" name as part of the
partnership name "Host Marriott, L.P." (the "LP Name").
5
<PAGE>
(ii) For the HM Subsidiaries to use certain of the
Marriott Marks as part of the Sub Names, as such marks are currently in use by
the HM Subsidiaries as of the date of this Agreement, and further subject to the
following:
(x) The License with respect to the names of
corporate HM Subsidiaries shall expire six (6) months from the date of execution
of this Agreement, by which time the HM Parties shall have caused (or used their
reasonable best efforts to cause and continues to pursue to completion
thereafter) all of the corporate HM Subsidiaries to adopt new names which do not
contain any Marriott Mark;
(y) The HM Parties shall use their reasonable
efforts to cause all of the partnership HM Subsidiaries (other than HM Operating
Partnership) to adopt new names (not incorporating any of the Marriott Marks);
and
(z) In the event the HM Parties cease to have
Control over any HM Subsidiary, the License with respect to such HM Subsidiary
shall cease and terminate.
(iii) For all purposes of this Agreement, the Marriott
Marks shall not be used in a manner other than as part of the HM Name, the LP
Name and the Sub Names.
(2) Purposes. The License to use the Marriott Marks in the
--------
contexts described in Section 2.b(1) is limited specifically to the following
purposes:
(i) The Marriott Marks shall be used as part of the
HM Name, the LP Name and the Sub Names only (x) to identify HM Corporation, HM
Operating Partnership and the HM Subsidiaries for corporate or partnership name
purposes, as further described in Section 2.d below and (y) except as
specifically provided in Section 2.b(2)(ii) below, only in connection with HM
6
<PAGE>
Corporation's, HM Operating Partnership's and the HM Subsidiaries' activities
relating directly to the Development and Ownership Business. With respect to
that portion of the Development and Ownership Business consisting of the
ownership of restaurants, senior living, office buildings and other real estate,
the HM Parties agree that any additional business (i.e. beyond the business
conducted as of the date hereof) in such areas shall not be undertaken by
entities utilizing the Marriott Mark as part of their name, the intent being
that to the extent the HM Parties are engaged in such business as of the date
hereof, they may maintain such business in their current corporate ownership
structure, but that new business in such areas will not utilize in any manner
the Marriott Marks as part of the ownership structure. The License does not
include, and HM Corporation, HM Operating Partnership and the HM Subsidiaries
are not permitted, any use of the Marriott Marks as trademarks or service marks
for any goods or services, or any use of the Marriott Marks in connection with
the operation or management of any business other than the Development and
Ownership Business including, without limitation, any use of the Marriott Marks
in connection with the Management Business or in soliciting agreements from
hotel or other property owners to any HM Party to manage, operate or franchise
hotel, senior living, lodging, office, or timeshare properties.
(ii) Notwithstanding any provision hereof to the
contrary, for purposes of engaging in other businesses outside of the
Development and Ownership Business, any HM Party may do so without violating the
provisions of Section 2.b(2)(i) above, provided such other businesses are
conducted by an entity that does not utilize in any manner whatsoever the
Marriott Marks in its name or the conduct of its business (other than to
identify its corporate affiliation with HM Corporation, HM Operating Partnership
and/or the HM Subsidiaries (as the case may be), solely for the purposes of
satisfying legal requirements (such as SEC statements and other reports and
documents required to be filed with governmental agencies) or describing
corporate ownership for contractual purposes, but in no event for corporate
identification, marketing or solicitation purposes or any other
7
<PAGE>
purpose wherein a Marriott Mark would be used in the context of the identity of
such business that is promoted to the general public).
c. Conditions. The License is subject to the following conditions:
----------
(1) HM Corporation's corporate name remains HOST MARRIOTT
CORPORATION (provided that if HM Corporation changes its corporate structure,
the word "corporation" could be changed as necessary, and with the consent of
Marriott International, not to be unreasonably withheld, to incorporate the
proper legal term for such structure, such as "Host Marriott Trust");
(2) HM Operating Partnership's partnership name remains HOST
MARRIOTT, L.P.;
(3) The majority of all hotels owned by the HM Parties are managed
by, or operated pursuant to franchises granted by, Marriott International or an
entity controlled by Marriott International; and
(4) At least sixty percent (60%) of the gross revenues of the HM
Parties (on a consolidated basis, including gross revenues of subsidiaries and
affiliates as are reported on a consolidated basis), is derived from the
business of developing, purchasing, leasing, selling and owning, but not
managing, hotel properties.
d. Use of the Marriott Marks for Corporate and Partnership
-------------------------------------------------------
Identification Purposes Only. As described above, the only purposes for which
- ----------------------------
the Marriott Marks may be used pursuant to the License (as part of the names of
HM Name, the LP Name and the Sub Names) is for corporate or partnership (as
appropriate) identification of HM Corporation, HM Operating Partnership and the
HM Subsidiaries as entities engaged in the Development and Ownership Business.
Examples of such use include filings with the Securities and Exchange Commission
and other governmental entities, annual reports, invoices, shipping documents,
mailing labels, business cards and stationery, materials distributed to
investors,
8
<PAGE>
and other similar uses where a name is used to identify a corporation
or partnership. Any use of the Marriott Marks (as part of the names of HM Name,
the LP Name and the Sub Names) in any promotional materials or advertising,
including electronic medium such as the Internet, shall be to identify HM
Corporation, HM Operating Partnership and the HM Subsidiaries as entities in the
Development and Ownership Business, and shall not be used to promote any goods
or services.
e. Use of Marriott Marks on the Internet and as a Domain Name. HM
----------------------------------------------------------
Corporation shall be permitted to post materials on the Internet and use the HM
Name as part of a domain name (i.e. www.hostmarriott.com) without violating the
restrictions of Section 2.d, subject to the following:
(1) the materials available to the public at any HM Corporation
produced or sponsored web page, or similar electronic site that is connected to
a domain name using the HM Name (i) are in compliance with the restrictions
contained in this Agreement and (ii) include a notice stating that "MARRIOTT is
a registered trademark of Marriott International, Inc., used pursuant to
license."
(2) such web site shall not be used in any manner to engage in or
conduct activities that constitute the Management Business, including, without
limitation, the making of reservations through or over such web site, provided
however, that such web site may contain a connection (or "link") to the
authorized web sites of Marriott International, Inc. and its Affiliates.
f. Use of Marriott Marks in Facilities Signage. HM Corporation is
-------------------------------------------
permitted to use the HM Name on signage at its corporate offices such as
corporate headquarters or any of its regional offices, provided such corporate
offices are private offices, which are not part of the general public operation
at any lodging (including restaurant), healthcare or retirement facility owned,
developed, managed, operated or franchised by any HM Party. No other use of the
Marriott Marks is permitted on any signage at any other building, with the
9
<PAGE>
exception that the HM Name, the LP Name or the Sub Names, as appropriate, may be
used on postings such as liquor licenses when a statute or regulation requires
the identity of the corporate or partnership owners on the posting.
g. Use of Marriott Marks in Countries Outside the United States. The HM
------------------------------------------------------------
Parties shall not use the Marriott Marks in any country outside the United
States without providing Marriott International with advance notice of such
contemplated use and allowing the Marriott International Parties sufficient time
to take such actions as the Marriott International Parties reasonably deem
necessary to secure, or protect against impairment of, rights in the Marriott
Marks. The HM Parties shall cooperate with the Marriott International Parties in
connection with their efforts to secure and protect rights in the Marriott
Marks. Notwithstanding the foregoing, HM Corporation may continue to use the
Marriott Marks (as part of the HM Name) in countries where it currently
operates, subject to its cooperation with the Marriott International Parties in
connection with their efforts to secure and protect rights in the Marriott
Marks.
h. Restrictions on Use of the Marriott Marks Generally. No HM Party
---------------------------------------------------
shall operate or conduct any business in any form that uses the Marriott Marks,
if such business either (1) is outside the present operating format of the
Development and Ownership Business conducted by HM Corporation as of the date of
this Agreement, (2) expands the manner in which the HM Name, the LP Name and the
Sub Names are currently used, or (3) competes with the Management Business.
i. Prohibition Against Certain Uses of the Marriott Marks. This
------------------------------------------------------
Agreement does not grant to the HM Parties any right or license to use the
Marriott Marks (1) alone or in any' other manner except as expressly allowed
herein, and (2) in any manner in which MARRIOTT is not immediately preceded by
the word "HOST", subject only to the express and limited exceptions for use as
part of the names of HM Name, the LP Name and the Sub Names as noted above.
3. Marriott International's Ownership of Marks.
-------------------------------------------
10
<PAGE>
a. The HM Parties acknowledge, without representation, warranty or
inquiry, that the Marriott International Parties are the exclusive owners of the
Marriott Marks. The HM Parties agree that, except for the right to use the
Marriott Marks as provided in this Agreement, or as provided by Section 22 of
this Agreement, the HM Parties, from and after the date hereof, have no right,
title or interest in or to any of the marks licensed by Marriott International
under the Assignment and License Agreement, and the HM Parties agree, on their
own behalf and on behalf of their Subsidiaries that the license provisions
contained in the Assignment and License Agreement are expressly revoked and
superseded by this Agreement. The HM Parties agree that all uses of the Marriott
Marks and the goodwill associated with such uses shall inure solely to the
benefit of the Marriott International Parties, and upon termination of the HM
Parties rights to use the Marriott Marks as provided in this Agreement, all
right and interest of the HM Parties in and to the Marriott Marks shall revert
fully to the Marriott International Parties.
b. The HM Parties agree to cooperate fully with the Marriott
International Parties in recording appropriate assignment and other documents
evidencing the Marriott International Parties' ownership of the Marriott Marks.
The HM Parties agree to take no action inconsistent with the Marriott
International Parties' ownership of and interest in the Marriott Marks. The
Marriott International Parties agree to cooperate fully with the HM Parties in
recording appropriate documents evidencing the License to the HM Parties.
c. The HM Parties shall not attack the validity of the Marriott Marks,
the Marriott International Parties' ownership thereof, or any of the terms of
this Agreement, or assist any third party in doing any of the same, and the HM
Parties hereby waive any right to contest the validity of the Marriott Marks.
4. Limitations on Use of the Licensed Name. The right to use the
---------------------------------------
Marriott Marks granted to the HM Parties in Section 2 of this Agreement is
expressly subject to the following conditions:
11
<PAGE>
a. All uses of the Marriott Marks, other than any use in effect as of
the date of this Agreement, shall be subject to Marriott International's prior
written approval on the basis of samples submitted by the HM Parties with a
written description of the intended use or uses. If such samples and uses are
approved, they shall be made in strict conformance with such reasonable
specifications or requirements as Marriott International shall establish, as
such specifications or requirements may be modified by Marriott International
from time to time.
b. All displays of the Marriott Marks as permitted hereunder shall bear
such copyright, trademark, service mark and other notices as Marriott
International shall reasonably require, and the HM Parties shall adhere to any
other reasonable and customary posting requirements developed by Marriott
International with respect to the Marriott Marks.
c. The HM Parties shall not use the Marriott Marks (including display
of the HM Name, the LP Name and the Sub Names) as part of or in conjunction
with, any other names or marks except with Marriott International's prior
written approval (which approval shall not be unreasonably withheld) or as
expressly provided in Section 2. Such prior written approval by Marriott
International shall be provided within 15 days after receipt of such requests
from the HM Parties. In the absence of a written disapproval within 15 days, the
use or intended use by the HM Parties shall be presumed to be consistent with
this Agreement.
d. The HM Parties shall not use the Marriott Marks, or any name, term
or design that is confusingly similar to the Marriott Marks, except as expressly
authorized in this Agreement or consented to by Marriott International in
writing, and the HM Parties shall not attempt to register or aid any third party
in using or attempting to register any such name, mark, term or design.
Notwithstanding this subsection or any other section of this Agreement, use by
HM
12
<PAGE>
Corporation of the "HM" service mark (since it does not contain the word
"Marriott") shall not be subject to the terms and conditions of this Agreement.
e. The HM Parties shall not use the Marriott Marks in any manner that
will indicate that they are using such Marriott Marks other than as a licensee
of the Marriott International Parties.
f. The HM Parties shall not use the Marriott Marks in any manner that
will: (1) negatively impact or disparage the image or reputation of the Marriott
International Parties or of HM Corporation, HM Operating Partnership and the HM
Subsidiaries, and/or (2) dilute the distinctiveness of the HM Name, the LP Name
and the Sub Names, or the Marriott Marks.
Any breach of the foregoing provisions may be remedied by the remedies set forth
in (i) Section 10 of this Agreement, and (ii) Section 13 of this Agreement as
applicable.
5. Quality Control.
---------------
a. The Marriott International Parties are familiar with the general
quality of the services now provided by the HM Parties in the Development and
Ownership Business and find, at the present time, the quality of such services
to be acceptable. All activities conducted by HM Corporation, HM Operating
Partnership and the HM Subsidiaries, for so long as their names contain any
Marriott Marks, shall be provided substantially in accordance with the quality
standards of the HM Parties now in place.
b. The HM Parties shall use their reasonable best efforts to ensure
that the Marriott International Parties shall have the right, at reasonable
times and with prior notice, to inspect any facility owned or developed by HM
Corporation, HM Operating Partnership or any of the HM Subsidiaries at any time
for the purpose of determining whether they have met or are meeting the quality
standards required under this Agreement. The HM Parties shall promptly produce
and deliver (at its own expense) to Marriott International such examples of its
use
13
<PAGE>
of the Marriott Marks as the Marriott International Parties shall reasonably
request.
c. Any breach of the foregoing provisions of this Section 5 may be
remedied by the remedies set forth in (i) Section 10 of this Agreement, and (ii)
Section 13 of this Agreement as applicable.
6. Limitation of Liability; Indemnity.
----------------------------------
a. IN NO EVENT SHALL THE MARRIOTT INTERNATIONAL PARTIES BE LIABLE
FOR ANY MATTER WHATSOEVER RELATING TO THE USE BY ANY HM PARTIES OF THE HM NAME,
LP NAME, AND THE SUB NAMES EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN SECTION 6
AND SECTION 7 OF THIS AGREEMENT.
b. The HM Parties shall indemnify, defend and hold harmless the
Marriott International Parties and their respective subsidiaries, affiliates and
their respective employees, representatives, directors, officers and agents
(each, a "Marriott International Indemnitee") from and against any and all
costs, judgments, liabilities and expenses, including, without limitation,
interest, penalties, attorney and third party fees, and all other amounts paid
in the investigation, litigation, defense and/or settlement (collectively,
"Expenses") resulting from any actual or potential claim, demand, dispute,
notice, lawsuit, administrative proceeding or other action (collectively,
"Disputes") that relate in any way to use of the Marriott Marks by the HM
Parties in violation of this Agreement.
c. The Marriott International Parties shall indemnify, defend and
hold harmless the HM Parties and the HM Subsidiaries and their respective
employees, representatives, directors, officers and agents from and against all
Expenses resulting from any Disputes that relate in any way to (i) the provision
or promotion of goods or services by any Marriott International Party under, or
any other usage by such party of, the Marriott Marks, or (ii) the liabilities
14
<PAGE>
and obligations described in subsection 8.c.(iii) of the Assignment and License
Agreement.
d. If any Dispute is asserted against any party that would entitle
such party to indemnification pursuant to Section 6.b or 6.c, any party who
seeks indemnification (the "Indemnified Party") shall give written notice
thereof to the party or parties from whom indemnification is sought (the
"Indemnitor") promptly, but in no event later than thirty (30) days after the
General Counsel of such Indemnified Party receives notice of such Dispute;
provided, however, that the Indemnified Party's failure to give the Indemnitor
- -------- -------
prompt notice shall not bar the Indemnified Party's right to indemnification
unless such failure has materially prejudiced the Indemnitor's ability to defend
such Dispute. The Indemnitor shall have the right to employ counsel reasonably
acceptable to the Indemnified Party to defend any such Dispute and to
compromise, settle or otherwise dispose of the same, if the Indemnitor deems it
advisable to do so, at the sole cost and expense of the Indemnitor; provided,
--------
however, the Indemnitor shall not settle or consent to the entry of any judgment
- -------
in any Dispute without first obtaining (i) an unconditional release of the
Indemnified Party from all liability with respect to all claims underlying such
Dispute and/or (ii) the prior written consent of the Indemnified Party, such
consent not to be unreasonably withheld, conditioned or delayed. Each Indemnitor
and each Indemnified Party will fully cooperate with each other in any such
Dispute and shall make available to each other any books or records useful for
the defense of any such Proceeding.
7. Infringement Proceedings. The Marriott International Parties shall
------------------------
take those steps they deem necessary, in their reasonable judgment, to protect
their rights and interest in the Marriott Marks. Promptly upon receiving notice
or knowledge thereof, the HM Parties shall provide Marriott International with
written notice of any unauthorized use or potentially infringing use by third
parties of the Marriott Marks, or of the HM Name, the LP Name or the Sub Names,
or any confusingly similar trademarks, service marks, trade names, terms or
designs
15
<PAGE>
(collectively "Infringing Marks") which comes to their attention. The Marriott
International Parties shall have the right, in their sole discretion and at
their sole cost and expense, to commence infringement, unfair competition or
other actions regarding any such use by third parties of any Infringing Marks.
The HM Parties shall cooperate with and assist Marriott International in its
investigation and prosecution of any of the foregoing. In the event that the
Marriott International Parties decline to commence such an action with respect
to the Marriott Marks or the HM Name, the LP Name or the Sub Names or any
confusingly similar mark, the HM Parties may commence, at the HM Parties' sole
cost and expense, such an action in its capacity as a licensee of such Marriott
Marks; provided, however, that the HM Parties must obtain the prior written
-------- -------
approval of Marriott International regarding commencement of such action, such
consent not to be unreasonably withheld. Notwithstanding the foregoing to the
contrary, Marriott International retains the right, in its sole discretion, to
control the prosecution of such action by the HM Parties. If at any time
Marriott International concludes, in its reasonable judgment, that the
prosecution of such action might impair or in any way diminish the Marriott
International Parties' rights or interests in or to the name or mark(s) at issue
in such action, Marriott International may withdraw its prior consent. In any
action commenced by the HM Parties pursuant to this Section, the HM Parties
shall keep Marriott International fully and timely informed of any development
in such action and upon request, the HM Parties shall provide to Marriott
International any copies of documents related to such action. In any such
action, the HM Parties shall not consent to the entry of any judgment in such
action or agree to settle such action, in whole or in part, without obtaining
the prior written approval of Marriott International. Nothing in this section
shall prevent the HM Parties from protecting their own rights to tradenames or
marks that do not involve the Marriott Mark, such as protecting their rights to
the "Host" name, or, in the event Marriott International declines to prosecute
an action with respect to the infringement of the HM Name, the LP Name or the
Sub Names, to take such actions as the HM Parties deem necessary to protect its
rights to such names.
16
<PAGE>
8. Relationship of Parties. Nothing in this agreement shall be construed
-----------------------
to create any relationship among the parties of agency, partnership, or joint
venturer or render any party liable for any debts or obligations incurred by any
other party hereto. No party is authorized to enter into agreements for or on
behalf of any other party hereto, to collect any obligation due or owed to any
such party, or to bind any other party in any manner whatsoever.
9. Assignment and Sublicense. No HM Party may assign any rights under this
-------------------------
Agreement or sublicense any rights to use the Marriott Marks, or the HM Name,
the LP Name or the Sub Names, in whole or in part, to any party without the
prior written consent of Marriott International (which consent may be withheld
in the sole discretion of Marriott International). Upon any assignment or
sublicense entered into in accordance with this Section 9, such assignee or
sublicensee shall enter into an assignment or sublicense agreement with the HM
Parties, in a form reasonably satisfactory to Marriott International, pursuant
to which such assignee or sublicensee agrees to comply with, and be bound by,
the terms of this Agreement and acknowledges the status of Marriott
International as an intended third party beneficiary of such assignment or
sublicense agreement. If requested by Marriott International, such assignee or
sublicensee shall also execute an instrument or instruments pursuant to which
such assignee or sublicensee shall be bound by, and become a party to, this
Agreement. Any purported assignment or sublicense by either of the HM Parties
not in compliance with the terms of this Agreement shall be null and void.
Subject to the foregoing, this Agreement shall be binding upon and inure to the
benefit of the parties and their successors and assigns. No third party
beneficiaries are intended by execution and delivery of this Agreement.
10. Termination of License; Change of Control. This Agreement shall at
-----------------------------------------
all times remain in full force unless terminated for a reason specified in and
in accordance with this Section 10. Marriott International may:
17
<PAGE>
a. terminate the License, upon thirty (30) days written notice to the
HM Parties, upon a Change of Control; or
b. terminate the License, immediately upon notice, if either of the HM
Parties becomes insolvent, files for bankruptcy, reorganization, liquidation,
dissolution, or receivership, is adjudicated bankrupt or takes the benefit of
any act in force or legally permissible procedure for the relief of insolvent
debtors; or
c. terminate the License, immediately upon notice, if either of the HM
Parties, or any HM Subsidiary, attempts to sell, assign, license, sublicense or
otherwise transfer any or all rights to use Marriott Marks in violation of this
Agreement; or
d. terminate the License, upon sixty (60) days written notice to the HM
Parties, if either of the HM Parties breaches any term of this Agreement,
provided that if the breaching HM Party cures such breach within sixty (60) days
following such written notice by Marriott International, then such termination
shall not be effective; or
e. terminate the License, upon thirty (30) days written notice to the
HM Parties, upon the failure of either of the HM Parties to satisfy any of the
conditions contained in Section 2.c hereof, provided that if the breaching HM
Party satisfies such condition within thirty (30) days following such written
notice by Marriott International, then such termination shall not be effective.
The HM Parties hereby agree to notify Marriott International in writing
immediately upon the occurrence of an event constituting a Change of Control or
failure to satisfy a condition contained in Section 2.c hereof.
11. Effect of Termination.
---------------------
a. For a period of one hundred eighty (180) days after the termination
of this Agreement, HM Corporation, HM Operating Partnership and the HM
Subsidiaries shall be entitled to continue to use the Marriott Marks in
18
<PAGE>
accordance with the terms of this Agreement, but only for the purpose of
effecting an orderly transition to the use of new names. Upon the expiration of
such one hundred eighty (180) day period, the HM Parties shall:
(i) Immediately discontinue use of the Marriott Marks, refrain
from using any marks, terms or designs similar or confusingly similar to the
Marriott Marks, and no longer possess any right or interest in the Marriott
Marks; and
(ii) If the Marriott International Parties require, cooperate with
the Marriott International Parties to apply to the appropriate authorities to
cancel from all governmental records the recording of this Agreement or
recording the HM Parties as a registered user; and
(iii) Already have taken all steps necessary to change each of the
HM Name, the LP Name and the Sub Names to a name that does not contain any of
the Marriott Marks or anything similar thereto.
b. In the event of any termination of this Agreement, the License
granted hereunder shall be terminated pursuant to Section 10 with respect to all
uses of the Marriott Marks by all of the HM Parties and the HM Subsidiaries,
regardless of the cause of the termination.
c. Notwithstanding any termination of this Agreement, (1) the
provisions of Sections 3.c, 4.d, 6, and 13 of this Agreement shall remain in
full force and effect in perpetuity and (2) the provisions of Section 11 of this
Agreement shall remain in effect until satisfied in full.
12. Severability. The invalidity or partial invalidity or unenforceability
------------
of any provision of this Agreement shall not affect the validity or
enforceability of any other provisions.
13. Remedies.
--------
a. The HM Parties, on the one hand, and the Marriott International
Parties, on the other hand, acknowledge and agree that money
19
<PAGE>
damages would be inadequate relief for any breach or threatened breach by the
other of its obligations hereunder, and that upon such breach, the non-breaching
party or parties, as the case may be, shall be entitled to injunctive or other
equitable relief for any breach or threatened breach thereof.
b. The HM Parties acknowledge that a failure of HM Corporation, HM
Operating Partnership and the HM Subsidiaries to cease use of the Marriott Marks
and the HM Name, the LP Name and the Sub Names after termination of this
Agreement, its use of the Marriott Marks or the HM Name, the LP Name or the Sub
Names in any way that negatively impacts or disparages the Marriott Marks, or
its attempt to assign any of its rights in violation of this Agreement will
result in immediate and irreparable damage to Marriott International. The HM
Parties acknowledge and admit that there is no adequate remedy at law for such
breaches of this Agreement, and the HM Parties agree that in the event of such
breaches (individually or collectively), Marriott International shall be
entitled to equitable relief by way of a preliminary injunction and such other
relief as any court with jurisdiction may deem just and proper.
14. Choice of Law. This Agreement shall be construed under and enforced
-------------
in accordance with the laws of the State of Maryland.
15. Attorneys' Fees. If any party commences an action against the other
---------------
with respect to this Agreement, the prevailing party in such action shall be
entitled to an award of reasonable costs and expenses of litigation, including
reasonable attorneys' fees, to be paid by the non-prevailing party.
16. Entire Agreement. This Agreement constitutes the entire agreement
----------------
and understanding among the parties with respect to its subject matter, is
intended as a complete and exclusive statement of the terms of their agreement,
and supersedes any prior or contemporaneous agreement or understanding related
to the subject matter hereof.
20
<PAGE>
17. Amendments. This Agreement may not be amended, supplemented or
----------
modified in any respect except by written agreement among the parties, duly
signed by their respective authorized representatives.
18. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all such
counterparts together shall constitute but one and the same instrument.
19. Waiver. The HM Parties may waive any breach of this Agreement by
------
Marriott International and Marriott International may waive any breach of this
Agreement by the HM Parties; provided, however, that no such waiver shall be
-------- -------
deemed effective unless in writing, signed by the waiving party, and
specifically designating the breach waived. No waiver shall constitute a
continuing waiver of similar or other breaches.
20. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be delivered by hand, by facsimile or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other addresses for a party as shall be specified by like
notice) and shall be deemed given on the date on which such notice is received:
If to the HM Parties:
Host Marriott
10400 Fernwood Road
Washington, D.C. 20058 (registered or certified mail)
Bethesda, Maryland 20817 (express mail or courier)
Attention: General Counsel
Dept. 72/923
FAX NO. (301) 380-3588
21
<PAGE>
If to one or more of the Marriott International Parties:
Marriott International, Inc.
One Marriott Drive
Washington, D.C. 20058 (registered or certified mail)
Attention: General Counsel
Dept. 52/923
FAX NO. 301/380-6727
or
10400 Fernwood Road
Bethesda, Maryland 20817 (express mail or courier)
Attention: General Counsel
Dept. 52/923
FAX NO. 301/380-6727
or to such other address as one party may designate to the other by written
notice given in accordance with this Section 20.
21. Further Assurances. The parties hereto hereby covenant and agree to
------------------
execute and deliver all such documents, make such government filings, and to do
or cause to be done all such acts or things as may be necessary to complete and
effect the transactions contemplated hereby.
22. Other Agreements. The parties acknowledge that they have entered into
----------------
franchise and management agreements regarding specific properties, and various
agreements with specific partnership HM Subsidiaries, and that such franchise,
management and other agreements may grant certain rights to use the Marriott
Marks in connection with their respective properties. Nothing in this Agreement
shall be construed to limit or expand the rights granted under such agreements.
22
<PAGE>
23. Headings. The descriptive headings of the several sections of this
--------
Agreement are for convenience only and do not constitute a part of the Agreement
or affect its meaning or interpretation.
24. No Undue Influence. This Agreement is executed voluntarily and without
------------------
any duress or undue influence on the parties or their officers, employees,
agents, or attorneys, and no party is relying on any inducement, promises or
representations made by any other party or any of its officers, employees,
agents or attorneys other than as set forth herein. The parties hereto
acknowledge that they have been represented in the negotiations for and in the
preparation of this Agreement by counsel, that they have had this Agreement
fully explained to them by such counsel, and that they are aware of the contents
of this Agreement and of its legal effect.
23
<PAGE>
IN WITNESS WHEREOF, a duly authorized representatives of each
party has executed this Agreement as of the date first written above.
HOST MARRIOTT CORPORATION
By:
-----------------------------
Its:
--------------------------
MARRIOTT INTERNATIONAL, INC.
By:
-----------------------------
Its:
--------------------------
MARRIOTT WORLDWIDE CORPORATION
By:
-----------------------------
Its:
--------------------------
HOST MARRIOTT, L.P.
By: Host Marriott Corporation, general partner
By:
-----------------------------
Its:
--------------------------
24
<PAGE>
STATE OF MARYLAND )
COUNTY OF MONTGOMERY ) ss:
Before me, a Notary Public, in and for said County and State,
on this day personally appeared____________ , the____________ of Host Marriott
Corporation, known to me as the person whose name is subscribed to the foregoing
instrument.
Given under my hand and seal this __ day of ___________, 1998.
---------------------
Notary Public
My commission Expires:
---------------------
STATE OF MARYLAND )
COUNTY OF MONTGOMERY ) ss:
Before me, a Notary Public, in and for said County and State,
on this day personally appeared_________________ , the______________ of Marriott
International, Inc., known to me as the person whose name is subscribed to the
foregoing instrument.
Given under my hand and seal this__ day of__ , 1998.
-------------------
Notary Public
My Commission Expires:
25
<PAGE>
STATE OF MARYLAND )
COUNTY OF MONTGOMERY ) ss:
Before me, a Notary Public, in and for said county and state,
on this day personally appeared__________ , the____________ of Marriott
Worldwide Corporation, known to me as the person whose name is subscribed to the
foregoing instrument.
Given under my hand and seal this ___ day of __________, 1998.
----------------------------------
Notary Public
My Commission Expires:
-------------
STATE OF MARYLAND )
COUNTY OF MONTGOMERY ) ss:
Before me, a Notary Public, in and for said County and State,
on this day personally appeared______________ , the______________ of Host
Marriott Corporation, known to me as the person whose name is subscribed to the
foregoing instrument.
Given under my hand and seal this ____ day of ___________ 1998.
----------------------------------
Notary Public
My Commission Expires:
---------------------
26
<PAGE>
EXHIBIT A
SUBSIDIARIES
------------
(those marked by an asterisk are those which appear to have Marriott Marks)
1.) Beachfront Properties, Inc.
2.) Bossier RIBM Two LLC
3.) Bossier RIBM Two, Inc. (Non-consolidated)
4.) CBM Associates II, LLC
5.) CBM Funding Corporation
6.) CBM One Corporation
7.) CBM One Holdings, Inc.
8.) CBM Two Corporation
9.) CRF Lodging I, Inc.
* 10.) Courtyard II Associates Management Corporation
* 11.) Courtyard II Finance Company
13.) DS Hotel LLC
14.) Durbin LLC
15.) FGI Financing I Corporation
16.) Farrell's Ice Cream Parlour Restaurants, Inc.
*18.) Forum Alpha Investments, Inc. (being renamed Crestline Alpha
Investments, Inc.)
*19.) Forum Delaware, Inc. (being renamed Crestline Delaware, Inc.)
*20.) Forum Group, Inc. (being renamed Crestline Group, Inc.)
*21.) Forum Ohio Healthcare, Inc. (being renamed Crestline Ohio Healthcare,
Inc.)
*22.) Forum Pueblo Norte, Inc. (being renamed Crestline Pueblo Norte, Inc.)
*23.) Forum Retirement, Inc. (being renamed Crestline Retirement, Inc.)
*24.) Forum of Kentucky, Inc. (being renamed Crestline of Kentucky, Inc.)
25.) G.L. Insurance Corporation
26.) HMA-GP, Inc.
27.) HMC Airport, Inc.
28.) HMC Atlanta LLC
29.) HMC BN Corporation
30.) HMC Boynton Beach, Inc.
31.) HMC California Leasing Corp.
32.) HMC Capital Corporation
33.) HMC Capital LLC
34.) HMC Capital Resources Corp.
35.) HMC Chicago LLC
36.) HMC Desert LLC
37.) HMC Diversified LLC
38.) HMC East Side Financial Corporation
39.) HMC East Side, Inc.
40.) HMC Gateway, Inc.
<PAGE>
41.) HMC Hanover LLC
42.) HMC Hartford, Inc.
43.) HMC Hotel Development Corporation
44.) HMC Leisure Park Corporation
45.) HMC Manhattan Beach, Inc.
46.) HMC Merger Corporation
47.) HMC Mexpark, Inc.
48.) HMC NGL, Inc.
49.) HMC Naples Golf, Inc.
50.) HMC Partnership Holdings, Inc.
51.) HMC Partnership Properties LLC
52.) HMC Pavilion, Inc.
53.) HMC Polanco, Inc.
54.) HMC Potomac LLC
55.) HMC Properties I LLC
56.) HMC Properties II LLC
57.) HMC Real Estate LLC
58.) HMC Retirement Properties, Inc.
59.) HMC SFO LLC
60.) HMC SFO, Inc.
61.) HMC Seattle LLC
62.) HMC Ventures, Inc.
63.) HMC Waterford, Inc.
64.) HMC Westport Corporation
65.) HMH General Partner Holdings, Inc.
*66.) HMH HPT Courtyard, INC..
*67.) HMH HPT Residence Inn, Inc.
68.) HMH Marina LLC
69.) HMH Marina, Inc.
70.) HMH Norfolk, Inc.
71.) HMH Pentagon Corporation
72.) HMH Pentagon LLC
73.) HMH Properties, Inc.
74.) HMH Realty Company, Inc.
75.) HMH Restaurants, Inc.
76.) HMH Rivers, Inc.
77.) HMH WTC LLC
78.) HMH WTC, Inc.
79.) HMP Capital Ventures, INC.
80.) HMP Financial Services Corporation
81.) HMP Sandalwood Holdings, Inc.
82.) Hanover Hotel Acquisition Corp.
83.) Host Airport Hotels, Inc.
84.) Host LaJolla, Inc.
*85.) Host Marriott Corporation
<PAGE>
*86.) Host Marriott Financial Trust
*87.) Host Marriott Hospitality, Inc.
88.) Hot Shoppes, Inc.
89.) Hotel Properties Management, Inc.
90.) LTJ Senior Communities Corporation
91.) MDSM Finance LLC
92.) MHP Acquisition Corp.
93.) MHP II Acquisition Corp.
94.) MOHS Corporation
95.) Marina Hotel LLC
*96.) Market Street Marriott LLC
*97.) Marriott Condominium Development Corporation
*98.) Marriott DSM LLC
*99.) Marriott Desert Springs Corporation
*100.) Marriott FIBM One Corporation
*101.) Marriott Family Restaurants, Inc. of Illinois (being renamed MFR of
Illinois LLC)
*102.) Marriott Family Restaurants, Inc. of Vermont (being renamed MFR of
Vermont LLC)
*103.) Marriott Family Restaurants, Inc. of Wisconsin (being renamed MFR of
Wisconsin, LLC)
*104.) Marriott Financial Services, Inc.
*105.) Marriott Hanover Hotel Corporation
*106.) Marriott MDAH One Corporation
*107.) Marriott MHP Two Corporation
*108.) Marriott Marquis Corporation
*109.) Marriott PLP Corporation
*110.) Marriott Park Ridge Corporation
*111.) Marriott Properties, Inc.
*112.) Marriott RIBM Three Corporation
*113.) Marriott RIBM Two Corporation
*114.) Marriott Realty Sales, Inc.
*115.) Marriott SBM One Corporation
*116.) Marriott SBM Two Corporation
*117.) Marriott SBM Two LLC
*118.) Marriott's Bickford's Family Fare, Inc.
*119.) Marriott/Portman Finance Corporation (non-consolidated)
120.) PM Financial Corporation
121.) PRM Corporation
122.) Panther GenPar, Inc.
123.) Park Ridge L.L.C.
124.) Philadelphia Airport Hotel Corporation
125.) Philadelphia Market Street Hotel Corporation
126.) RIBM One Corporation
127.) S.D. Hotels, Inc.
<PAGE>
128.) SFM Finance Corporation
*129.) Saga Property Leasing Corporation
*130.) Saga Restaurants, Inc.
*131.) San Diego Marriott Marina LLC
132.) Sparky's Virgin Islands, Inc.
133.) Tecon Hotel Corporation
134.) Willmar Distributors LLC
135.) Willmar Distributors, Inc.
136.) YBG Associates LLC
PARTNERSHIPS
------------
Atlanta Marriott Marquis Limited Partnership
Camelback Inn Associates Limited Partnership
Courtyard by Marriott Limited Partnership
Courtyard by Marriott II Limited Partnership
Desert Springs Marriott Limited Partnership
Fairfield Inn by Marriott Limited Partnership
Forum Retirement Communities I, L.P.
Forum Retirement Communities II, L.P.
Forum Retirement Partners, L.P.
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Marriott Residence Inn Limited Partnership
Marriott Residence Inn II Limited Partnership
Marriott Residence Inn USA Limited Partnership
Marriott Suites Limited Partnership
Mutual Benefit/Marriott Hotel Associates I Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Times Square Marquis Hotel, L.P.
Wellsford-Marriott Park Ridge Hotel Limited Partnership
<PAGE>
Exhibit 10.19
NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT ("Agreement") is made and entered into as of
December 28, 1998, between and among HOST MARRIOTT CORPORATION, a Delaware
corporation ("HMC"), HOST MARRIOTT, L.P., a Delaware limited partnership (the
"Operating Partnership," together with HMC "Host"), CRESTLINE CAPITAL
CORPORATION, a Maryland corporation ("CCC"), FERNWOOD HOTEL ASSETS, INC., a
Delaware corporation ("Fernwood") and ROCKLEDGE HOTEL PROPERTIES, INC., a
Delaware corporation ("Rockledge"). As used in this Agreement, the terms
"Host," "CCC," "Fernwood" and "Rockledge" shall mean Host, CCC, Fernwood and
Rockledge, respectively, and their respective Subsidiaries and Affiliates (as
such terms are defined in Section 1).
WHEREAS, in connection with (i) the lease of substantially all of the full-
service hotels owned by Host, and the sublease of certain limited-service hotels
leased by Host from third parties, to CCC (each, a "Hotel Lease" and, together,
the "Hotel Leases") and (ii) the lease by Fernwood or Rockledge to CCC of
certain furniture, furnishing, fixtures, soft goods, case goods, equipment and
other similar items for use in the hotels ("FF&E") under certain leases entered
into in connection with the Hotel Leases (the "FF&E Leases"), in each case as
part of the REIT Conversion (as defined in Section 1), Host, CCC, Fernwood and
Rockledge have agreed to enter into this Agreement; and
WHEREAS, as of the date hereof, CCC's principal business consists of owning
the Senior Living Community Business, the Hotel Leasing Business, the Asset
Management Services Business and the Swissotel Management Company Interest (as
such terms are defined in Section 1); and
WHEREAS, as of the date hereof, Host's principal business consists of
owning the Host Business and the Non-Controlled Subsidiary Interests (as such
terms are defined in Section 1).
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, in the Hotel Leases and the FF&E Leases, and in the related
agreements entered into pursuant to or related to the Hotel Leases or the FF&E
Leases, and for other valuable consideration, the receipt and sufficiency of
which are hereby mutually acknowledged, Host, CCC, Fernwood and Rockledge agree
as follows:
<PAGE>
ARTICLE ONE
DEFINITIONS
1. Definitions.
The following terms when used herein shall have the meanings set forth
below:
"Affiliates" shall mean any Person directly or indirectly controlling or
----------
controlled by, or under direct or indirect common control with, Host, Fernwood,
Rockledge or CCC, as the case may be. For purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, through the
ownership of voting securities, by contract, or otherwise. Notwithstanding the
foregoing, (i) Host's Affiliates shall not include CCC, Marriott International,
Inc., Fernwood, Rockledge or any other Non-Controlled Subsidiary, or their
respective Subsidiaries or Affiliates, (ii) CCC's Affiliates shall not include
Host, Marriott International, Inc., Fernwood, Rockledge or any other Non-
Controlled Subsidiary or their respective Subsidiaries or Affiliates, (iii)
Fernwood's Affiliates shall not include Host, CCC, Marriott International, Inc.,
Rockledge or any other Non-Controlled Subsidiary, or their respective
Subsidiaries or Affiliates and (iv) Rockledge's Affiliates shall not include
Host, CCC, Marriott International, Inc., Fernwood or any other Non-Controlled
Subsidiary, or their respective Subsidiaries or Affiliates.
"Asset Management Services Business" means the provision of asset
----------------------------------
management services to owners of hotels, including without limitation, (i)
administration of contracts, (ii) review of operating and financial results,
financial statements, budgets, revenue projections and capital spending plans
with hotel managers and owners, (iii) administration of facility loans, (iv)
negotiation of third party management arrangements, (v) assessment of market
conditions, (vi) negotiation of regulatory issues and (vii) provision of advice
and information in connection with acquisitions or dispositions of hotels.
"Carried Interest" shall mean with respect to any Person (the "Paying
----------------
Person"), any right of another Person (by reason of its status as a general
partner, sponsor or otherwise) (the "Recipient Person") either (i) to receive a
specific portion of the earnings or assets of the Paying Person once other
investors in the Paying Person have received an agreed upon return on their
investment in the Paying Person or (ii) to receive payments or other
distributions which are disproportionate to the Recipient Person's investment in
the Paying Person.
"CCC" shall have the meaning set forth in the first paragraph of this
---
Agreement.
-2-
<PAGE>
"CCC Managed Hotel" shall have the meaning given to it in the definition of
-----------------
"Permitted Operating Lease."
"Code" shall mean the Internal Revenue Code of 1986, as amended.
----
"Compete" shall mean (i) to conduct or participate or engage in, or bid
-------
for, or otherwise pursue, a business, whether as a principal, sole proprietor,
partner, stockholder, or agent of, or consultant or lender to, or manager for,
any Person or in any other capacity, or (ii) to have any ownership or financial
interest in any Person or business which conducts, participates or engages in,
or bids for, or otherwise pursues, a business, whether as a principal, sole
proprietor, partner, stockholder, or agent of, investor in, or consultant or
lender to or manager for, any Person or in any other capacity.
"FF&E" shall have the meaning set forth in the second paragraph of this
----
Agreement.
"FF&E Leases" shall have the meaning set forth in the second paragraph of
-----------
this Agreement.
"Fernwood" shall have the meaning set forth in the first paragraph of this
--------
Agreement.
"Franchise Business" shall mean the ownership or operation of any single or
------------------
multiple full-service hotel management or franchise system operating under one
or more common brand names. Without otherwise expanding the definition of
"Franchise Business," the term "Franchise Business" shall not include (i) the
operation of hotels, whether owned by CCC or otherwise, pursuant to a franchise
or similar license agreement with the owner or operator of the brand name as
long as such owner or operator is not CCC, including the operation of full-
service hotels owned by owners other than CCC pursuant to leases or management
agreements, (ii) any business or activity with respect to limited-service hotels
or (iii) any asset management activities undertaken with respect to hotels for
the owners of such hotels.
"Host" shall have the meaning set forth in the first paragraph of this
----
Agreement.
"Host Business" shall mean the business of owning, investing in, lending
-------------
money to, or otherwise financing, full-service hotels, including without
limitation the Initial Hotels, acquiring additional existing and newly developed
full-service hotels, developing and constructing for ownership by Host full-
service hotels, and improving and expanding the Initial Hotels and any
additional full-service hotels in which Host acquires an interest. The term
"Host Business" shall not include, without limitation, (i) any business or other
activity with respect to limited-service hotels or (ii) any business or other
activity with respect to full-service hotels other
-3-
<PAGE>
than the acquisition, development or ownership of full-service hotels or equity
interests therein.
"Host REIT" shall mean HMC Merger Corporation, a Maryland corporation into
---------
and with which HMC will merge as part of the REIT Conversion.
"Hotel Lease" shall have the meaning set forth in the second paragraph of
-----------
this Agreement.
"Hotel Leasing Business" means the business of any Person of leasing, as
----------------------
the tenant or subtenant, limited-service or full-service hotel properties from a
REIT pursuant to a lease under which the rental payments made by such Person to
the lessor qualify as "rents from real property" within the meaning of Section
856(d) of the Code where such Person will not be the operator or manager of such
hotel (other than through a contractual arrangement with a third-party manager
that is not an Affiliate of such Person). Without otherwise expanding the
foregoing, the term "Hotel Leasing Business" shall not include any lease of a
limited-service or full-service hotel property (i) from a lessor that is not a
REIT, (ii) from a lessor that is a REIT but pursuant to a lease under which the
rental payments made to the lessor do not qualify as "rents from real property"
within the meaning of Section 856(d) of the Code, or (iii) where the lessee (or
any Affiliate of the lessee) will be the operator or manager of such hotel
(other than through a contractual arrangement with a third-party manager that is
not an Affiliate of the lessee).
"Hotel Management Business" means the business of managing, operating or
-------------------------
franchising limited-service or full-service hotel properties on behalf of third
parties with respect to matters incident to the operation of such properties
including, without limitation, management services with respect to food,
beverages, housekeeping, laundry, vending, plant and equipment operation and
maintenance, grounds care, gift or merchandise shops within such properties,
reservations, sales and marketing services, conference and meeting facilities,
health rooms, swimming and other sports facilities and all other services
related to the operation of such hotel properties.
"Initial Hotels" shall mean the full-service hotels operated primarily
--------------
under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names
in which Host will initially have controlling interests or own outright
following the REIT Conversion, as set forth on Schedule A hereto.
----------
"Lease Term" shall mean the period commencing on the lease commencement
----------
date and ending on the initial expiration date of the lease, or, in the case of
any extension or renewal of any lease which may be exercised solely at the
lessee's option (other than renewals or extensions which provide for rent at
then prevailing fair market rental rates), the expiration of the extension or
renewal period.
-4-
<PAGE>
"Leased Hotel Equity Value" shall mean for a hotel the Leased Hotel Present
-------------------------
Value of such hotel less the outstanding third party debt (provided by lenders
unrelated to the owner of the hotel) with respect to such hotel at the
commencement of the Lease Term or reasonably anticipated at such time to become
outstanding. For purposes of the foregoing, any debt that is secured directly
by the hotel, incurred by the owner of the hotel, or directly or indirectly
secured by an equity interest in the entity owning the hotel shall be taken into
account.
"Leased Hotel Present Value" shall mean the estimated total economic
--------------------------
benefit to be derived from the leased property during the Lease Term, which
shall equal the sum of (1) the present value (calculated by applying a discount
factor which is appropriate in light of the leased property's condition and
overall market conditions at the time of determination of such economic value)
of the projected total net operating income from the leased property for the
Lease Term (before any deductions for rental payments to be made under the lease
and before any deductions for debt service on the hotel or of the tenant or
subtenant, but after any deductions for base management fees (but without
deduction for "incentive management fees" that are based upon operating profit
of the hotel or proceeds from the sale or refinancing of the hotel)) and (2) the
present value (calculated by applying a discount factor which is appropriate in
light of the leased property's condition and overall market conditions at the
time of determination of such economic value) of the projected residual value of
the leased property at the expiration of the Lease Term, computed by applying a
capitalization rate which is appropriate in light of the leased property's
expected condition and overall market conditions as of such date to the
projected annual net operating income (before any deductions for rental payments
to be made under the lease, and before any deductions for debt service on the
hotel or of the tenant or subtenant, but after deduction for any base management
fees that a buyer of the hotel would be required to assume (or if greater, an
imputed reasonable market-level base management fee) (but without any deduction
for "incentive management fees" that are based upon the operating profit of the
hotel or proceeds from a sale or refinancing of the hotel)) as of the last day
of the Lease Term.
"Managed Hotel Equity Value" shall mean, with respect to any CCC Managed
--------------------------
Hotel, the Managed Hotel Present Value of such hotel less the third party debt
(provided by lenders unrelated to the owner of the hotel) outstanding (or
reasonably contemplated to become outstanding) with respect to such hotel at the
commencement of the Management Agreement Term (computed as of the time specified
in the specific provision of this Agreement where the term is being used). For
purposes of the foregoing, any debt that is secured directly by the hotel,
incurred by the owner of the hotel, or directly or indirectly secured by an
equity interest in the entity owning the hotel shall be taken into account.
"Managed Hotel Present Value" shall have the meaning given to it in
---------------------------
subsection (ii) of the definition of "Permitted Full-Service Management
Agreement"
-5-
<PAGE>
(computed as of the time specified in the specific provision of this Agreement
where the term is being used).
"Management Agreement Term" shall have the meaning given to it in the
-------------------------
definition of "Permitted Full-Service Management Agreement."
"Merger" shall mean the merger of HMC with and into Host REIT as part of
------
the REIT Conversion.
"1998 Noncompetition Agreement" shall have the meaning set forth in Section
-----------------------------
4.1.B. hereof.
"Non-Controlled Subsidiary" shall mean any taxable corporation, including
-------------------------
without limitation Fernwood and Rockledge, in which the Operating Partnership
owns, directly or through a Subsidiary, more than fifty percent (50%) of the
economic interest but which the Operating Partnership, either directly or
through a Subsidiary, does not control. For purposes of this definition,
"control," when used with respect to any Non-Controlled Subsidiary, means the
power to direct the management and policies of such Non-Controlled Subsidiary,
directly or indirectly, through the ownership of voting securities, by contract,
or otherwise.
"Non-Controlled Subsidiary Interests" shall mean the economic interests
-----------------------------------
held by the Operating Partnership, either directly or through a Subsidiary, in
the Non-Controlled Subsidiaries.
"Operating Partnership" shall have the meaning set forth in the first
---------------------
paragraph of this Agreement.
"Permitted Full-Service Lease" shall mean either a Permitted REIT Lease or
----------------------------
a Permitted Operating Lease.
"Permitted Full-Service Management Agreement" shall mean a management
-------------------------------------------
agreement entered into by CCC (or to be entered into by CCC) with respect to a
full-service hotel where CCC will be the manager but CCC will not also be the
lessee with respect to such full-service hotel and with respect to which the
estimated economic benefit to be derived by CCC from such management contract
(including any base, incentive and other similar management fees) during the
period commencing on the management agreement commencement date and ending on
the initial termination date for such management agreement, or, in the case of
any extension or renewal of any management agreement which may be exercised
solely at the manager's option (other than renewals or extensions which provide
for management fees at then prevailing fair market rates), the termination of
the extension or renewal period (the "Management Agreement Term"), computed as
described in clause (i) below, shall not exceed twenty percent (20%) of the
estimated Managed Hotel Present Value (as defined below) (and if CCC is making a
direct or
-6-
<PAGE>
indirect investment with respect to the hotel, the condition in Section
3.B(v)(D) shall have been satisfied). For purposes of the foregoing:
(i) The estimated economic benefit to be derived by CCC during
the Management Agreement Term shall equal the present value of the
projected management fees (including base management fees, incentive
management fees, and other similar fees payable to CCC pursuant to the
management agreement, but not including expense reimbursements),
calculated by applying a discount factor which is appropriate in light
of overall market conditions at the time of determination of such
economic value and the risk to the manager associated with the
proposed management agreement fee structure; and
(ii) The term "Managed Hotel Present Value" means the estimated
total economic benefit to be derived from the managed property during
the Management Agreement Term, which shall equal the sum of (1) the
present value (calculated by applying a discount factor which is
appropriate in light of the managed property's condition and overall
market conditions at the time of determination of such economic value)
of the projected total net operating income from the managed property
for the Management Agreement Term (before any deductions for rental
payments to be made under any lease and before any deductions for debt
service on the hotel or of the tenant or subtenant, but after any
deductions for base management fees (but without deduction for
"incentive management fees" that are based upon operating profit of
the hotel or proceeds from the sale or refinancing of the hotel)) and
(2) the present value (calculated by applying a discount factor which
is appropriate in light of the managed property's condition and
overall market conditions at the time of determination of such
economic value) of the projected residual value of the managed
property at the expiration of the Management Agreement Term, computed
by applying a capitalization rate which is appropriate in light of the
managed property's expected condition and overall market conditions as
of such date to the projected annual net operating income (before any
deductions for debt service on the hotel or of the tenant or subtenant
and before any deductions for rent but after deduction for any base
management fee that a buyer of the hotel would be required to assume
(or if greater, an imputed reasonable market-level base management
fee) (but without any deduction for "incentive management fees" that
are based upon operating profit of the hotel or proceeds from a sale
or refinancing of the hotel) as of the last day of the Management
Agreement Term (the "Managed Hotel Present Value").
-7-
<PAGE>
All of the various determinations of net operating income from the managed
property provided for above, together with the various adjustments thereto, and
the discount rates and capitalization rates to be applied in making the
computations provided for above shall be as reasonably determined by CCC
(subject to the review and approval of Host in its reasonable judgment and to
Section 5.1 of this Agreement in the event that there is a disagreement between
Host and CCC with respect thereto).
"Permitted Operating Lease" shall mean a lease by CCC with respect to
-------------------------
a full-service hotel where CCC will be the operator or manager of the hotel
(other than through a contractual arrangement with a third-party manager) (a
"CCC Managed Hotel"), and which meets the following conditions:
(i) If the lessor is a Publicly-Traded REIT or a Permitted
Private REIT and the lease is such that the rental payments made
thereunder by CCC to the lessor qualify as "rents from real property"
within the meaning of Section 856(d) of the Code, the estimated
economic benefit to be derived by CCC from the lease and any related
management contract (including both management fees, including any
base, incentive and other similar management fees, and any operating
profit to be retained by the tenant or subtenant in such capacity)
during the Lease Term, computed as described in clause (iii) below,
shall not exceed either twenty-five percent (25%) of the Leased Hotel
Present Value, or fifty percent (50%) of the Leased Hotel Equity Value
of such hotel.
(ii) If the lessor is not either a Publicly-Traded REIT or a
Permitted Private REIT or if the lease is such that the rental
payments made thereunder by CCC to the lessor will not qualify as
"rents from real property" within the meaning of Section 856(d) of the
Code, the estimated economic benefit to be derived by CCC from the
lease and any related management contract (including both management
fees, including any base, incentive and other similar management fees,
and any operating profit to be retained by the tenant or subtenant in
such capacity) during the Lease Term, computed as described in clause
(iii) below, shall not exceed either twenty percent (20%) of the
Leased Hotel Present Value, or forty percent (40%) of the Leased Hotel
Equity Value of such hotel.
(iii) For purposes of subparagraphs (i) and (ii) above, the
estimated economic benefit to be derived by CCC during the Lease Term
shall equal the present value of the sum of (1) the projected net
operating income to be received by the tenant or subtenant,
respectively, from the leased property for the Lease Term (after
deduction for rental payments but before deduction for debt service on
-8-
<PAGE>
the hotel or of the tenant or subtenant and including any residual
payments to be received by the tenant or subtenant at any time during
the Lease Term (including on the last day thereof)) and (2) the
projected management fees to be received by CCC, the tenant or the
subtenant during the Lease Term (including base management fees,
incentive management fees, and other similar fees payable to CCC
pursuant to the management agreement, but not including expense
reimbursements), calculated by applying a discount factor which is
appropriate in light of the leased property's condition and overall
market conditions at the time of determination of such economic value
and the risk to the tenant or subtenant associated with the proposed
lease structure.
All of the various determinations of net operating income from the leased
property provided for above, together with the various adjustments thereto, and
the discount rates and capitalization rates to be applied in making the
computations provided for above shall be as reasonably determined by CCC
(subject to the review and approval of Host in its reasonable judgment and to
Section 5.1 of this Agreement in the event that there is a disagreement between
Host and CCC with respect thereto).
"Permitted Private REIT" shall mean an entity that would be a Publicly-
----------------------
Traded REIT but for the fact that shares of capital stock or other units of
equity interests of the REIT that are generally entitled to vote for the
election of directors or similar managers are not listed or admitted to trading
on the New York Stock Exchange or the American Stock Exchange or designated for
quotation on the Nasdaq National Market, or any successor to any of the
foregoing, so long as CCC's lease or sublease of a full-service hotel from such
entity and any other investment in or with respect to such full-service hotel
would not cause CCC to violate Section 3.D.
"Permitted REIT Lease" shall mean a lease by CCC that is with respect to a
--------------------
full-service hotel where CCC will not be the operator or manager of such hotel
(other than through a contractual arrangement with a third-party manager) and
which meets the following conditions:
(i) the lessor must be a Publicly-Traded REIT or a Permitted
Private REIT and the rental payments made by CCC to the lessor must
qualify as "rents from real property" within the meaning of Section
856(d) of the Code; and
(ii) the estimated economic benefit to be derived by the tenant
or subtenant, as applicable, during the Lease Term shall not exceed
fifteen percent (15%) of the Leased Hotel Present Value.
-9-
<PAGE>
(iii) For purposes of clause (ii) above, the estimated economic
benefit to be derived by the tenant or subtenant during the Lease Term
shall equal the present value of the projected net operating income to
be received by the tenant or subtenant, respectively, from the leased
property for the Lease Term (after deduction for rental payments but
before deduction for debt service on the hotel or of the tenant or
subtenant and including any residual payments to be received by the
tenant or subtenant at any time during the Lease Term (including on
the last day thereof)), calculated by applying a discount factor which
is appropriate in light of the leased property's condition and overall
market conditions at the time of determination of such economic value
and the risk to the tenant or subtenant associated with the proposed
lease structure.
All of the various determinations of net operating income from the leased
property provided for above, together with the various adjustments thereto, and
the discount rates and capitalization rates to be applied in making the
computations provided for above shall be as reasonably determined by CCC
(subject to the review and approval of Host in its reasonable judgment and to
Section 5.1 of this Agreement in the event that there is a disagreement between
Host and CCC with respect thereto).
"Person" shall mean any person, firm, corporation, general or limited
------
partnership, association, or other entity.
"Primary Host Lessee" shall mean the lessee of more than 25% by number of
-------------------
the Initial Hotels.
"Publicly-Traded REIT" shall mean a REIT whose shares of capital stock or
--------------------
other units of equity interests that are generally entitled to vote for the
election of directors or similar managers are listed or admitted to trading on
the New York Stock Exchange or the American Stock Exchange or designated for
quotation on the Nasdaq National Market, or any successor to any of the
foregoing. The term "Publicly-Traded REIT" shall include any Person whose
operations are consolidated with those of a Publicly-Traded REIT under generally
accepted accounting principles or in which the Publicly-Traded REIT otherwise
owns, directly or indirectly, a twenty-five percent (25%) or greater equity
interest so long as, in either case, the Publicly-Traded REIT must take the
assets and operations of such Person into account in determining whether it
satisfies the income and asset requirements of Section 856(c) of the Code.
"REIT" shall mean a "real estate investment trust" within the meaning of
----
Sections 856 through 859 of the Code.
"REIT Conversion" shall mean the reorganization of Host's business
---------------
operations to permit Host REIT to qualify as a REIT, including the Merger and
the
-10-
<PAGE>
other transactions described in the Prospectus/Consent Solicitation that is
part of the Registration Statement filed with the Securities and Exchange
Commission by Host REIT and the Operating Partnership on Form S-4 (File No. 333-
55807).
"Rockledge" shall have the meaning set forth in the first paragraph of this
---------
Agreement.
"Senior Living Community Business" shall mean, as to any Person, the
--------------------------------
business of developing, acquiring, owning or investing in, existing and newly
developed retirement community properties (including, without limitation,
assisted living facilities, independent care facilities and nursing homes),
improving and expanding the retirement community properties (including, without
limitation, assisted living facilities, independent care facilities and nursing
homes) owned and acquired by such Person and/or operating retirement community
properties (including, without limitation, assisted living facilities,
independent care facilities and nursing homes) for other owners thereof (whether
pursuant to a management agreement, operating agreement, lease, license or
otherwise).
"Subsidiaries" shall mean corporations or other entities which are more
------------
than ten percent (10%) owned, directly or indirectly, by Host, CCC, Fernwood or
Rockledge, as the case may be, and partnerships in which Host, CCC, Fernwood or
Rockledge, as the case may be, or a Subsidiary thereof, is a general partner.
Notwithstanding the foregoing, Host's Subsidiaries shall not include Fernwood,
Rockledge or any other Non-Controlled Subsidiary which becomes a party to this
Agreement or otherwise agrees to be bound by terms which are substantially the
same as those set forth in Section 2.
"Swissotel Management Company Interest" means CCC's 25% interest in
-------------------------------------
Swissotel Management (U.S.A.) L.L.C.
"Transfer" shall mean the sale, conveyance, disposal of or other transfer
--------
of ownership, title or other interest.
ARTICLE TWO
NONCOMPETITION WITH RESPECT TO THE SENIOR LIVING
COMMUNITY BUSINESS
2. Certain Restrictions on Host, Fernwood and Rockledge.
A. Except as provided in Section 2.C., from the date hereof until December
31, 2003, neither Host, Fernwood nor Rockledge shall Compete in the Senior
Living Community Business.
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<PAGE>
B. Except as provided in Section 2.C., from the date hereof until the
earlier of (i) December 31, 2008 and (ii) the date on which CCC is no longer the
Primary Host Lessee, neither Host, Fernwood nor Rockledge shall Compete in the
Hotel Leasing Business.
C. Neither Section 2.A. nor Section 2.B. shall prohibit Host, Fernwood or
Rockledge from engaging in the following activities:
(i) the ownership of any equity interest in any Person which
Competes in the Senior Living Community Business or the Hotel Leasing
Business if Host, Fernwood or Rockledge, as the case may be, directly or
indirectly, is the beneficial owner of not more than five percent (5%) of
such Person's outstanding equity interests, including for such purpose any
Carried Interest in such Person, whether or not earned (based upon the
maximum percentage applicable for such Carried Interest) and cannot, by
reason of the ownership of such equity interest or otherwise, have any
right to control such Person (including, but not limited to, control
resulting from a general partner interest, special rights as a manager of a
limited liability company or similar entity, contractual or other rights to
representation on the board of such Person that are disproportionate to
Host's, Fernwood's or Rockledge's, as the case may be, equity ownership in
such Person, disproportionate voting rights with respect to Host's,
Fernwood's or Rockledge's, as the case may be, equity position, or veto or
approval rights as to major decisions);
(ii) the acquisition (by merger, stock purchase or otherwise) of, or
the purchase of assets from, any Person who Competes in the Senior Living
Community Business or the Hotel Leasing Business if the fair market value,
on the acquisition date, of the acquired assets which relate to activities
which Compete with the Senior Living Community Business or the Hotel
Leasing Business, as the case may be, do not constitute more than ten
percent (10%) of the total purchase price for the transaction; or
(iii) (A) the leasing, directly or indirectly, by Host from Fernwood
or Rockledge or by Fernwood or Rockledge from Host of limited-service or
full-service hotel properties, (B) the leasing, directly or indirectly, by
Host of properties pursuant to the leases listed on Schedule B attached
hereto, including any renewals or extensions thereof, (C) the leasing,
directly or indirectly, by Host, Fernwood or Rockledge from any other
Person of limited-service or full-service hotel properties where Host,
Fernwood or Rockledge, as the case may be, has a direct or indirect equity
interest in such Person sufficient for such Person to be consolidated with
Host for financial accounting purposes, or (D) any leasing, directly or
indirectly, by Host, Fernwood, Rockledge or any other Non-Controlled
Subsidiary, as lessee, of full-service hotels or limited-service hotels
pursuant to leases that would not fall within the scope of the term "Hotel
Leasing Business."
-12-
<PAGE>
D. Each of Host, Fernwood and Rockledge agrees that, from the date hereof
until December 31, 2000, it will not solicit, hire or induce the termination of
employment of, a person who is employed by CCC at the time of, or was employed
by CCC at any time within three months prior to, such solicitation, hiring or
inducement and whose grade is, or, if applicable, was at the time of the
termination of his employment with CCC, the equivalent of Host's current grade
56 or above.
ARTICLE THREE
NONCOMPETITION WITH RESPECT TO THE HOST BUSINESS
3. Certain Restrictions on CCC.
A. Except as provided in Section 3.B., from the date hereof until the
earlier of (i) December 31, 2008 and (ii) the date on which CCC is no longer the
Primary Host Lessee, (a) CCC shall not Compete in the Host Business, and (b) CCC
shall not, without the consent of Host, in its sole and absolute discretion,
either enter into any leases with respect to full-service hotels other than
Permitted Full-Service Leases or enter into any management agreements with
respect to full-service hotels other than Permitted Full-Service Management
Agreements and management agreements in connection with Permitted Operating
Leases.
B. Section 3.A. shall not prohibit CCC from engaging in the following
activities:
(i) any activity (including any investments) undertaken by CCC that
is necessary to and reasonably connected with its business of acting as a
lessee of full-service hotels, including acquisitions of property and
assets used in such hotels that are incidental to CCC's role as lessee
(such as "hotel working capital" and "furniture, fixtures and equipment" in
a manner similar to that contemplated under the Hotel Leases) but excluding
loans to or equity investments in the lessor or any of its Affiliates
except to the extent permitted under clause (v) below;
(ii) any activity undertaken by CCC with respect to the Asset
Management Services Business;
(iii) the ownership of any equity interest in any Person which
Competes in the Host Business if CCC, directly or indirectly, is the
beneficial owner of not more than five percent (5%) or more of such
Person's outstanding equity interests, including for such purpose any
Carried Interest in such Person, whether or not earned (based upon the
maximum percentage applicable for such Carried Interest) and cannot, by
reason of the ownership of such equity interest or otherwise, have any
right to control such Person
-13-
<PAGE>
(including, but not limited to, control resulting from a general partner
interest, special rights as a manager of a limited liability company or
similar entity, contractual or other rights to representation on the board
of such Person that are disproportionate to CCC's equity ownership in such
Person, disproportionate voting rights with respect to CCC's equity
position, or veto or approval rights as to major decisions);
(iv) the acquisition (by merger, stock purchase or otherwise) of, or
the purchase of assets from, any Person who Competes in the Host Business
if the fair market value, on the acquisition date, of the acquired assets
which relate to activities which Compete with the Host Business do not
constitute more than ten percent (10%) of the total purchase price for the
transaction; or
(v) the provision of financing for any full-service hotel (whether
directly or by participation in a lender syndicate) so long as the
following conditions are met:
(A) on the date on which CCC becomes contractually committed to
provide such financing (1) CCC is (or in connection with such
financing will become) the lessee (or lessee and manager) of such
hotel pursuant to a lease which is a Permitted Full-Service Lease, (2)
CCC is (or in connection with such financing will become) the manager
of such hotel pursuant to a management agreement which is a Permitted
Full-Service Management Agreement, or (3) CCC has a bona fide contract
to become either the lessee (or lessee and manager) of such hotel
pursuant to a lease which would be a Permitted Full-Service Lease or
the manager of such hotel pursuant to a management agreement which
would be a Permitted Full-Service Management Agreement upon completion
of the construction and development or stabilization of such hotel and
upon satisfaction of reasonable conditions;
(B) if such financing is in the form of a loan, (x) the present
value of CCC's interest in the hotel represented by such financing
(determined applying the principles set forth in clause (E) below)
does not exceed fifteen percent (15%) of the Leased Hotel Present
Value or Managed Hotel Present Value, as applicable, of the hotel
which is subject to such financing, each determined as of the date on
which CCC becomes contractually committed to provide such financing,
and (y) such loan does not include any equity participation feature
(whether in the form of warrants, options, a conversion right,
interest payments based upon profits, revenues, and/or appreciation,
or otherwise) that would cause CCC to violate clause (C) below at any
time, assuming for purposes of such determination that CCC would
exercise any and all options and other rights that it might have in
connection with such loan (provided that the foregoing shall not
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<PAGE>
prevent the exercise by CCC of its rights upon foreclosure of such
indebtedness unless the default with respect to such indebtedness
giving the right to such foreclosure had occurred or was imminent at
the time CCC acquired such indebtedness),
(C) if such financing is in the form of an equity investment,
directly or indirectly, in the full-service hotel or the Person
owning, directly or indirectly, such hotel, CCC will not beneficially
own (and will not have any right to acquire beneficial ownership of)
more than fifteen percent (15%) of the outstanding Leased Hotel Equity
Value or Managed Hotel Equity Value, as applicable, computed on the
date on which CCC becomes contractually committed to make such equity
investment (including for such purpose any Carried Interest in the
Person which owns such hotel, whether or not earned (based upon the
maximum percentage applicable for such Carried Interest)), and CCC
cannot, by reason of the ownership of such equity interest or
otherwise, have any right to control the hotel or the Person owning
such hotel (including, but not limited to, control resulting from a
general partner interest, special rights as a manager of a limited
liability company or similar entity, contractual or other rights to
representation on the board of such Person that are disproportionate
to CCC's equity ownership in such Person, disproportionate voting
rights with respect to CCC's equity position, or veto or approval
rights as to major decisions), and
(D) the following condition, as applicable, is satisfied:
(1) if the Permitted Full-Service Lease will not be a Permitted
Operating Lease where the lessor is a Publicly-Traded REIT or a
Permitted Private REIT and with respect to which the rental
payments made thereunder by CCC to the lessor qualify as "rents
from real property" within the meaning of Section 856(d) of the
Code, the combined economic interest of CCC in the full-service
hotel under such Permitted Full-Service Lease (calculated as set
forth in the definition of "Permitted REIT Lease" or "Permitted
Operating Lease," as applicable) and the present value of CCC's
interest in the hotel represented by any financing or equity
interests described in clauses (B) and (C) above (determined
applying the principles set forth in clause (E) below), all
determined as of the date CCC becomes contractually committed to
make such investment, cannot exceed either (x) twenty percent
(20%) of the Leased Hotel Present Value, on the date CCC becomes
contractually committed to provide such financing, of the hotel
which is subject to such financing, or (y)
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<PAGE>
forty percent (40%) of the Leased Hotel Equity Value of such
hotel on such date; or
(2) if the Permitted Full-Service Lease will be a Permitted
Operating Lease where the lessor is a Publicly-Traded REIT or a
Permitted Private REIT and with respect to which the rental
payments made thereunder by CCC to the lessor qualify as "rents
from real property" within the meaning of Section 856(d) of the
Code, the combined economic interest of CCC in the full-service
hotel under such Permitted Full-Service Lease (calculated as set
forth in the definition of "Permitted REIT Lease" or "Permitted
Operating Lease," as applicable) and the present value of CCC's
interest in the hotel represented by any financing or equity
interests described in clauses (B) and (C) above (determined
applying the principles set forth in clause (E) below), all
determined as of the date CCC becomes contractually committed to
make such investment, cannot exceed either (x) twenty-five
percent (25%) of the Leased Hotel Present Value, on the date CCC
becomes contractually committed to provide such financing, of the
hotel which is subject to such financing, or (y) fifty percent
(50%) of the Leased Hotel Equity Value of such hotel on such
date; or
(3) if CCC is a party to, or has a bona fide contract to become a
party to, a Permitted Full-Service Management Agreement, the
combined economic interest of CCC in the full-service hotel under
such Permitted Full-Service Management Agreement (calculated as
set forth in the definition of "Permitted Full-Service Management
Agreement") and the present value of CCC's interest in the hotel
represented by any financing or equity interests described in
clauses (B) and (C) above (determined applying the principles set
forth in clause (E) below), all determined as of the date CCC
becomes contractually committed to make such investment, cannot
exceed either (x) twenty percent (20%) of the Managed Hotel
Present Value, on the date CCC becomes contractually committed to
provide such financing, of the hotel which is subject to such
financing, or (y) forty percent (40%) of the Managed Hotel Equity
Value of such hotel on such date. (Payments to a third party
unrelated to the owner of the hotel to purchase an existing
management agreement do not constitute an investment subject to
the foregoing provisions.)
(E) For purposes of this Section 3.B.(v), the present value of
CCC's interest in any financing or equity interests shall be
determined
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<PAGE>
by computing the present value of the cash flow projected to be
received by CCC with respect to such financing or equity interest
during the Lease Term or the Management Agreement Term, as applicable,
assuming that the hotel is sold for its projected fair market value at
the expiration of the Lease Term or Management Agreement Term, as
applicable, and the proceeds of such sale are applied to repay debt
and make distributions to equity owners in accordance with their
respective interests, calculated by applying a discount factor which
is appropriate in light of overall market conditions at the time of
determination of such economic value and the risk to CCC associated
with the proposed financing or equity interest. All of the various
determinations of cash flow projected to be received from the proposed
financing or equity interest and the discount rates to be applied in
making the computations provided for above (and any capitalization
rates to be applied for determining projected fair market values at
the expiration of the Lease Term or Management Agreement Term, as
applicable) shall be as reasonably determined by CCC (subject to the
review and approval of Host in its reasonable judgment and to Section
5.1 of this Agreement in the event that there is a disagreement
between Host and CCC with respect thereto).
C. CCC agrees that, from the date hereof until December 31, 2000, it will
not solicit, hire, or induce the termination of employment of, a person who is
employed by Host, Fernwood or Rockledge at the time of, or was employed by Host,
Fernwood or Rockledge at any time within three months prior to, such
solicitation, hiring or inducement and whose grade, is or, if applicable, was at
the time of the termination of his employment with Host or Fernwood or
Rockledge, the equivalent of Host's current grade 56 or above.
D. Notwithstanding any other provision of this Agreement, until the
expiration of the period set forth in Section 3.A., CCC shall not lease or
sublease any full-service hotel from a REIT that is not a Publicly-Traded REIT
unless the combined investments, if any, of CCC in such lease and any other
leases of full-service hotels from REITs that are not Publicly-Traded REITs
(including any security or other deposits provided by CCC to the landlord) and
any financing or equity interests in hotels leased from such REITs (or in the
Persons owning such hotels) (with the value thereof determined using the
methodology described in Section 3.B(v)(E) above as of the date on which the
determination is being made under this Paragraph D) does not exceed the greater
of $125,000,000 or fifteen percent (15%) of the book value of CCC's assets as of
such date.
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ARTICLE FOUR
LIMITATION ON ENGAGEMENT IN THE HOTEL MANAGEMENT BUSINESS
4. Certain Restrictions on CCC.
A. Except as provided in Sections 4.1.B. and 4.1.C., CCC shall be entitled
to Compete in the Hotel Management Business.
B. CCC acknowledges that the provisions of that certain Restated
Noncompetition Agreement between and among Host and Marriott International,
Inc., dated March 3, 1998 (the "1998 Noncompetition Agreement"), applies to it
and that such 1998 Noncompetition Agreement has been amended effective the date
hereof to include CCC as a party thereto.
C. Notwithstanding the foregoing Section 4.1.A., from the date hereof
until the earlier of (i) December 31, 2008 and (ii) the date on which CCC is no
longer the Primary Host Lessee, CCC shall comply with the following
restrictions:
(i) CCC shall not, without the consent of Host in its sole
discretion, engage in the Hotel Management Business with regard to any
hotels owned by Host, provided that, the foregoing shall not be deemed
to prohibit CCC from acting in its capacity as a lessee of hotels
owned by Host where CCC has engaged another Person who is not a
Affiliate of CCC to manage or operate, within the meaning of the term
"Hotel Management Business," the leased hotels.
(ii) CCC shall not engage in the Hotel Management Business with
regard to any full-service hotels not owned by Host unless either (a)
if CCC is not the lessee (or sublessee) with respect to such hotel,
the management agreement with respect to such hotel is a Permitted
Full-Service Management Agreement, or (b) if CCC is either the lessee
or sublessee with respect to such hotel, the lease with respect to
such hotel is a Permitted Full-Service Lease and CCC is compliance
with the conditions set forth in Section 3.B(v) with respect to such
hotel.
(iii) CCC shall not Compete in the Franchise Business.
D. Notwithstanding anything herein to the contrary, nothing in this
Agreement shall prohibit CCC from owning the Swissotel Management Company
Interest or any activities undertaken by Swissotel Management (U.S.A.) L.L.C.
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<PAGE>
ARTICLE FIVE
MISCELLANEOUS
5.1 Arbitration of Certain Matters.
Host, CCC, Fernwood and Rockledge agree that any controversy or dispute
concerning any calculation or determination of value, present values, net
operating income, anticipated cash flow, capitalization rate or sales arising
under the definition of "Host Leasing Business," "Leased Hotel Equity Value,"
"Leased Hotel Present Value," "Permitted Full-Service Management Agreement,"
"Managed Hotel Present Value," or "Managed Hotel Equity Value" in Section 1,
or under Section 2.C.(ii), Section 3.B.(iv), Section 3.B.(v), or Section 3.E
hereof, including without limitation any dispute as to whether as determination
of any of the foregoing by CCC is reasonable, shall be settled in arbitration in
accordance with the Rules of the American Arbitration Association then in
effect. Such arbitration shall take place in Washington, D.C. Any judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. The arbitrators shall not, under any circumstances, have
any authority to award punitive, consequential, exemplary or similar damages,
and may not, in any event, make any ruling, finding or award that does not
conform to the terms and conditions of this Agreement. Nothing contained in
this Section 5.1 shall limit or restrict in any way the right or power of a
party at any time to seek injunctive relief in any court and to litigate the
issues relevant to such request for injunctive relief before such court (i) to
restrain the other party from breaching this Agreement, or (ii) for specific
enforcement of this Section 5.1. The parties agree that any legal remedy
available to a party with respect to a breach of this Section 5.1 will not be
adequate and that, in addition to all other legal remedies, each party is
entitled to an order specifically enforcing this Section 5.1. Neither party nor
the arbitrators may disclose the existence or results of any arbitration under
this Agreement or any evidence presented during the course of the arbitration
without the prior written consent of both parties, except as required to fulfill
applicable disclosure and reporting obligations, or as otherwise required by
agreements with third parties, or by law.
5.2 Entire Agreement.
This Agreement, the Hotel Leases, the FF&E Leases and the 1998
Noncompetition Agreement constitute the entire agreement of the parties
concerning the subject matter hereof.
5.3 Modification.
This Agreement may only be amended, modified or supplemented in a written
agreement signed by both parties hereto.
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<PAGE>
5.4 Waiver.
No term or condition of this Agreement shall be deemed to have been waived,
nor shall there be any estoppel against the enforcement of any provision hereof,
except by written instrument of the party charged with such waiver or estoppel.
5.5 Severability.
Host, CCC, Fernwood and Rockledge agree that the period of restriction and
the lack of geographical area of restriction imposed upon the parties are fair
and reasonable, are reasonably required for the protection of each of the
parties hereto and have been specifically negotiated and carefully tailored with
a view to preventing the serious and irreparable injury the other party will
suffer in the event of competition by such party with the other party during the
time periods set forth herein. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect as though the invalid portions were not a part
hereof. If the provisions of this Agreement relating to the geographical area
of restriction or the period of restriction shall be deemed to exceed the
maximum geographical area or period which a court having jurisdiction over the
matter would deem enforceable, such area or period shall, for purposes of this
Agreement, be deemed to be the maximum geographical area or period which such
court would deem valid and enforceable.
5.6 Remedies.
CCC, Host, Fernwood and Rockledge agree that irreparable damage would occur
in the event any of the provisions of this Agreement were not to be performed in
accordance with the terms hereof, and that their remedy at law for any breach of
the other party's obligations hereunder would be inadequate. CCC, Host,
Fernwood and Rockledge agree and consent that temporary and permanent injunctive
relief may be granted in any proceeding which may be brought to enforce any
provision hereof without the necessity of proof of actual damage.
The parties hereby agree that the obligations of each of Host, Fernwood and
Rockledge hereunder are independent and that none of them shall have any
liability for the breach by any of the others of such other's obligations
hereunder. CCC and Host agree that, in the event that any Non-Controlled
Subsidiary which is not a party to this Agreement engages in any activity in
which Host is prohibited from engaging under this Agreement, CCC shall not be
entitled to terminate this Agreement but Host shall indemnify and hold CCC
harmless from any liabilities, damages, losses and reasonable expenses incurred
by CCC as a result thereof.
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<PAGE>
5.7 Enforceability.
The terms, conditions and promises contained in this Agreement shall be
binding upon and shall inure to the benefit of each of the parties hereto, their
heirs, personal representatives, or successors and assigns. Without limiting
the generality of the foregoing, the parties agree that, following the Merger,
Host REIT shall be deemed to be a successor of Host under this Agreement. Each
of the parties hereto shall cause its Subsidiaries which are not Non-Controlled
Subsidiaries to comply with such party's obligations hereunder. Nothing herein,
expressed or implied, shall be construed to give any other Person any legal or
equitable rights hereunder.
5.8 Assignment and Successors and Assigns.
Neither party shall, without the prior written consent of the other, assign
any rights or delegate any obligations under this Agreement. Notwithstanding
anything herein to the contrary, the restrictions, rights and obligations set
forth herein shall be treated as follows: in the event Host Transfers all or
substantially all of the Host Business, the transferee thereof shall
automatically be bound by the terms of this Agreement; in the event CCC
Transfers all or substantially all of the Senior Living Community Business or
all or substantially all of the Hotel Leasing Business or all or substantially
all of the Asset Management Services Business, the transferee thereof shall
automatically be bound by the terms of this Agreement; and, in the event either
Fernwood or Rockledge Transfers all or substantially all of its business of
leasing FF&E to lessees of full and limited-service hotels, the transferee
thereof shall automatically be bound by the terms of this Agreement. The
parties acknowledge that, upon the effectiveness of the Merger, Host REIT shall
succeed to all of the rights and obligations of HMC under this Agreement.
5.9 Consent to Jurisdiction.
Subject to Section 5.1 hereof, the parties irrevocably submit to the
exclusive jurisdiction of (i) the Courts of the State of Maryland in Montgomery
County, and (ii) if federal jurisdiction exists, the United States District
Court for the State of Maryland for the purposes of any suit, action or other
proceeding arising out of this Agreement.
5.10 Interpretation.
When a reference is made to this Agreement to a Section, Article, or
Schedule, such reference shall be to a Section, Article, or Schedule of this
Agreement unless otherwise indicated. The headings contained in this Agreement
are for reference purposes only and shall neither affect the meaning or
interpretation of this Agreement, nor define or limit the scope or intent of any
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<PAGE>
provision or part hereof. Whenever the words "include," or "includes," or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
5.11 Notices.
All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by telecopier with computer generated acknowledgment
of receipt, by mail or by Federal Express or similar expedited commercial
carrier, to the parties at the following addresses (or at such other addresses
for a party as shall be specified by like notice), postpaid and certified with
return receipt requested (if by mail), or with all freight charges prepaid (if
by Federal Express or similar carrier), and shall be deemed given on the date of
acknowledged receipt, in the case of a notice by telecopier, and, in all other
cases, on the date of receipt or refusal:
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<PAGE>
To Host:
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher G. Townsend, Senior Vice
President, General Counsel and
Corporate Secretary
Fax No.: 301/380-3588
To CCC:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: General Counsel
Fax No.: 240/694-2040
with a copy to:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Executive Vice President - Asset Management
Fax No.: 240/694-2082
To Fernwood:
Fernwood Hotel Assets, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: President
Fax: 301/380-6338
With a copy to:
Host Marriott Corporation Law Department,
as agent for Fernwood Hotel Assets, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher G. Townsend, Senior Vice
President, General Counsel and
Corporate Secretary
Fax No.: 301/380-3588
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<PAGE>
To Rockledge:
Rockledge Hotel Properties, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: President
Fax: 301/380-5188
With a copy to:
Host Marriott Corporation Law Department,
as agent for Rockledge Hotel Properties, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher G. Townsend, Senior Vice
President, General Counsel and
Corporate Secretary
Fax No.: 301/380-3588
5.12 Governing Law.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland, regardless of the laws that might be applied
under applicable principles of conflicts of laws.
5.13 Relationship of Parties.
It is understood and agreed that nothing in this Agreement shall be deemed
or construed by the parties or any third party as creating an employer-employee,
principal/agent, partnership or joint venture relationship between or among the
parties.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the day and year first above written.
CRESTLINE CAPITAL CORPORATION
By:
----------------------------------
Name: Bruce D. Wardinski
Title: President and Chief Executive
Officer
HOST MARRIOTT CORPORATION
By:
----------------------------------
Name:
Title:
HOST MARRIOTT, L.P.
By: HMC REAL ESTATE LLC,
General Partner
By:
----------------------------------
Name:
Title:
FERNWOOD HOTEL ASSETS, INC.
By:
----------------------------------
Name:
Title:
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<PAGE>
ROCKLEDGE HOTEL PROPERTIES, INC.
By:
----------------------------------
Name:
Title:
The undersigned is executing this Agreement solely for the purpose of
acknowledging and consenting to the provisions of the last sentence of Section
5.8 hereof.
HMC MERGER CORPORATION
By:
----------------------------------
Name:
Title:
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<PAGE>
Schedule A
----------
Initial Hotels
--------------
<PAGE>
Schedule B
----------
Certain Permitted Leases
------------------------
<PAGE>
Exhibit 10.26
HOST MARRIOTT, L.P.
RETIREMENT AND SAVINGS PLAN
Effective December 28, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page No.
--------
ARTICLE I
DEFINITIONS ....................................................... 2
1.1 Account .................................................. 2
1.2 Actual Contribution Percentage ........................... 2
1.3 Actual Deferral Percentage ............................... 2
1.4 Additional After-tax Savings ............................. 2
1.5 Additions ................................................ 2
1.6 Administrative Expenses .................................. 2
1.7 Affiliated Company ....................................... 2
1.8 After-tax Savings ........................................ 2
1.9 After-tax Savings Account ................................ 2
1.10 Allocable Portion ........................................ 2
1.11 Allocation Agreement ..................................... 3
1.12 Alternate Payee .......................................... 3
1.13 Annuity Starting Date .................................... 3
1.14 Authorized Leave of Absence .............................. 3
1.15 Basic After-tax Savings .................................. 3
1.16 Beneficiary .............................................. 3
1.17 Board of Directors ....................................... 3
1.18 Code ..................................................... 3
1.19 Combined Basic Savings ................................... 3
1.20 Committee ................................................ 4
1.21 Company .................................................. 4
1.22 Company Contribution Account ............................. 4
1.23 Compensation ............................................. 4
1.24 Distributee .............................................. 5
1.25 Effective Date ........................................... 5
1.26 Eligible Rollover Distribution ........................... 5
1.27 Eligible Retirement Plan ................................. 5
1.28 Employee ................................................. 5
1.29 Entry Date ............................................... 6
1.30 ERISA .................................................... 6
1.31 Fiduciary ................................................ 6
1.32 Fiscal Year .............................................. 6
1.33 Flexible Compensation .................................... 6
1.34 FLSA ..................................................... 6
1.35 Fund ..................................................... 6
1.36 Hardship ................................................. 7
1.37 Highly Compensated Employee .............................. 7
1.38 Hire Date ................................................ 7
1.39 Host Marriott, L.P. ...................................... 7
i
<PAGE>
1.40 Investment Expenses ...................................... 7
1.41 Maximum Permissible Amounts .............................. 7
1.42 Month .................................................... 8
1.43 Month of Credit .......................................... 8
1.44 Named Fiduciary .......................................... 8
1.45 Participant .............................................. 8
(a) Former Participant ................................... 8
(b) Terminated Participant ............................... 8
(c) Retired Participant .................................. 8
(d) Disabled Participant ................................. 8
(e) Deceased Participant ................................. 8
1.46 Participating Company .................................... 8
1.47 Permanent Disability ..................................... 8
1.48 Period of Severance ...................................... 9
1.49 Plan ..................................................... 9
1.50 Plan Administrator ....................................... 9
1.51 Plan Year ................................................ 9
1.52 Predecessor Company ...................................... 9
1.53 Prior Plan ............................................... 9
1.54 Pro Rata Share of Administrative Expenses ................ 9
1.55 Qualified Domestic Relations Order or QDRO ............... 9
1.56 Qualified Joint and Survivor Annuity or QJSA ............. 9
1.57 Qualifying Employer Real Property ........................ 9
1.58 Qualifying Employer Securities ........................... 10
1.59 Reemployment Date ........................................ 10
1.60 Required Beginning Date .................................. 10
1.61 Section 401(k) Contribution .............................. 10
1.62 Section 401(k) Contribution Account ...................... 10
1.63 Separation Date .......................................... 10
1.64 Service .................................................. 11
1.65 Spousal Consent .......................................... 11
1.66 Spouse or Surviving Spouse ............................... 11
1.67 Subaccount ............................................... 11
1.68 Subsidiary or Affiliated Company ......................... 12
1.69 Trustees ................................................. 12
1.70 Trust Agreement .......................................... 12
1.71 Trust Fund ............................................... 12
1.72 Valuation Date ........................................... 12
ii
<PAGE>
ARTICLE II
ELIGIBILITY AND PARTICIPATION ...................................... 13
2.1 Eligibility and Participation .................................. 13
(a) Eligibility ............................................... 13
(b) Commencement of Participation ............................. 13
(c) Continued Participation ................................... 13
(d) Participation Voluntary ................................... 13
2.2 Reemployment of Employee ....................................... 13
(a)Eligibility Upon Reemployment ............................... 13
2.3 Termination of Plan Participation .............................. 13
2.4 Readmission of Former Participant .............................. 13
2.5 Participation During Authorized Leave of Absence or During
Employment by Subsidiary Which Has Not Joined Plan ............. 13
2.6 Treatment of Participants Who Cease Being Employees Pursuant to
Section 1.29 ................................................... 14
ARTICLE III
COMPANY CONTRIBUTION ............................................... 15
3.1 Amount of Contribution ......................................... 15
3.2 Time of Payment of Contributions ............................... 15
3.3 Form of Payment of Contributions ............................... 15
3.4 Return of Contributions to Company ............................. 15
ARTICLE IV
PARTICIPANTS' AFTER-TAX SAVINGS .................................... 17
4.1 Participant After-tax Savings .................................. 17
4.2 Amount of After-tax Savings .................................... 17
4.3 Payroll Deduction .............................................. 17
4.4 Change in Rate of After-tax Savings ............................ 17
4.5 Payment to Trustees ............................................ 17
4.6 Investment of Participants' After-tax Savings .................. 17
4.7 In-Service Withdrawal of After-tax Savings ..................... 17
4.8 Effect of Termination of Plan or Discontinuance of After-Tax
Contributions .................................................. 17
ARTICLE V
SECTION 401(k) CONTRIBUTIONS ....................................... 18
5.1 Designation of Flexible Compensation ........................... 18
5.2 Section 401(k) Contributions ................................... 18
5.3 Election Rules ................................................. 18
(a) Method of Election ........................................ 18
(b) Effective Date of Election ................................ 18
(c) Revocation or Amendment ................................... 18
5.4 Compensation Reduction ......................................... 19
5.5 Limitations on Section 401(k) Contributions .................... 19
5.6 Actual Deferral Percentage Tests ............................... 19
5.7 Recharacterization of Certain Section 401(k) Contributions ..... 19
iii
<PAGE>
5.8 Coordination of After-tax Savings and Section 401(k)
Contributions ............................................... 19
5.9 Payment to Trustees ......................................... 20
5.10 Distribution of Section 401(k) Contributions ................ 20
(a) Restrictions on Distributions .......................... 20
(b) In-Service Withdrawal of Section 401(k) Contributions .. 20
5.12 Effect of Termination of Plan or Discontinuance of Section
401(k) Contributions ........................................ 21
ARTICLE VI
ALLOCATION OF CONTRIBUTIONS
AND NET INCOME AMONG PARTICIPANTS ................................. 22
6.1 Maintenance of Separate Accounts ............................ 22
6.2 Allocation to After-tax Savings Accounts .................... 22
6.3 Allocation to Section 401(k) Contribution Account ........... 22
6.4 Allocation of Company Contribution .......................... 22
6.5 (a) Limitation on After-tax Savings and Company
Contributions ............................................... 23
(b) Multiple Use of the Alternative Limitation ............. 23
6.6 Correcting Excess Aggregate Contributions ................... 24
6.7 Special Provision for Allocating Company Contributions ...... 25
6.8 Allocation of Net Income .................................... 25
6.9 Use of Forfeitures .......................................... 25
6.10 Use of Unclaimed Benefits ................................... 25
(a) Method of Allocation ................................... 25
(b) Reduction in Forfeitures ............................... 25
6.11 Allocation Limitations ...................................... 25
(a) Maximum Additions ...................................... 26
(b) Correction of Excess ................................... 26
(c) Further Limitations on Additions ....................... 26
6.12 Transfers From Other Qualified Plans ........................ 26
(a) Manner of Rollover or Direct Transfer .................. 26
(b) Governing Provisions ................................... 27
ARTICLE VII
VESTING ........................................................... 28
7.1 Vesting of After-tax Savings Account ........................ 28
7.2 Vesting of Section 401(k) Contribution Account .............. 28
7.3 Vesting of Company Contribution Account ..................... 28
(a) Vesting Schedule ....................................... 28
(b) Service to be Credited Upon Resumption of Employment ... 28
(c) Definition of Service .................................. 28
(d) Automatic 100% Vesting ................................. 29
ARTICLE VIII
TERMINATION AND DISTRIBUTION
UPON RETIREMENT, DEATH OR DISABILITY ........................ 30
8.1 Retirement .................................................. 30
iv
<PAGE>
8.2 Death ......................................................... 30
8.3 Disability .................................................... 30
8.4 Valuation of Account Balances ................................. 30
8.5 Available Payment Options ..................................... 30
8.6 Spousal Consent Rules ......................................... 31
(a) Revocation of an Annuity ............................... 31
(b) Waiver of Qualified Joint and Survivor Annuity ......... 31
(c) Written Explanation .................................... 32
(d) Result of Effective Waiver ............................. 32
(e) Spousal Consent ........................................ 32
8.7 Distributions Upon Married Participant's Death ................ 33
8.8 General Distribution Requirements ............................. 33
(a) Distributions to Participants .......................... 33
(b) Distributions to Beneficiary ........................... 33
(c) Commencement of Distribution ........................... 34
8.9 Form of Payment ............................................... 35
8.10 Mandatory Cash-Out of Small Accounts .......................... 35
8.11 Account Balance ............................................... 35
8.12 Special Rule for Rollovers Out of the Plan .................... 35
ARTICLE IX
TERMINATION AND DISTRIBUTION UPON TERMINATION
OF EMPLOYMENT OTHER THAN FOR RETIREMENT,
DEATH OR DISABILITY ................................................ 36
9.1 Terminated Participant ........................................ 36
9.2 Distribution of After-tax Savings and Section 401(k)
Contributions.................................................. 36
9.3 Distribution of Vested Company Contribution Account ........... 36
9.4 Mandatory Cash-Out of Small Accounts .......................... 36
9.5 Unvested Company Contributions ................................ 37
(a) Forfeiture ............................................. 37
(b) Restoration of Forfeiture .............................. 37
(c) Distribution Prior to Reemployment ..................... 37
9.6 Account Balance ............................................... 37
9.7 Special Rule for Rollovers Out of the Plan .................... 37
v
<PAGE>
ARTICLE X
DISTRIBUTION DURING CONTINUED EMPLOYMENT .......................... 38
10.1 Withdrawal of After-tax Savings ............................... 38
(a) Withdrawal of Additional After-tax Savings.............. 38
(b) Withdrawal of Basic After-tax Savings .................. 38
(c) Valuation of After-tax Savings Account ................. 38
(d) Form of Payment ........................................ 38
(e) Taxation of Withdrawal ................................. 38
10.2 Withdrawal of Section 401(k) Contribution ..................... 38
10.3 Withdrawal of Vested Company Contribution Account.............. 38
10.4 Readmission of Former Participant to Plan ..................... 38
10.5 Distributions Upon Attainment of Age 59-1/2 ................... 39
10.6 Account Balance ............................................... 39
10.7 Hardship Withdrawals .......................................... 39
(a) Terms of Hardship Withdrawals .......................... 39
(b) Restrictions ........................................... 39
(c) Committee Guidelines and Determination ................. 40
10.8 Special Rule for Rollovers Out of the Plan .................... 40
ARTICLE XI
LOANS TO PARTICIPANTS .............................................. 41
11.1 General Provisions ............................................ 41
11.2 Maximum Loan Amount ........................................... 41
11.3 Minimum Loan Amount ........................................... 41
11.4 Repayment Period .............................................. 42
11.5 Terms and Conditions .......................................... 42
11.6 Nondiscrimination ............................................. 42
11.7 Decision of the Plan Administrator ............................ 43
11.8 Offset of Account Balance ..................................... 43
11.9 Default ....................................................... 43
ARTICLE XII
BENEFICIARIES ...................................................... 44
12.1 Designation of Beneficiary .................................... 44
12.2 Manner of Designation ......................................... 44
12.3 Absence of Valid Designation of Beneficiary ................... 44
12.4 Beneficiary Bound by Plan Provisions .......................... 44
ARTICLE XIII
QUALIFIED DOMESTIC RELATIONS ORDERS ................................ 45
13.1 Governing Provisions .......................................... 45
vi
<PAGE>
ARTICLE XIV
PARTICIPANT'S DIRECTED INVESTMENTS ................................ 46
14.1 Election by Participants .................................... 46
14.2 Election Rules .............................................. 46
(a) Election to be in Writing ............................... 46
(b) Effective Date of Election .............................. 46
(c) Revocation of Election .................................. 46
(d) Change in Election ...................................... 46
(e) Default Election ........................................ 47
14.3 Transfer Date ............................................... 47
14.4 Confirmation ................................................ 47
14.5 Subdivision of Accounts ..................................... 47
(a) Establishment of Subaccounts ............................ 47
(b) Allocation of After-tax Savings, Section 401(k)
Contributions, Company Contributions and Forfeitures
Among Subaccounts ....................................... 47
14.6 Investment Funds ............................................ 47
(a) Committee's Responsibility for Funds .................... 47
(b) Investment Policy of Funds .............................. 48
(c) Funds ................................................... 48
(1) Stable Value Fund ................................... 48
(2) Spectrum Income Fund ................................ 48
(3) Balanced Fund ....................................... 48
(4) Blue Chip Growth Fund ............................... 48
(5) Host Marriott Corporation Common Stock Fund ......... 48
(6) International Stock Fund ........................... 49
(7) New Horizons Fund ................................... 49
14.7 Voting Rights ............................................... 49
14.8 Allocation of Income of Funds ............................... 49
14.9 Investment Authority of Former Employees .................... 49
14.10 Investment for the Benefit of Incompetents .................. 49
14.11 Rules of Committee .......................................... 49
ARTICLE XV
PLAN FIDUCIARIES .................................................. 50
15.1 Plan Fiduciaries ............................................ 50
(a) Named Fiduciary ......................................... 50
(b) Profit Sharing Committee ................................ 50
(c) Trustees ................................................ 50
15.2 Fiduciary Duty .............................................. 50
15.3 Agents and Advisors ......................................... 51
(a) Employment of Agents .................................... 51
(b) Delegation to Agents and Plan Administrator ............. 51
(c) Appointment of Investment Manager ....................... 51
15.4 Administrative Action........................................ 51
(a) Action by Majority ...................................... 51
(b) Right to Vote ........................................... 51
vii
<PAGE>
(c) Authority to Execute Documents .......................... 52
15.5 Liabilities and Indemnifications ............................ 52
(a) Liability of Fiduciaries ................................ 52
(b) Indemnity by Company .................................... 52
15.6 Plan Expenses and Taxes...................................... 52
(a) Plan Expenses ........................................... 52
(b) Taxes ................................................... 52
15.7 Records and Financial Reporting ............................. 52
(a) Book of Account ......................................... 52
(b) Financial Reporting Under ERISA ......................... 53
15.8 Compliance with ERISA and Code .............................. 53
15.9 Prohibited Transactions ..................................... 53
15.10 Foreign Assets .............................................. 53
15.11 Exclusive Benefit of Trust Fund ............................. 53
15.12 Board of Directors Resolution ............................... 53
ARTICLE XVI
PLAN ADMINISTRATION ............................................... 54
16.1 Administration of the Plan .................................. 54
(a) Authority to Administer ................................. 54
(b) Delegation of Authority to Plan Administrator ........... 54
(c) Finality of Decision .................................... 54
16.2 Claims ...................................................... 54
(a) Claims for Benefits ..................................... 54
(b) Notice of Claim Denied .................................. 54
(c) Request for Review of Denial ............................ 55
(d) Decision on Review of Denial ............................ 55
ARTICLE XVII
PARTICIPATING COMPANY WITHDRAWAL FROM PLAN;
TERMINATION OR MERGER OF THE PLAN ................................. 56
17.1 Voluntary Withdrawal from Plan .............................. 56
(a) Withdrawal By Participating Company ..................... 56
(b) Segregation of Trust Assets Upon Withdrawal ............. 56
(c) Exclusive Benefit of Participants ....................... 56
(d) Applicability of Withdrawal Provisions .................. 56
17.2 Amendment of Plan ........................................... 56
17.3 Voluntary Termination of Plan ............................... 57
(a) Right to Terminate Plan ................................. 57
(b) Merger or Consolidation of Plan and Trust ............... 58
(c) Termination of Plan and Trust Fund ...................... 58
17.4 Discontinuance of Contributions ............................. 58
17.5 Rights to Benefits Upon Termination of Plan or Complete
Discontinuance of Contributions ............................. 58
ARTICLE XVIII
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<PAGE>
ELECTION TO PARTICIPATE BY SUBSIDIARIES ........................... 59
19.1 Consent Required for Subsidiaries to Join Plan .............. 59
ARTICLE XIX
MISCELLANEOUS PROVISIONS .......................................... 60
19.1 Status of Employment ........................................ 60
19.2 Liability of Company ........................................ 60
19.3 Information ................................................. 60
(a) Supplied by Named Fiduciary, the Committee or Trustees .. 60
(b) Supplied by Company ..................................... 60
19.4 Provisions of Plan to Control ............................... 60
19.5 Payment for Benefit of Incompetent .......................... 60
19.6 Account to be Charged Upon Payment .......................... 61
19.7 Tax Qualification of Plan ................................... 61
19.8 Deductibility of Company Contributions ...................... 61
19.9 Restriction on Alienation or Assignment ..................... 61
19.10 Unclaimed Benefits .......................................... 61
19.11 Recovery of Plan Benefits Payment Made by Mistake ........... 62
19.12 Bonding ..................................................... 62
19.13 Titles and Captions ......................................... 62
19.14 Execution of Counterparts ................................... 62
19.15 Governing Law ............................................... 62
19.16 Separability ................................................ 62
19.17 Supplements and Appendices .................................. 62
19.18 Military Service ............................................ 62
19.19 Employer Securities ......................................... 62
ARTICLE XX
TOP HEAVY PROVISIONS .............................................. 63
20.1 Determination of Top Heavy Status ........................... 63
20.2 Definitions ................................................. 63
20.3 Requirements if Plan a Top Heavy Plan ....................... 64
ix
<PAGE>
HOST MARRIOTT, L.P.
RETIREMENT AND SAVINGS PLAN
---------------------------
PREAMBLE
--------
WHEREAS, Host Marriott, L.P. has entered into the Employee Benefits and
Other Employment Matters Allocation Agreement between Host Marriott Corporation,
Host Marriott, L.P. and Crestline Capital Corporation (the "Agreement") entered
into in connection with the distribution of outstanding common shares of the
Company (the "Distribution");
WHEREAS, pursuant to the Agreement, Host Marriott, L.P. assumed sponsorship
of the Host Marriott Corporation (HMC) Retirement and Savings Plan;
NOW, THEREFORE, Host Marriott, L.P. hereby amends and restates the Host
Marriott Corporation (HMC) Retirement and Savings Plan effective as of December
28, 1998, such plan to be hereafter named the Host Marriott, L.P. Retirement
and Savings Plan.
<PAGE>
ARTICLE I
DEFINITIONS
-----------
When used in this instrument, the following words and phrases have the
indicated meanings except where the contrary is expressly stated:
1.1 "Account" shall have the meaning set forth in Section 6.1.
-------
1.2 "Actual Contribution Percentage" means, for a given Plan Year,
------------------------------
the average of the ratios, calculated separately for each Participant in a
group, of (a) the sum of After-tax Savings credited to the Participant's After-
tax Savings Account and Company contributions and forfeitures allocable to the
Participant's Company Contribution Account for the Plan Year to (b) the
Participant's Compensation for such Plan Year.
1.3 "Actual Deferral Percentage" means, for a given Plan Year, the
--------------------------
average of the ratios, calculated separately for each Participant in a group, of
(a) the Section 401(k) Contributions made on behalf of such Participant by the
Company for the Plan Year to (b) the Participant's Compensation for such Plan
Year.
1.4 "Additional After-tax Savings" means After-tax Savings not included
----------------------------
in Combined Basic Savings for a payroll period.
1.5 "Additions" means, with respect to each Participant for any Fiscal
---------
Year, the total of (a) the Company contributions and forfeitures allocated for
the Fiscal Year to the Participant's Company Contribution Account, plus (b)
Section 401(k) Contributions allocated for the Fiscal Year to the Participant's
Section 401(k) Contributions Account, plus (c) the After-tax Savings allocated
for the Fiscal Year to the Participant's After-tax Savings Account.
1.6 "Administrative Expenses" means the administrative expenses described
-----------------------
in Section 15.6(a).
1.7 "Affiliated Company" means a "Subsidiary", as defined in Section
------------------
1.68.
1.8 "After-tax Savings" means the after-tax savings deposited into the
-----------------
Trust Fund by a Participant in accordance with Article IV.
1.9 "After-tax Savings Account" shall have the meaning set forth in
-------------------------
Section 6.1(a).
1.10 "Allocable Portion" means, for purposes of Section 11.2, the lesser
-----------------
of: (a) fifty percent (50%) of the Participant's vested Account balance; or (b)
$50,000, reduced by the excess of (1) the highest outstanding balance of any
previous loan from the Plan and any other plans of the Company or a Subsidiary
during the one-year period ending on the day before the date on which the
current loan is made over (2) the outstanding balance of any previous loan from
the Plan and any other plans of the Company or a Subsidiary on the date on which
the current loan is made.
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<PAGE>
1.11 "Allocation Agreement" means the Employee Benefits & Other Employment
--------------------
Matters Allocation Agreement entered into by and between Host Marriott
Corporation, Host Marriott, L.P. and Crestline Capital Corporation.
1.12 "Alternate Payee" means any Spouse, former Spouse, child or other
---------------
dependent of a Participant who is entitled under a Qualified Domestic Relations
Order to receive all, or part of, the benefits payable to that Participant under
the Plan.
1.13 "Annuity Starting Date" means the first day of the first period for
---------------------
which an amount is received as an annuity by reason of retirement or disability.
1.14 "Authorized Leave of Absence" means any absence authorized by the
---------------------------
Company under the Company's standard personnel practices provided that the
Employee or Participant returns within the period of authorized absence. An
absence due to service in the Armed Forces of the United States shall be
considered an Authorized Leave of Absence provided that the absence is caused by
war or other emergency, or provided that the Employee or Participant is required
to serve under the laws of conscription in time of peace, and further provided
that the Employee or Participant returns to employment with the Company within
the period provided by law. Except for service in the Armed Forces of the
United States in accordance with the preceding sentence, an Authorized Leave of
Absence may not extend beyond two (2) years.
1.15 "Basic After-tax Savings" means After-tax Savings included in
-----------------------
Combined Basic Savings for a payroll period.
1.16 "Beneficiary" means the person or persons designated as a beneficiary
-----------
pursuant to Article XII.
1.17 "Board of Directors" means the Board of Directors of Host Marriott
------------------
Corporation, a Delaware corporation and the General Partner of Host Marriott,
L.P.
1.18 "Code" means the Internal Revenue Code of 1986, as amended, or any
----
successor statute, including the regulations issued thereunder.
1.19 "Combined Basic Savings" means the sum of a Participant's After-tax
----------------------
Savings and Section 401(k) Contributions for each payroll period, provided that
such sum shall include only an amount up to six percent (6%) of Compensation for
each payroll period. If the sum of a Participant's After-tax Savings and
Section 401(k) contributions for a payroll period exceed six percent (6%), the
Participant's 401(k) contributions shall be included in Combined Basic Savings
before After-tax Savings.
1.20 "Committee" means the Profit Sharing Committee appointed by the Board
---------
of Directors pursuant to Section 15.1(b).
1.21 "Company" means Host Marriott, L.P. and any affiliate or Subsidiary
-------
that elects to join the Plan with the consent of the Board of Directors.
-3-
<PAGE>
1.22 "Company Contribution Account" shall have the meaning set forth in
----------------------------
Section 6.1(c).
1.23 "Compensation" means:
------------
(a) Except as hereinafter specified, (1) earned income, wages,
salary, overtime, cash bonus, commissions, annual leave, sick leave and holiday
pay, paid by the Company to an Employee, and (2) gratuities reported by the
Employee to the Company and the Internal Revenue Service, all without regard for
any election under Article V or any elections made by the Participant under any
plan maintained by the Company pursuant to Section 125 of the Code, but
excluding any and all other forms of compensation. Notwithstanding the
foregoing, Compensation taken into account for each Employee for a Plan Year
shall not exceed One Hundred Sixty Thousand Dollars ($160,000) or such other
amount as the United States Secretary of Treasury may designate under Section
401(a)(17) of the Code.
(b) For purposes of the limitation on contributions and benefits
under Section 415 of the Code as set forth in Section 6.11, a Participant's
wages, salaries, and fees for professional services, and other amounts received
for personal services actually rendered in the course of employment with the
Company to the extent that the amounts are includable in gross income
(including, but not limited to, commissions, gratuities reported by the Employee
to the Company and the Internal Revenue Service, bonuses, fringe benefits,
reimbursements or other expenses allowable under a nonaccountable plan (as
described in Section 1.62-2(c) of the Treasury Regulations) annual leave, sick
leave and holiday pay) and including amounts contributed by the Company pursuant
to a salary reduction agreement and which are not includible in the gross income
of the Participant under Sections 125, 402(g)(3) or 402(h)(1)(B) of the Code,
and excluding the following:
(1) Company contributions to a plan of deferred compensation
which (except as provided above with respect to Sections 125, 402(g)(3) and
402(h)(1)(B) of the Code) are not included in the Employee's gross income for
the taxable year in which contributed, or any distribution from a plan of
deferred compensation;
(2) Amounts realized from the exercise of a nonqualified stock
option, or when restricted stock (or property) held by the Employee either
becomes freely transferable or is no longer subject to a substantial risk of
forfeiture; and
(3) Amounts realized from the sale, exchange or other disposition
of stock acquired under a qualified stock option.
1.24 "Distributee" means a Participant, Former Participant, Retired
-----------
Participant, Disabled Participant, the Surviving Spouse of a Deceased
Participant, and an Alternate Payee.
1.25 "Effective Date" means December 28, 1998.
--------------
1.26 "Eligible Rollover Distribution" means any distribution of all or a
------------------------------
portion of the Distributee's Account balance, except that an Eligible Rollover
Distribution does not include (a) any
-4-
<PAGE>
distribution that is one of a series of substantially equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) of
the Distributee or the joint lives (or joint life expectancies) of the
Distributee and the Distributee's designated Beneficiary, or for a specified
period of ten (10) years or more, (b) any distribution to the extent such
distribution is required under Section 401(a)(9) of the Code, and (c) the
portion of any distribution that is not includable in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
Company securities).
1.27 "Eligible Retirement Plan" means an individual retirement account
------------------------
(described in Section 408(a) of the Code), an individual retirement annuity
(described in Section 408(b) of the Code), an annuity plan (described in Section
403(a) of the Code), or a qualified trust (described in Section 401(a) of the
Code), that accepts the Distributee's Eligible Rollover Distribution. However,
in the case of an Eligible Rollover Distribution to the Spouse, an "Eligible
Retirement Plan" means an individual retirement account or individual retirement
annuity only.
1.28 "Employee" means any person classified as an "employee" and employed
--------
by a Participating Company other than: (a) a person who is covered by a
collective bargaining agreement, if there is evidence to show that retirement
benefits were the subject of good faith bargaining between a Participating
Company and the employee representatives with whom such agreement was entered;
(b) a nonresident alien who receives no earned income (within the meaning of
Section 911(d)(2) of the Code) from a Participating Company which constitutes
income from sources within the United States (within the meaning of Section
861(a)(3) of the Code); (c) a participant in a profit sharing plan, pension plan
or other retirement plan (other than the Plan, the Host Marriott, L.P. Executive
Deferred Compensation Plan or the Host Marriott Corporation and Host Marriott,
L.P. Comprehensive Stock and Cash Incentive Plan or the Host Marriott
Corporation Non-Employee Directors' Deferred Stock Compensation Plan) maintained
by Host Marriott Corporation or Host Marriott, L.P. or an affiliate, whether or
not the plan or the trust of such plan is intended to qualify under Section 401
of the Code; and (d) a leased employee (within the meaning of Section 414(n) of
the Code).
Employees are classified as follows:
Class A consists of all Employees not included in Class B whose base
-------
compensation is stated in terms of hourly rates of pay including those who
receive gratuities collected and distributed by the employer.
Class B consists of all management and professional Employees whose
-------
base compensation at the time the determination is to be made is stated in terms
of a weekly or annual salary, or whose base compensation is stated in terms of
hourly rates but who receive management benefits, regardless of whether such
Employees are exempt from the overtime pay requirements of the FLSA.
Unless specifically referring to a particular class, any and all provisions
of this Plan shall apply to all Employees regardless of classification.
-5-
<PAGE>
1.29 "Entry Date" means the first day of the four week accounting period
----------
of the Company immediately following receipt by the Plan Administrator of an
application for admission to the Plan in writing, or in such other form
authorized by the Plan Administrator; provided, however, that Employees who were
employed by Host Marriott Corporation on the day immediately prior to the
Effective Date shall be eligible to participate in the Plan on the Effective
Date. The Board of Directors may, with respect to persons who become Employees
by virtue of having been employed by any business entity the stock or
substantially all of the assets of which are acquired by Host Marriott, L.P. or
any affiliate or Subsidiary or the management of which is assumed by the
Company, establish by written resolution as a special Entry Date, solely for
such Employees, the date of such acquisition or assumption of management.
1.30 "ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
1.31 "Fiduciary" means any person who (a) exercises any discretionary
---------
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of the
Plan's assets; (b) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any monies or other property of the Plan, or
has any authority or responsibility to do so; or (c) has any discretionary
authority or discretionary responsibility in the administration of the Plan.
The term "Fiduciary" includes the Named Fiduciary, the Trustees and any person
to whom fiduciary responsibilities have been delegated pursuant to Section 15.3.
1.32 "Fiscal Year" means each year beginning on the first day of each
-----------
fiscal year of Host Marriott, L.P. and ending on the last day of each fiscal
year of Host Marriott, L.P. Effective December 28, 1998, the fiscal year is the
calendar year. The Fiscal Year shall be the "limitation year" of the Plan for
purposes of the limitation on contributions and benefits under Section 415 of
the Code, or any successor provision thereto.
1.33 "Flexible Compensation" shall have the meaning set forth in Section
---------------------
5.l.
1.34 "FLSA" means the Fair Labor Standards Act, as amended from time to
----
time.
1.35 "Fund" means any of the separate funds in which Participants'
----
Accounts may be placed and which are allocated and invested in accordance with
Article XIV.
1.36 "Hardship" means the existence of an immediate and heavy financial
--------
need of the Participant. A need exists if it is necessary for the following:
(a) expenses for medical care previously incurred by the
Participant, his spouse or any of his dependents or necessary for these persons
to obtain medical care within the limits of Section 213(d) of the Code;
(b) purchase (excluding mortgage payments) of a principal residence
for the Participant;
-6-
<PAGE>
(c) payment of tuition, related education fees and room and board
for the next 12 months of post-secondary education for the Participant, his
spouse, children or dependents;
(d) payment to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the Participant's
principal residence; and
(e) any other event determined by the Commissioner of Internal
Revenue.
1.37 "Highly Compensated Employee" means any Employee or former Employee
---------------------------
who performs service for a Participating Company during the Plan Year and who
(I) for the prior Plan Year received Compensation from the Participating Company
as determined for purposes of Section 415 of the Code in excess of $80,000 (as
adjusted pursuant to Code Section 415(d)); or (ii) during the Plan Year or the
prior Plan Year was a 5% owner (as defined in Code Section 416(I)(1)).
1.38 "Hire Date" means, for any Employee, the date on which he first
---------
becomes entitled to credit for an hour for which he is directly or indirectly
paid or entitled to be paid by the Company or a Subsidiary for the performance
of employment services.
1.39 "Host Marriott, L.P." means Host Marriott, L.P., a Delaware
--------------------
limited partnership, or any successor thereto by merger, consolidation or the
acquisition of substantially all of the assets and business thereof.
1.40 "Investment Expenses" means all expenses which under generally
-------------------
accepted accounting principles would be classified as investment expenses,
including, without limitation, investment manager's or advisor's fees and
expenses, custodial fees, fees of broker-dealers for effecting investment
transactions or rendering investment advice, expenses relating to the making of
investments and expenses relating to the recovery of any investment in a
bankrupt or insolvent entity.
1.41 "Maximum Permissible Amounts" means the lesser of:
---------------------------
(a) $30,000, or such higher amount to which such amount may be
adjusted or, pursuant to Section 415(f) of the Code, to implement special rules
applicable to combining more than one defined contribution plan as a single
plan; or
(b) Twenty-five percent (25%) of the Participant's Compensation as
provided in Section 1.23(b).
1.42 "Month" means any calendar month.
-----
1.43 "Month of Credit" means any Month during the entire period of which
---------------
an Employee is employed by the Company. For purposes of the foregoing, a Month
of Credit shall be deemed to commence on the day of hire and end on the close of
business on the day preceding the next month's anniversary thereof. Months of
Credit are cumulative and need not be successive. Notwithstanding any other
provision to the contrary, a Participant's Months of Credit under the Plan shall
include
-7-
<PAGE>
Months of Credit, if any, credited to such Participant under the Prior
Plan immediately before the Effective Date.
1.44 "Named Fiduciary" means the Committee in its role as named fiduciary
---------------
of the Plan as set forth in Section 15.1(a).
1.45 "Participant" means an Employee of the Company who has been admitted
-----------
to participation in this Plan in accordance with Article II. As appropriate to
the context a "Participant" may include one or more of the following sub-
definitions.
(a) "Former Participant" means any present Employee of the Company
------------------
who, after having been a Participant, ceases to participate in the Plan.
(b) "Terminated Participant" means any prior Employee of the
----------------------
Company who, after having been a Participant, terminated his employment other
than by retirement, death or Permanent Disability, and has any vested balance in
the Plan.
(c) "Retired Participant" means any Participant who retires from
-------------------
employment in accordance with Section 8.1 and who has any vested balance in the
Plan.
(d) "Disabled Participant" means any Participant who terminates
--------------------
from employment as a result of a Permanent Disability and who has any vested
balance in the Plan.
(e) "Deceased Participant" means any Participant who terminates
--------------------
employment by reason of death and who leaves any vested balance in the Plan.
1.46 "Participating Company" means Host Marriott, L.P. or any affiliate or
---------------------
Subsidiary that has elected to join the Plan with the consent of the Host
Marriott Corporation's Board of Directors. All of the Participating Companies
constitute the "Company", as defined in Section 1.21.
1.47 "Permanent Disability" means that the Participant, as a result of a
--------------------
disability, will be prevented on a permanent basis from engaging in any
occupation for which he is reasonably qualified by education, training or
experience as certified by a competent medical authority designated by the Named
Fiduciary to make such determination. The foregoing shall include disability
attributable to the permanent loss or loss of use of a member or function of the
body, or to the permanent disfigurement of the Participant.
The determination of the existence of a Permanent Disability shall be made
by the Plan Administrator and shall be final and binding upon the Participant
and all other parties.
1.48 "Period of Severance" means the period of time commencing on the
-------------------
Separation Date and ending on the Participant's Reemployment Date.
1.49 "Plan" means the Host Marriott, L.P. Retirement and Savings Plan,
----
including any amendments thereto.
-8-
<PAGE>
1.50 "Plan Administrator" means the person to whom the duties of Plan
------------------
Administrator are delegated pursuant to Section 15.3(b).
1.51 "Plan Year" shall mean, for Plan Years beginning after the Effective
---------
Date, the same meaning as "Fiscal Year" in Section 1.33; for the Plan Year in
which the Effective Date occurs, the Plan Year shall mean January 4, 1998
through December 31, 1998; for other Plan Years beginning before the Effective
Date, Plan Year shall mean the Fiscal Year of Host Marriott Corporation.
1.52 "Predecessor Company" means Host Marriott Corporation.
-------------------
1.53 "Prior Plan" means the Host Marriott Corporation (HMC) Retirement and
----------
Savings Plan and Trust, as in effect prior to the Effective Date.
1.54 "Pro Rata Share of Administrative Expenses" means the amount
-----------------------------------------
determined by multiplying the Administrative Expenses of the Plan by a fraction,
the numerator of which is the total value of each Fund and the denominator of
which is the total aggregate value of all such Funds.
1.55 "Qualified Domestic Relations Order" or "QDRO" shall have the same
---------------------------------- ----
meaning as "qualified domestic relations order" under Section 414(p) of the Code
and the Treasury Regulations thereunder.
1.56 "Qualified Joint and Survivor Annuity" or "QJSA" means an annuity
------------------------------------ ----
purchased from a commercial insurance company with the Participant's Account
that pays a benefit for the life of the Participant with a survivor annuity for
the life of the Participant's Surviving Spouse in an amount elected by the
Participant of either fifty percent (50%) or one hundred percent (100%) of the
amount being paid to the Participant during his lifetime.
1.57 "Qualifying Employer Real Property" means parcels of real property
---------------------------------
(and related personal property) which are leased to the Company or an Affiliated
Company (a) if a substantial number of the parcels are dispersed geographically;
and (b) if each parcel and the improvements thereon are suitable (or adaptable
without excessive cost) for more than one use.
1.58 "Qualifying Employer Securities" means (a) any stocks or other equity
------------------------------
securities issued by the Company or an Affiliated Company; or (b) any bonds,
debentures, notes or certificates or other evidences of indebtedness of the
Company or an Affiliated Company which are described in Section 503(e) of the
Code and Section 407(e) of ERISA.
1.59 "Reemployment Date" means, for any Employee, the first date following
-----------------
the Employee's Separation Date on which he first becomes entitled to credit for
an hour for which he is directly or indirectly paid or entitled to be paid by
the Company or a Subsidiary for the performance of employment duties.
1.60 "Required Beginning Date" means April 1 of the calendar year
-----------------------
following the calendar year in which the Participant attains age 70-1/2 or, if
later, the calendar year in which the Participant retires from the Company;
provided, however, that in the case of a Participant who is a 5% owner (as
defined in Code section 416), Required Beginning Date means April 1 of the
calendar year
-9-
<PAGE>
following the calendar year in which the Participant attains age 70-1/2; and
provided, further, that in the case of a Participant who attained age 70-1/2
before January 1, 1988, Required Beginning Date means the April 1 following the
later of the calendar year in which he (a) attained age 70-1/2; or (b) the
sixtieth (60th) day following the close of the Plan Year in which the
Participant terminates employment with the Company, provided such date is not
later than April 1 of the calendar year following the calendar year during which
such termination occurs, unless he was a five percent (5%) owner (as defined in
Section 416 of the Code) of the Company with respect to the Plan Year ending in
the calendar year in which the he attains age 70-1/2, in which case, clause (b)
shall not apply.
1.61 "Section 401(k) Contribution" shall have the meaning set forth in
---------------------------
Section 5.2.
1.62 "Section 401(k) Contribution Account" shall have the meaning set
-----------------------------------
forth in Section 6.1(b).
1.63 "Separation Date" means the earlier of:
---------------
(a) Any date on which an Employee's employment with the Company
terminates by reason of voluntary termination, discharge, retirement or death;
or
(b) The first anniversary of the first date of a period in which the
Employee remains absent from active employment with the Company for some reason
other than voluntary termination, discharge, retirement, death, approved leave
of absence, or military service.
Provided, however, that, solely for the purpose of determining whether a
Period of Severance has occurred, if an Employee is absent from service beyond
the first anniversary of the first date of absence by reason of a "maternity or
paternity leave", then the Separation Date of such Employee shall be the second
anniversary of the first date of such absence. For purposes of this Section,
"maternity or paternity leave" means termination of employment or absence from
work due to: (I) the pregnancy of the Participant, (ii) the birth of a child of
the Participant, (iii) the placement of a child in connection with the adoption
of the child by a Participant, or (iv) the caring for a Participant's child
during the period immediately following the child's birth or placement for
adoption. The Plan Administrator shall determine, under rules of uniform
application and based on information provided to the Plan Administrator by the
Participant, whether or not the Participant's termination of employment or
absence from work is due to "maternity or paternity leave".
1.64 "Service" means an Employee's or a Participant's period of employment
-------
with the Company; the Predecessor Company prior to the Effective Date; and as a
leased employee (within the meaning of Section 414(n) of the Code) unless the
leased employee is covered by a safe harbor plan described in Section 414(n)(5)
of the Code; and any other employer that is required to be aggregated with the
Company under section 414 of the Code, as determined in accordance with Article
VII. Employment of an Employee or a Participant by any of the following
employers shall be treated as Service:
(a) A Subsidiary, both prior to and after becoming a Subsidiary, if
such Subsidiary has elected to join the Plan.
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<PAGE>
(b) A Subsidiary, after becoming a Subsidiary, if such Subsidiary
has not elected to join the Plan.
In addition, the Board of Directors shall have the authority by adopting
written resolutions to recognize employment of an Employee or a Participant by
any of the following employers as Service:
(a) A Subsidiary, prior to becoming a Subsidiary, if such
Subsidiary has not elected to join the Plan.
(b) Any business entity substantially all of the assets of which
are acquired by Host Marriott, L.P. or any affiliate or Subsidiary or whose
management is assumed by the Company; provided that such recognition shall apply
uniformly to all employees of any such employer.
1.65 "Spousal Consent" means a Spouse's written consent which acknowledges
---------------
the effect of the Participant's election and is witnessed by a Plan
representative or notary public. Spousal Consent may be in the form of a
specific consent, general consent or limited general consent, as provided in
Section 8.6(e).
1.66 "Spouse" or "Surviving Spouse" means the spouse or surviving spouse
------ ----------------
of the Participant, provided that a former spouse will be treated as the spouse
or surviving spouse and a current spouse will not be treated as the spouse or
surviving spouse to the extent provided in a Qualified Domestic Relations Order.
1.67 "Subaccount" means the portion of a Participant's Account placed in
----------
each Fund pursuant to Article XIV.
1.68 "Subsidiary" or "Affiliated Company" means (a) a member of a
---------- ------------------
controlled group of corporations of which Host Marriott, L.P. is a member as
determined in accordance with Section 414(b) of the Code; or (b) an
unincorporated trade or business which is under common control by or with Host
Marriott, L.P., as determined in accordance with Section 414(c) of the Code.
For purposes hereof, a "controlled group of corporations" shall mean a
controlled group of corporations as defined in Section 1563(a) of the Code,
determined without regard to Sections 1563(a)(4) and 1563(e)(3)(C) of the Code,
except that, with respect to the limitation on Annual Additions set forth in
Section 6.11, instead of eighty percent (80%), the applicable percentage shall
be fifty percent (50%) wherever such percentage appears in Section 1563(a)(1) of
the Code.
1.69 "Trustees" means the corporate trustee or persons appointed as
--------
Trustee of the Trust Fund and any successors.
1.70 "Trust Agreement" means the Agreement providing for the terms and
---------------
conditions under which the Trustee will hold and invest the Trust Fund.
1.71 "Trust Fund" means the assets of the Plan and Trust as the same
----------
shall exist from time to time.
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<PAGE>
1.72 "Valuation Date" means the last day of the Plan Year and such other
--------------
dates as of which the Plan Administrator values the interest of Participants in
the assets of the Trust Fund, such valuations being made in accordance with the
provisions of Section 6.8.
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<PAGE>
ARTICLE II
ELIGIBILITY AND PARTICIPATION
-----------------------------
2.1 Eligibility and Participation.
-----------------------------
(a) Eligibility. Any Employee shall be eligible to participate in
-----------
the Plan immediately on the Employee's Hire Date.
(b) Commencement of Participation. Any Employee may commence
-----------------------------
participation in the Plan on any Entry Date after the Employee's Hire Date and
shall be admitted to the Plan on any such Entry Date if the Plan Administrator
receives the Employee's written application for admission to the Plan.
(c) Continued Participation. Notwithstanding subsection (a), any
-----------------------
person who was a Participant or Former Participant in the Prior Plan on the day
before the Effective Date shall automatically become a Participant under this
Plan on the Effective Date, provided that such person is an Employee on the
Effective Date.
(d) Participation Voluntary. Participation in the Plan shall be
-----------------------
entirely voluntary.
2.2 Reemployment of Employee.
------------------------
(a) Eligibility Upon Reemployment. An Employee who terminates
-----------------------------
employment with the Company and subsequently resumes employment with the Company
shall become eligible to participate in the Plan immediately upon again becoming
an Employee and may be admitted to the Plan on any Entry Date thereafter upon
written application in accordance with Section 2.1(b).
2.3 Termination of Plan Participation. A Participant may cease to
---------------------------------
participate in the Plan during the Participant's continued employment at any
time by giving written notice thereof to the Plan Administrator. Such notice
shall be effective to terminate participation upon its receipt by the Plan
Administrator and such Employee shall thereupon become a Former Participant.
2.4 Readmission of Former Participant. Any Former Participant may be
---------------------------------
readmitted to the Plan as a Participant on any Entry Date upon written
application in accordance with Section 2.1(b); provided, however, that if any
Former Participant withdraws any portion of his Basic After-tax Savings pursuant
to Section 10.1, he shall not be eligible for readmission to the Plan until six
(6) months have elapsed from the date on which he became a Former Participant.
2.5 Participation During Authorized Leave of Absence or During Employment
---------------------------------------------------------------------
by Subsidiary Which Has Not Joined Plan. Participation in the Plan may continue
- ---------------------------------------
during periods of Authorized Leave of Absence, and periods during which a
Participant is employed by a Subsidiary which has not elected to join the Plan.
However, the Participant may neither deposit savings in the Trust Fund nor share
in the allocation of the Company contribution during such periods. A
Participant on Authorized Leave of Absence who does not return to active
employment with the
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<PAGE>
Company by the expiration of such Authorized Leave of Absence shall be treated
for the purposes of the Plan as having terminated employment pursuant to Section
9.1.
2.6 Treatment of Participants Who Cease Being Employees Pursuant to
---------------------------------------------------------------
Section 1.29. Notwithstanding the provisions of Section 2.5, any Participant who
- ------------
ceases to be an Employee by reason of Section 1.29(a), (b) or (d), or by
becoming employed by a Subsidiary which has not elected to join the Plan, or by
becoming a participant in a plan described in Section 1.29(c), shall be treated
thereupon as a Former Participant in accordance with the provisions of this
Plan.
-14-
<PAGE>
ARTICLE III
COMPANY CONTRIBUTION
--------------------
3.1 Amount of Contribution. For each Fiscal Year or portion thereof,
----------------------
each Participating Company shall make the following contributions to the Trust
Fund:
(a) Section 401(k) Contributions, as provided by Article V;
(b) a matching contribution on behalf of each Participant in the
amount of fifty percent (50%) of the Participant's Combined Basic Savings for
each payroll period; and
(c) any additional contribution, if any, as determined in the
absolute and sole discretion of the Host Marriott Corporation Board of
Directors.
Notwithstanding anything to the contrary, in no event shall the amount
contributed by any Participating Company include an amount, if any, equal to the
amount of any "excess aggregate contributions" (as defined in Section
401(m)(6)(B) of the Code) for such year that would otherwise be allocable to
Participants who are Highly Compensated Employees, if such amounts were
contributed to the Plan.
In no event shall the amount of the contribution exceed the maximum amount
deductible by a Participating Company for the Fiscal Year with respect to which
the contribution is made under Section 404(a) of the Code or the corresponding
provision of any subsequent tax law.
3.2 Time of Payment of Contributions. A Participating Company may
--------------------------------
pay its contributions at such time or times and in such amount or amounts as it
may deem appropriate during the Fiscal Year for which each such contribution
becomes due and for such period thereafter during which payment thereof may be
permitted as a deduction for the previous Fiscal Year under the Code.
3.3 Form of Payment of Contributions. All payments of contributions
--------------------------------
shall be made directly to the Trustees. Payments may be in cash, Qualifying
Employer Securities (including treasury stock or previously unissued stock of
Host Marriott Corporation), Qualifying Employer Real Property or in such other
property of any kind as the Named Fiduciary may authorize the Trustees to
accept, to the extent permitted by law. The value of any property other than
cash which may be paid to the Trustees shall be its fair market value as of the
date of such payment, as determined by the Named Fiduciary, based on the report
of an independent appraiser.
3.4 Return of Contributions to Company. Notwithstanding any other
----------------------------------
provisions of this Plan, any contributions made by a Participating Company
pursuant to Section 3.1 shall, to the extent permitted by Section 403(c) of
ERISA, be returned to a Participating Company if:
(a) The contributions are made as the result of a mistake of fact;
-15-
<PAGE>
(b) A tax deduction claimed for the contributions pursuant to Section
404 of the Code is denied to the Company by the Internal Revenue Service; or
(c) The IRS determines that the Plan is not tax-qualified under
Section 401 of the Code.
Notwithstanding the foregoing, however, no contributions may be returned to a
Participating Company under the above provisions later than one (1) year from
the date a mistaken contribution is made, a tax deduction for a contribution is
denied, or the IRS determines that the Plan is not tax-qualified, as the case
may be. Further, except as otherwise provided in this paragraph, the assets of
the Plan shall not inure to the benefit of the Company, and shall be held for
the exclusive purposes of providing benefits to Participants and Beneficiaries
and defraying reasonable expenses of administering the Plan.
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<PAGE>
ARTICLE IV
PARTICIPANTS' AFTER-TAX SAVINGS
-------------------------------
4.1 Participant After-tax Savings. Subject to the provisions of Section
-----------------------------
4.2, each Participant may deposit After-tax Savings into the Trust Fund.
4.2 Amount of After-tax Savings. Subject to the limitation provisions of
---------------------------
Section 6.5, a Participant may deposit in the Trust Fund, specified in multiples
of one percent (1%), an amount which is at least one percent (1%), but not more
than fifteen percent (15%), of his Compensation paid for each payroll period.
The maximum amount of After-Tax Savings is reduced by the amount of the
Participant's 401(k) Contributions as provided in Section 5.8.
4.3 Payroll Deduction. Each Participant's After-tax Savings shall be
-----------------
withheld by the Company from Compensation paid such Participant for each payroll
period.
4.4 Change in Rate of After-tax Savings. A Participant may change the
-----------------------------------
rate of his After-tax Savings to any other rate authorized by Section 4.2 at any
time by giving written notice to the Plan Administrator. Such notice shall be
effective as specified by the Committee. In addition, a Participant may
discontinue his After-tax Savings at any time by giving written notice to the
Plan Administrator. Such notice of discontinuation shall be effective as
specified in Section 2.3, unless the Participant has made an election pursuant
to Section 5.2.
4.5 Payment to Trustees. The Participants' After-tax Savings withheld
-------------------
shall be paid to the Trustees by the Company on the earliest date on which such
After-tax Savings can reasonably be segregated from the Company's general
assets. A statement showing the amount representing the After-tax Savings of
each Participant shall accompany each such payment.
4.6 Investment of Participants' After-tax Savings. Subject to the
----------------------------------------------
Participant's right to direct investments, the Participant's After-tax Savings
shall be commingled with other assets in the Trust Fund for investment purposes.
4.7 In-Service Withdrawal of After-tax Savings. A Participant may
------------------------------------------
withdraw After-tax Savings from his After-tax Savings Account as provided in
Sections 10.1 and 10.5.
4.8 Effect of Termination of Plan or Discontinuance of After-Tax
------------------------------------------------------------
Contributions. In the event (a) the Plan is terminated or partially terminated
- -------------
with respect to a Participating Company or particular group or class of
Participants, or (b) the Company or any Participating Company discontinues the
making of After-Tax Contributions, the election made by any affected Participant
under the provisions of this Article IV shall be immediately null and void and
of no further effect, and no additional amounts of After-Tax Savings shall be
contributed to the Trust Fund by the Company or the Participating Company.
-17-
<PAGE>
ARTICLE V
SECTION 401(k) CONTRIBUTIONS
----------------------------
5.1 Designation of Flexible Compensation. The books and records of the
------------------------------------
Company shall designate fifteen percent (15%) of each Participant's Compensation
for each payroll period as "Flexible Compensation." Flexible Compensation shall
for all purposes, tax or otherwise, be treated as part of a Participant's
Compensation and the designation of such amount shall be relevant only for
purposes of this Article V.
5.2 Section 401(k) Contributions. Subject to the terms and conditions of
----------------------------
this Article V, any Participant may, at any time and from time to time, elect to
have contributed to the Trust Fund out of his Flexible Compensation, specified
in multiples of one percent (1%), an amount which shall be designated a Section
401(k) Contribution and shall constitute a contribution to the Trust Fund by the
Company on behalf of the Participant under the provisions of Section 401(k) of
the Code.
5.3 Election Rules.
--------------
(a) Method of Election. The Committee shall determine the method by
------------------
which an election may be made pursuant to this Article V. Any such election
method must be consistent with the provisions of Section 401(k)(2) of the Code
and (assuming such consistency) may include either an affirmative election
procedure whereby Participants shall only be treated as having made an election
upon written direction of the Participants or a negative election procedure
whereby Participants shall be deemed to have made an election until and unless a
Participant files a written direction negating the election. Regardless of the
method of election determined by the Committee, Participants shall be given
prompt and adequate notice thereof and thus be afforded an appropriate
opportunity to exercise their rights under this Article V.
(b) Effective Date of Election. An election shall become effective
--------------------------
(unless previously revoked) upon the first day of the payroll period of the
Company immediately following receipt by the Plan Administrator of the election.
(c) Revocation or Amendment. An election may be made to change a
-----------------------
Participant's rate of Section 401(k) Contributions to any other rate authorized
under Section 5.2 at any time. Such election shall be made in the manner, and
shall be effective, as specified by the Committee. In addition, an election may
be made to discontinue future Section 401(k) Contributions at any time. Such
election to discontinue future contributions shall be effective as specified in
Section 2.3, unless the Participant is depositing After-tax Savings into the
Trust Fund pursuant to Section 4.2. Finally, the Plan Administrator shall have
the right and obligation to reduce a Participant's rate of Section 401(k)
Contribution to any rate as necessary, from time to time, in order to assure
compliance by this Plan with the standards of Section 401(k)(3) of the Code.
5.4 Compensation Reduction. For each payroll period, a Participant's
----------------------
Compensation shall be reduced by the portion of a Participant's Flexible
Compensation which such Participant has elected to have contributed by the
Company to the Trust Fund as a Section 401(k) Contribution (or
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<PAGE>
such lesser amount determined by the Plan Administrator pursuant to Section
5.3(c)). A Participant's Flexible Compensation for the payroll period in excess
of such amount shall be paid to the Participant as cash compensation for the
period.
5.5 Limitations on Section 401(k) Contributions. Notwithstanding any
-------------------------------------------
provision of this Plan to the contrary, the maximum amount of Section 401(k)
Contributions for any Fiscal Year shall not exceed the least of:
(a) Fifteen percent (15%) of each Participant's Compensation;
(b) Such lesser amount which may be allowed in order to assure
compliance by the Plan with one of the Actual Deferral Percentage Tests set
forth in Section 5.6.
Furthermore, the maximum amount of a Participant's Section 401(k) Contributions
for a calendar year shall not exceed the amount in effect under Section
402(g)(5) for such calendar year.
5.6 Actual Deferral Percentage Tests. The Actual Deferral Percentage Test
--------------------------------
shall be satisfied for a Plan Year if one of the following two tests is met for
such Plan Year:
(a) The Actual Deferral Percentage for the eligible Highly Compensated
Employees is not more than the Actual Deferral Percentage of all other eligible
Employees for the prior Plan Year multiplied by 1.25; or
(b) The Actual Deferral Percentage for the Highly Compensated
Employees is not more than the Actual Deferral Percentage of all other eligible
Employees for the prior Plan Year multiplied by 2.0, and the excess of the
Actual Deferral Percentage for the Highly Compensated Employees for the prior
Plan Year over all other eligible Employees for the prior Plan Year is not more
than two percentage points.
5.7 Recharacterization of Certain Section 401(k) Contributions. To the
----------------------------------------------------------
extent that contributions made on behalf of a Participant pursuant to an
election under Section 5.2 by a Participant who is a Highly Compensated Employee
would otherwise cause the Plan to fail to comply with the Actual Deferral
Percentage Test set forth in Section 5.6, such contributions shall constitute
After-tax Savings by the Participant rather than Section 401(k) Contributions.
Excess contributions for a Plan Year shall be recharacterized as After-Tax
Savings on the basis of the amount of contributions by, or on behalf of, each
Highly Compensated Employee starting with the Highly Compensated Employee having
the highest dollar amount.
5.8 Coordination of After-tax Savings and Section 401(k) Contributions. A
------------------------------------------------------------------
Section 401(k) Contribution is made in lieu of all or a portion of such
Participant's After-tax Savings deposits into the Trust Fund under Section 4.2
of the Plan. Thus, the maximum After-tax Savings deposit which may be made by a
Participant under Section 4.2 during any Fiscal Year is equal to (a) the amount
which may be made under Section 4.2 without regard to this Section 5.8, less (b)
the Section 401(k) Contribution made on behalf of the Participant under Section
5.2.
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<PAGE>
5.9 Payment to Trustees. Section 401(k) Contributions shall be paid to
-------------------
the Trustees by the Company on the earliest date on which such Section 401(k)
Contributions can reasonably be segregated from the Company's general assets. A
statement showing the amount representing the Section 401(k) Contributions of
each Participant shall accompany each such payment.
5.10 Distribution of Section 401(k) Contributions.
---------------------------------------------
(a) Restrictions on Distributions. Notwithstanding any provision of
-----------------------------
this Plan to the contrary, a Participant's Section 401(k) Contributions (and
earnings attributable thereto) shall not be distributable other than upon:
(1) The Participant's separation from service (within the meaning
of Section 401(k)(2)(B) of the Code), death or Permanent Disability;
(2) The Participant's attainment of age 59-1/2, or termination of
participation in the Plan after attaining age 59-1/2;
(3) The Participant's Hardship;
(4) The termination of the Plan by the Company without
establishment or maintenance of another defined contribution plan (other than an
employee stock ownership plan as defined in Section 4975(e)(7) of the Code);
(5) The sale or other disposition by the Company (or a
Participating Company employing the Participant) of substantially all of the
assets (within the meaning of Section 409(d)(2) of the Code) used in a trade or
business of the Company (or such Participating Company) with respect to a
Participant who continues employment with the corporation acquiring such assets;
or
(6) The sale or other disposition by the Company (or a
Participating Company) employing the Participant of its interest in a
Participating Company (within the meaning of Section 409(d)(3) of the Code or
any successor provision) with respect to a Participant who continues employment
with the sold Participating Company.
Notwithstanding the foregoing, any distribution made pursuant to
subsections (a)(4), (a)(5) and (a)(6) of this Section must meet the requirements
of Section 410(k)(10) of the Code.
(b) In-Service Withdrawal of Section 401(k) Contributions. Any
-----------------------------------------------------
Participant or Former Participant who meets the requirements of subsection
(a)(2) or (3) of this Section may withdraw his Section 401(k) Contributions
during the Participant's continued employment, as provided in Section 10.5.
5.11 of Termination of Plan or Discontinuance of Section 401(k)
-----------------------------------------------------------------
Contributions. In the event (a) the Plan is terminated or partially terminated
- -------------
with respect to a Participating Company
-20-
<PAGE>
or particular group or class of Participants, or (b) the Company or any
Participating Company discontinues the making of Section 401(k) Contributions,
the election made by any affected Participant under the provisions of this
Article V shall be immediately null and void and of no further effect, and no
additional amounts of such Participant's Flexible Compensation shall be
contributed to the Trust Fund by the Company or the Participating Company.
-21-
<PAGE>
ARTICLE VI
ALLOCATION OF CONTRIBUTIONS
---------------------------
AND NET INCOME AMONG PARTICIPANTS
---------------------------------
6.1 Maintenance of Separate Accounts. The Plan Administrator shall
--------------------------------
maintain the following accounts in the name of each person participating in the
Plan:
(a) After-tax Savings Account (consisting of Participants' After-tax
Savings pursuant to Article IV and any earnings or losses thereon);
(b) Section 401(k) Contribution Account (consisting of Section 401(k)
Contributions pursuant to Article V and any earnings or losses thereon); and
(c) Company Contribution Account (consisting of Company contributions
under Section 3.1(b) and (c), forfeitures and any earnings or losses thereon).
All of such separate accounts and the separate Fund Subaccounts, as
established pursuant to Section 14.5(a), shall in the aggregate constitute the
Participant's Account.
6.2 Allocation to After-tax Savings Accounts. The After-tax Savings
----------------------------------------
deposited by a Participant pursuant to Section 4.2 shall be credited, as made,
to the Participant's After-tax Savings Account.
6.3 Allocation to Section 401(k) Contribution Account. Section 401(k)
-------------------------------------------------
Contributions made by the Company on behalf of a Participant pursuant to Section
V shall be credited, as made, to the Participant's Section 401(k) Contribution
Account.
6.4 Allocation of Company Contribution. Subject to Section 6.7, Company
----------------------------------
contributions shall be allocated as follows:
(a) Company contributions pursuant to Section 3.1(b) shall be credited
as made to the Participant's Company Contribution Account; and
(b) Company contributions pursuant to Section 3.1(c) shall be
allocated and applied in the following order:
(1) To the restoration of forfeitures of Terminated Participants
readmitted to the Plan in accordance with Section 9.5(b) and unclaimed benefits
previously reallocated in accordance with Section 6.10, to the extent that
current forfeitures are insufficient to provide for such restoration, as
provided in Sections 6.9 and 6.10; and
(2) To the Company Contribution Accounts of all Participants who
are Employees of the Company on the last day of the Fiscal Year and all
Participants who become Retired, Disabled or Deceased Participants during the
Fiscal Year, based on the ratio that each such
-22-
<PAGE>
Participant's Combined Basic Savings for such Fiscal Year bears to the total
Combined Basic Savings of all such Participants for such Fiscal Year. The
Company Contributions allocated to each Participant's Account shall be further
allocated among such Participant's Fund Subaccounts in accordance with the
provisions of Article XIV.
6.5 (a) Limitation on After-tax Savings and Company Contributions.
---------------------------------------------------------
Notwithstanding any provisions of the Plan to the contrary, the Participant's
After-tax Savings and Company contributions (including forfeitures used to
reduce contributions under Section 3.1(b) or (c)) for a Plan Year must satisfy
the Actual Contribution Percentage Tests for such Plan Year. The Actual
Contribution Percentage Test shall be satisfied for a Plan Year if one of the
following two tests is met for such Plan Year:
(1) The Actual Contribution Percentage for the eligible Highly
Compensated Employees is not more than the Actual Contribution Percentage for
the prior Plan Year of all other eligible Employees multiplied by 1.25; or
(2) The Actual Contribution Percentage for the Highly Compensated
Employees is not more than the Actual Contribution Percentage for the prior Plan
Year of all other eligible Employees multiplied by 2.0, and the excess of the
Actual Contribution Percentage for the Highly Compensated Employees over all
other eligible Employees for the prior Plan Year is not more than two percentage
points.
(b) Multiple Use of the Alternative Limitation. Notwithstanding the
------------------------------------------
above, if both Section 5.6(a) and subsection (a)(1) of this Section are not
satisfied for a Plan Year and one Highly Compensated Employee of the Company is
eligible to have Section 401(k) Contributions made on his behalf, and to make
deposits of After-tax Savings to his After-tax Savings Account or have Company
contributions allocated to his Company Contribution Account during such Plan
Year, then the sum of the Actual Deferral Percentage and the Actual Contribution
Percentage for eligible Highly Compensated Employees shall not exceed the
greater of:
(1) The sum of:
(a) 1.25 multiplied by the greater of:
(i) The Actual Deferral Percentage for eligible
Employees for the prior Plan Year who are not Highly Compensated Employees, or
(ii) The Actual Contribution Percentage for eligible
Employees who are not Highly Compensated Employees for the prior Plan Year; and
(b) Two (2) plus the lesser of:
(i) Subsection (b)(l)(a)(i) of this Section, or
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<PAGE>
(ii) Subsection (b)(1)(a)(ii) of this Section, which
shall in no event exceed twice the lesser of subsection (b)(1)(a)(i) of this
Section or subsection (b)(1)(a)(ii); or
(2) The sum of:
(a) 1.25 multiplied by the lesser of:
(i) Subsection (b)(1)(a)(i) of this Section, or
(ii) Subsection (b)(1)(a)(ii); and
(b) Two (2) plus the greater of:
(i) Subsection (b)(1)(a)(i), or
(ii) Subsection (b)(1)(a)(ii), which shall in no event
exceed twice the greater of subsection (B)(1)(a)(i) or subsection (b)(1)(a)(ii)
above.
In the event that the limitation of this subsection (b) is exceeded, the Actual
Contribution Percentage shall be reduced in accordance with the manner described
in Section 6.6
6.6 Correcting Excess Aggregate Contributions. In the event that the
-----------------------------------------
limitation imposed by Section 6.5 is not satisfied for any Plan Year,
Participant After-tax Savings (including recharacterized Section 401(k)
Contributions) credited to a Participant's Account shall, to the extent such
credited amounts constitute "excess aggregate contributions" (within the meaning
of Section 401(m)(6)(B) of the Code, and after taking into account the last
subsection of Section 3.1(c) and Section 6.7), be distributed to affected
Participants on or before the date which is two and one-half (2-1/2) months
after the end of the Plan Year to which such credited amounts relate. The
excess aggregate contributions for a Plan Year shall be allocated to each Highly
Compensated Employee in an amount equal to the amount by which the Highly
Compensated Employees' After-tax Savings (including recharacterized Section
401(k) contributions) are reduced in accordance with the following procedure.
The dollar amount of After-tax Savings (including recharacterized Section
401(k) Contributions) for the Plan Year made on behalf of the Highly Compensated
Employee with the highest dollar amount of After-tax Savings (including
recharacterized Section 401(k) contributions) for the Plan Year is reduced to
the extent required to (1) reduce the Plan's excess aggregate contributions to
zero, or (2) cause such Highly Compensated Employee's dollar amount of After-tax
Savings (including recharacterized Section 401(k) contributions) for the Plan
Year to equal the After-tax Savings (including recharacterized Section 401(k)
contributions) of the Highly Compensated Employee with the next highest dollar
amount of After-tax Savings (including recharacterized Section 401(k)
contributions) for the Plan Year. This process is repeated until the Plan's
excess aggregate contributions are reduced to zero. Each Highly Compensated
Employee's After-tax Savings (including recharacterized Section 401(k)
contributions that are treated as excess aggregate contributions) shall consist
first of unmatched After-tax Savings (including recharacterized Section 401(k)
contributions), and then to the extent necessary, matched Employee After-tax
Savings (including recharacterized Section 401(k) contributions). Distribution
of credited amounts shall
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<PAGE>
include any income attributable thereto, and shall be determined in accordance
with regulations promulgated by the United States Secretary of the Treasury
under Section 401(m) of the Code.
6.7 Special Provision for Allocating Company Contributions.
------------------------------------------------------
Notwithstanding any other provision of this Plan, Company contributions pursuant
to Sections 3.1(b) and 3.1(c) shall be allocated and applied to the accounts of
Participants who are not Highly Compensated Employees as if the reduction of
contributions provided in the last subsection of Section 3.l(c) had not taken
place. Company contributions shall be allocated and applied to the accounts of
Highly Compensated Employees after taking into account the reduction of
contributions provided in the next to last paragraph of Section 3.1 so that no
amounts constituting "excess aggregate contributions" (within the meaning of
Section 401(m)(6)(B) of the Code) are allocated to the Company Contribution
Account of any Participant under this Article VI.
6.8 Allocation of Net Income. As of each Valuation Date, each Fund shall
------------------------
be charged or credited with the net earnings, gains, losses, Investment Expenses
and the Pro Rata Share of Administrative Expenses as well as any appreciation or
depreciation in the market value using publicly issued fair market values when
available or appropriate. To the extent that a Participant's Subaccounts are
invested in Funds that are accounted for as pooled assets or investments, the
allocation of earnings, gains and losses of each Participant's accounts shall be
based upon the total amount of funds so invested, in a manner proportionate to
the Participant's share of such pooled investment. To the extent that a
Participant's Subaccounts are invested in Funds that are accounted for as
segregated assets, the allocation of earnings, gains and losses from such assets
shall be made on a separate and distinct basis.
6.9 Use of Forfeitures. Forfeitures, as described in Section 9.5(a),
------------------
shall be applied in the following order: (a) first to restore forfeitures of
Terminated Participants readmitted to the Plan in accordance with Section 9.5(b)
and unclaimed benefits previously reallocated in accordance with Section 9.6,
(b) second to pay Plan expenses, and (c) third, to reduce the Company
Contributions.
6.10 Use of Unclaimed Benefits.
-------------------------
(a) Method of Allocation. Unclaimed benefits, as described in Section
--------------------
19.10, shall be reallocated in the same manner as forfeitures as provided in
Section 6.9.
(b) Reduction in Forfeitures. If the Plan Administrator pays any
------------------------
unclaimed benefits which had previously been reallocated hereunder, the amount
of such benefits shall reduce the amount of forfeitures otherwise reallocated
pursuant to Section 6.9. In the event that forfeitures for the Fiscal Year in
question are not sufficient to pay any unclaimed benefits, the Company
contribution for such Fiscal Year shall first be applied for such payment.
6.11 Allocation Limitations.
----------------------
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<PAGE>
(a) Maximum Additions. Notwithstanding anything to the contrary
-----------------
contained in the Plan, the sum of: (1) the total Additions made to the Account
of a Participant under this Plan for any Fiscal Year; and (2) the "annual
additions" (as defined in Section 415 of the Code) made to the account of a
Participant under any other qualified defined contribution plan maintained by
the Company or any Affiliated Company, shall not exceed the Maximum Permissible
Amount.
(b) Correction of Excess. If the Maximum Permissible Amount is
--------------------
exceeded in any Plan Year for any Participant, the Plan shall distribute to the
Participant any After-tax Savings or Section 401(k) Contributions made by the
Participant to the Plan for the Plan Year to the extent such distribution would
cause the excess to be reduced. If, after returning such After-tax Savings or
Section 401(k) Contributions to the Participant an excess still exists, such
excess shall be corrected in accordance with the provisions of Treasury
Regulation Section 1.415-6(b)(6) or such other rules or procedures as the
Internal Revenue Service shall allow.
(c) Further Limitations on Additions. Notwithstanding the foregoing
--------------------------------
provisions of this Section 6.11, the otherwise permissible annual additions for
any Participant under this Plan shall be further reduced to the extent
necessary, as determined by the Committee to prevent disqualification of the
Plan under Section 415 of the Code, which imposes additional limitations on the
benefits payable to Participants who also may be participating in another tax-
qualified pension, profit sharing, savings or stock bonus plan of the Company or
any Affiliated Company. The Committee shall advise affected Participants of any
additional limitation of their annual Additions required by the preceding
sentence.
6.12 Transfers From Other Qualified Plans.
------------------------------------
(a) Manner of Rollover or Direct Transfer. An Employee (including an
--------------------------------------
Employee who is not a Participant) may rollover or transfer to this Plan amounts
received from a retirement plan which are eligible to be rolled over or
transferred to this Plan pursuant to the provisions of Section 402 of the Code,
including a direct transfer of an eligible rollover distribution pursuant to the
provisions of Section 401(a)(31) of the Code, or from an individual retirement
account that meets the requirements of Section 408(d)(3)(A) of the Code. Such
rollover of transfer must comply with the requirement of Section 402 of the
Code.
(b) Governing Provisions. The assets so rolled over or transferred
--------------------
shall be solely in cash. The Committee shall develop such procedures, and may
require such information from the Employee desiring to make such a rollover or
transfer, as it deems necessary to determine that the proposed rollover or
transfer will meet the requirements of this Section and will not jeopardize the
tax qualified status of the Plan. All amounts rolled over or transferred
pursuant to this Section shall be deposited in the Trust Fund and shall be
credited to a rollover account. The rollover account shall be one hundred
percent (100%) vested in the Participant, shall share in income allocations in
accordance with Section 6.8 (but shall not share in Company contributions) and
shall be invested in accordance with the provisions of Article XIV.
Distributions of amounts so transferred shall be subject to the same
restrictions as those stated in Section 5.10.
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<PAGE>
ARTICLE VII
VESTING
-------
7.1 Vesting of After-tax Savings Account. The interest of each
------------------------------------
Participant in his After-tax Savings Account shall vest to the extent of one
hundred percent (100%) as soon as such After-tax Savings are withheld from his
Compensation pursuant to Article IV and as soon as the earnings on such After-
tax Savings are credited pursuant to Article VI.
7.2 Vesting of Section 401(k) Contribution Account. The interest of each
----------------------------------------------
Participant in his Section 401(k) Contribution Account shall vest to the extent
of one hundred percent (100%) as soon as such Section 401(k) Contributions are
made on his behalf by the Company pursuant to Article V and as soon as the
earnings thereon are credited pursuant to Article VI.
7.3 Vesting of Company Contribution Account.
---------------------------------------
(a) Vesting Schedule. The interest of each Participant in his
----------------
Company Contribution Account shall vest as follows:
Period of Service Vested Percentage
----------------- -----------------
Less than 2 years 0%
At least 2 years but less than 3 years 25%
At least 3 years but less than 4 years 50%
At least 4 years but less than 5 years 75%
5 years or more 100%
(b) Service to be Credited Upon Resumption of Employment. If an
----------------------------------------------------
Employee terminates employment and is reemployed by the Company, upon the
Employee's reemployment, all Service with the Company (including Service before
and after such reemployment) shall be counted for purposes of determining his
vested interest in his Company Contribution Account, if any.
(c) Definition of "Service". For purposes of determining a
-----------------------
Participant's vested interest in his Company Contribution Account, "Service"
means the period of time commencing on the Participant's Hire Date and ending on
the Participant's Separation Date and, if applicable, the period of time
commencing on the Participant's Reemployment Date and ending on the
Participant's subsequent Separation Date. In addition, such Service shall
include the period following a Separation Date described in Section 1.63(a) if a
Participant's or Former Participant's Reemployment Date occurs within the 12-
consecutive month period following such Separation Date; provided, however, that
if a Participant or Former Participant is otherwise absent from employment, the
period following such Separation Date shall be counted as Service only if the
Participant's or Former Participant's Reemployment Date occurs within the 12-
consecutive month period following the commencement of such other absence from
employment. "Service" shall also include any periods of absence from active
employment followed by a Separation Date, and periods of approved leaves of
absence granted in accordance with a nondiscriminatory leave policy; provided,
however, that if
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<PAGE>
the Participant or Former Participant does not resume status as an employee of
the Company at the time agreed upon by the Company and the Participant, the
Participant shall be deemed to be discharged at such time. Service includes
periods of employment described in Section 1.64.
(d) Automatic 100% Vesting. Notwithstanding subsection (a) of this
----------------------
Section, the Participant's interest in his Company Contribution Account shall
vest to the extent of one hundred percent (100%) upon the earlier of the
following while employed by the Company or an Affiliate:
(1) Death;
(2) Permanent Disability; or
(3) Attainment of age fifty-five (55) for Class B Participants
and age forty-five (45) for Class A Participants.
Such vesting in the event of Permanent Disability is intended to provide
"accident or health insurance" as described in Section 105(a) of the Code, in
providing benefits for the permanent loss or loss of use of a member or function
of the body, or the permanent disfigurement of Participants, to the extent that
Permanent Disability results.
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<PAGE>
ARTICLE VIII
TERMINATION AND DISTRIBUTION UPON
RETIREMENT, DEATH OR DISABILITY
-------------------------------
8.1 Retirement. Upon retirement, a Participant shall be eligible to
----------
receive the balance in his Account. Retirement for purposes of this Plan may be
elected by any Participant upon attaining the earliest of the following age:
Class A Participants - Age forty-five (45)
Class B Participants - Age fifty-five (55)
Any age after two hundred forty (240) Months of Credit with the
Company
8.2 Death. The death of any Participant or Former Participant shall be
-----
reported promptly to the Plan Administrator by the Company. The death of a
Terminated Participant or a Retired Participant shall be reported to the Plan
Administrator by dependents or beneficiaries who are directly concerned. Upon
the Participant's death, the Participant's Beneficiary shall be entitled to
payment of the balance of the Participant's vested Account in the manner
provided by the Plan.
8.3 Disability. The termination of a Participant's employment with the
----------
Company by reason of Permanent Disability shall be promptly certified to the
Plan Administrator by the Company. Upon such termination of employment, the
Participant shall be eligible to receive the balance in his Account.
8.4 Valuation of Account Balances. The Account balance of a Retired,
-----------------------------
Deceased or Disabled Participant shall be valued as of the Valuation Date
coinciding with or immediately preceding the date distribution is made to such
Participant or Beneficiary, as applicable (and shall include such Participant's
pro rata share of the Company contribution under Section 3.1(c), as determined
under Section 6.4(b), if any, for the year in which such Participant terminated
employment).
8.5 Available Payment Options. Subject to the mandatory cash-out of small
-------------------------
amounts provided in Section 8.10, a Retired, Deceased or Disabled Participant's
Account balance shall be distributed by the Trustees under such of the following
payment options as the Participant (or, if a Deceased Participant shall have
failed to select a payment option, as his Beneficiary) shall determine:
(a) Lump sum payment;
(b) Deferred payments in installments in any amount from time to time
or over a period of time specified by the Participant, including
installment payments in substantially equal amounts;
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<PAGE>
(c) Purchase of a term annuity contract from a commercial insurance
company with payments for a term certain in regular installments;
or
(d) Purchase of a single-life or Qualified Joint and Survivor Annuity
contract from a commercial insurance company with payments for
the life of the Participant or the life of the Participant and
his or her Surviving Spouse. Election of a single life annuity by
a married Participant and revocation of Qualified Joint and
Survivor Annuity are subject to the Spousal Consent Rules of
Section 8.6.
8.6 Spousal Consent Rules.
---------------------
(a) Revocation of an Annuity. A married Participant who has selected
------------------------
a Term Annuity pursuant to Section 8.5(c) or a single life annuity or Qualified
Joint and Survivor Annuity (hereinafter "QJSA"), pursuant to Section 8.5(d), may
revoke such election and elect instead to receive his or her benefits as
follows:
(1) If the Participant elected a term certain annuity form of
payment and the commercial annuity contract has not yet been purchased by the
Plan, the Participant (or the Surviving Spouse, if the Participant has died) may
elect to receive any other form of benefit available for the Plan;
(2) If the Participant elected a life annuity or a Qualified Joint
and Survivor Annuity form of payment and the commercial annuity contract has not
yet been purchased by the Plan, the Participant (or his Surviving Spouse, if the
Participant has died) may elect to receive any other form of benefit available
from the Plan, provided that the Participant and his Spouse (or the Surviving
Spouse, if the Participant has died) consent in writing to the distribution
revocation of such election in accordance with Section 8.6(b).
(b) Waiver of Life Annuity or Qualified Joint and Survivor Annuity. A
--------------------------------------------------------------
Participant who is married on the Annuity Starting Date may elect a single life
annuity pursuant to Section 8.5(d) only if the Participant's Spouse provides a
waiver of a Qualified Joint and Survivor Annuity. A married Participant who has
selected a QJSA, pursuant to Section 8.5(d), may if permitted under Section
8.6(a) elect to revoke such election and waive the QJSA payment option. Such
waivers must be made within the ninety (90) day period ending on the
Participant's Annuity Starting Date with respect to such benefit. Subject to
Section 8.6(a), a Participant may subsequently revoke the election to waive the
QJSA and elect again to waive the QJSA at any time and any number of times prior
such Annuity Starting Date. All such elections and revocations shall be in
writing. Any election to waive the QJSA must:
(1) Specify the alternate payment option elected;
(2) Be accompanied by the designation of a specific nonspouse
Beneficiary (including any class of beneficiaries or any contingent
beneficiaries) who will receive the benefit upon the Participant's death, if
applicable; and
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<PAGE>
(3) Be accompanied by Spousal Consent.
Notwithstanding the above, no consent under this subsection (b) shall be valid
unless, within thirty (30) days and no more than ninety (90) days before the
Annuity Starting Date, the Plan Administrator has provided the Participant with
the written explanation described in subsection (c) of this Section. A
Participant may elect to receive distribution prior to the expiration of such
thirty (30) day period if distribution commences more than seven (7) days after
the written explanation described in the previous sentence was provided.
A Participant who is not married on the Annuity Starting Date may, subject to
Section 8.6(a), revoke an election to receive a single life annuity. The
election must comply with this Section and Section 8.6(c) as if it were an
election to waive the Qualified Joint and Survivor Annuity by a married
participant, but without the Spousal Consent requirement.
(c) Written Explanation. The written explanation shall contain the
-------------------
following:
(1) The terms and conditions of the QJSA;
(2) The Participant's right to make, and the effect of, an
election to waive the QJSA payment option;
(3) The rights of the Participant's Spouse; and
(4) The right to make, and the effect of, a revocation of a
previous election to waive the QJSA.
(d) Result of Effective Waiver. In the event of an effective waiver
--------------------------
of the QJSA payment option, in accordance with the terms of subsection (b) of
this Section, the amount payable to the married Retired or Disabled Participant
(or to the Beneficiary of a Deceased Participant) shall be distributed by the
Trustees or their delegate under such of the alternate payment options set forth
in Section 8.5 as the Participant or his legal representative may select.
(e) Spousal Consent. A Spousal Consent shall specify the non-spouse
---------------
Beneficiary. Once made, a consent shall be irrevocable unless the Participant
changes his Beneficiary designation or revokes his election to waive the
Qualified Joint and Survivor Annuity; upon such event, the consent shall be
deemed to be revoked.
Notwithstanding the foregoing, Spousal Consent is not required if the
Participant establishes to the satisfaction of the Plan Administrator that such
written consent cannot be obtained because there is no Spouse or that the Spouse
cannot be located. In addition, no Spousal Consent is necessary if the
Participant has been legally separated or abandoned within the meaning of local
law and the Participant provides the Plan Administrator with a court order to
that effect, so long as such court order does not conflict with a Qualified
Domestic Relations Order. If the Spouse is legally incompetent to consent, the
Spouse's legal guardian may consent on his behalf, even if the legal guardian is
a Participant.
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<PAGE>
8.7 Distributions Upon Married Participant's Death. If a Participant is
----------------------------------------------
married on the date of his death, the full amount of the Participant's Account
balance shall be payable on the death of the Participant to the Participant's
Surviving Spouse, unless the Participant's Surviving Spouse has given Spousal
Consent to the designation of a specific non-spouse Beneficiary (including any
class of beneficiaries or any contingent beneficiaries) who will receive the
Account balance upon the Participant's death.
8.8 General Distribution Requirements. Notwithstanding any provision to
---------------------------------
the contrary, all Plan distributions to Participants and Beneficiaries shall
comply with the requirements of Section 401(a)(9) of the Code and the
regulations thereunder, including the incidental death benefit distribution
rules of Section 1.401(a)(9)-2 of the Treasury Regulations.
(a) Distributions to Participants. The Participant's Account balance
-----------------------------
shall be distributed or begin to be distributed no later than the Participant's
Required Beginning Date and may only be distributed over:
(1) A period of years not to exceed the life-expectancy of the
Participant, or the joint life expectancy of the Participant and the
Participant's designated Beneficiary; or
(2) The life of the Participant, or the lives of the Participant
and the Participant's designated Beneficiary.
Life expectancy shall be recalculated annually.
(b) Distributions to Beneficiary. Notwithstanding any other provision
----------------------------
of this Article VIII, any distribution to a Participant's Beneficiary must
comply with the following requirements:
(1) If the Participant dies after distribution of his Account
balance has begun, then the remaining portion of such Account balance shall be
distributed at least as rapidly as under the method of distribution being used
prior to the Participant's death.
(2) If the Participant dies before receiving any portion of his
Account balance, then distribution of the Participant's entire Account balance
shall be completed by December 31 of the calendar year containing the fifth
(5th) anniversary of the Participant's death unless:
(i) The Beneficiary elects to receive payments over his life
(or over a period not extending beyond his life expectancy), in which case the
first installment must be made by December 31 of the calendar year immediately
following the calendar year in which the Participant died; or
(ii) In the case of a Beneficiary who is a Surviving Spouse,
the Surviving Spouse elects to receive installment payments as set forth in
subsection (b)(2)(i) of this
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<PAGE>
Section, in which case the first installment may be deferred until the later of:
December 31 of the calendar year immediately following the calendar year in
which the Participant died, or December 31 of the calendar year in which the
Participant would have attained age 70-1/2.
Such an election shall be made by the earlier of: the date the distribution
is required to be made under subsection (b)(2) of this Section, or December 31
of the calendar year which contains the fifth (5th) anniversary of the
Participant's death. If the Participant has no Beneficiary, or if the
Beneficiary does not elect a method of distribution, distribution of the entire
Account balance shall be completed by December 31 of the calendar year
containing the fifth (5th) anniversary of the Participant's death.
If the Surviving Spouse dies after the Participant, but before payments to
such Surviving Spouse begin, then the provisions of subsection (b)(2) of this
Section, with the exception of subsection (b)(2)(ii) of this Section, shall be
applied as if the Spouse were the Participant.
(c) Commencement of Distribution. Distribution of a Participant's
----------------------------
Account balance shall be made or commence no later than 60 days after the close
of the Plan Year in which occurs the latest of:
(1) The date on which the Participant attains age 62;
(2) The tenth anniversary of the year in which the Participant
commenced participation in the Plan; or
(3) The date on which the Participant terminates employment with
the Company.
Notwithstanding the preceding sentence, no payment will be made under the Plan
until the Participant files a written claim for such payment, unless otherwise
required by the Plan.
8.9 Form of Payment. Distribution may be in cash or employer securities,
---------------
except that any distribution of employer securities shall be limited to the
amount of such securities credited to the Participant's account under the Host
Marriott Corporation Stock Fund.
8.10 Mandatory Cash-Out of Small Accounts. Notwithstanding any other
------------------------------------
provision of this Article VIII, if the total vested value of the Participant's
Account does not (and did not, at the time of commencement of the distribution)
exceed Five Thousand Dollars ($5,000), the Plan Administrator shall direct the
Trustee to distribute as soon as practicable the full amount thereof to the
Participant, his legal representative or Beneficiary to the extent permitted by
Section 411(a)(11) of the Code and Section 203(e) of ERISA.
8.11 Account Balance. For purposes of this Article VIII, Account
---------------
balance shall include any rollover account balance.
8.12 Special Rule for Rollovers Out of the Plan. Notwithstanding any
------------------------------------------
provision of the Plan to the contrary that would otherwise limit the election of
a Distributee under this Article VIII,
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<PAGE>
a Distributee may elect, at the time and in the manner prescribed by the Plan
Administrator, to have any portion of an Eligible Rollover Distribution paid
directly to an Eligible Retirement Plan specified by the Distributee in a direct
rollover. Any portion of an Eligible Rollover Distribution that is not paid
directly to an Eligible Retirement Plan shall be subject to applicable income
tax withholding. For purposes of this Section 8.12, a "direct rollover" is a
payment by the Plan to the Eligible Retirement Plan specified by the
Distributee.
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<PAGE>
ARTICLE IX
TERMINATION AND DISTRIBUTION UPON
TERMINATION OF EMPLOYMENT OTHER THAN
FOR RETIREMENT, DEATH OR DISABILITY
-----------------------------------
9.1 Terminated Participant. Upon a Participant's or Former Participant's
----------------------
termination of employment with the Company for any reason other than retirement,
death or Permanent Disability, the Company shall promptly notify the Plan
Administrator in writing of such fact and such Participant shall become (a) a
Terminated Participant if such Participant has not attained retirement age (as
provided in Section 8.1), or (b) a Retired Participant if such Participant has
attained retirement age (as provided in Section 8.1). In the event a Terminated
Participant has attained retirement age, the provisions of Article VIII shall
thereafter apply to such Participant.
9.2 Distribution of After-tax Savings and Section 401(k) Contributions.
------------------------------------------------------------------
The balance of a Terminated Participant's After-tax Savings Account and Section
401(k) Contribution Account (as determined in accordance with Articles IV and V)
shall be valued as of the Valuation Date coinciding with or immediately
preceding the date distribution is made to the Participant, and shall be subject
to distribution in the same manner as provided in Sections 8.5 and 8.10 (and in
the same forms as provided in Section 8.9) without discrimination in favor of or
against any class.
9.3 Distribution of Vested Company Contribution Account. The vested
---------------------------------------------------
interest of the Terminated Participant in the Terminated Participant's Company
Contribution Account (as determined in accordance with Article VII) shall be
valued as of the Valuation Date coinciding with or immediately preceding the
date distribution is made to the Participant, and shall be subject to
distribution in the same manner as provided in Section 8.5 and 8.10 (and in the
same forms as provided in Section 8.9) without discrimination in favor of or
against any class. A Terminated Participant may elect to defer distribution of
his vested interest until the earliest of the date such Terminated Participant
attains age 62, dies, or suffers a Permanent Disability; provided, however, that
the Terminated Participant may elect to commence distribution in any of the
forms of payment available under Section 8.5 as of any earlier date after the
date on which he becomes a Terminated Participant. There will be no pro rata
credit of the Company Contribution for the partial Plan Year in valuing a
Terminated Participant's Company Contribution Account.
9.4 Mandatory Cash-Out of Small Accounts. Notwithstanding any other
------------------------------------
provision in this Article IX, if the total value of the Terminated Participant's
vested Account does not (and did not, at the time of any prior distribution or
withdrawal) exceed Five Thousand Dollars ($5,000), the Plan Administrator shall
direct the Trustee to distribute as soon as practicable the full amount thereof
to the Terminated Participant or his legal representative or Beneficiary to the
extent permitted by Section 411(a)(11) of the Code and Section 203(e) of ERISA,
and subject to Section 5.10.
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<PAGE>
9.5 Unvested Company Contributions.
------------------------------
(a) Forfeiture. Any portion of a Terminated Participant's Company
----------
Contribution Account, which has not vested at the time the Participant's
employment is terminated will be forfeited upon the Participant's incurring a
one year Period of Severance.
(b) Restoration of Forfeiture. Subject to the requirements of
-------------------------
subsection (c) of this Section, a Terminated Participant (described in
subsection (a) of this Section) who resumes status as an Employee of the Company
before incurring five (5) consecutive Periods of Severance and who is readmitted
to the Plan in accordance with Section 2.2 shall have his forfeited amounts
restored and added to his new Company Contribution Account (where it will vest
in accordance with Article VII).
(c) Distribution Prior to Reemployment. A Terminated Participant
----------------------------------
described in subsection (b) of this Section who previously received a
distribution will have his forfeitures restored only if he repays, at any time
prior to the end of five (5) consecutive Periods of Severance commencing on the
date such distribution is made:
(1) The entire amount of distribution, if any, previously received
from the Terminated Participant's After-tax Savings Account under Section 9.2;
(2) The entire amount of distribution, if any, previously received
from the Terminated Participant's Section 401(k) Contribution Account under
Section 9.2; and
(3) The entire amount of distribution, if any, previously received
from the Terminated Participant's Vested Company Contribution Account under
Section 9.3.
Any repayment made by a Participant pursuant to this subsection (c) shall be
made by means of a single lump sum cash payment.
9.6 Account Balance. For purposes of this Article IX, Account balance
---------------
shall include any rollover account balance.
9.7 Special Rule for Rollovers Out of the Plan. The special rule provided
------------------------------------------
in Section 8.12 shall apply to distributions under this Article IX.
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<PAGE>
ARTICLE X
DISTRIBUTION DURING CONTINUED EMPLOYMENT
----------------------------------------
10.1 Withdrawal of After-tax Savings.
-------------------------------
(a) Withdrawal of Additional After-tax Savings. A Participant or
------------------------------------------
Former Participant may withdraw his Additional After-tax Savings at any time and
continue to participate in the Plan after such withdrawal.
(b) Withdrawal of Basic After-tax Savings. A Participant or Former
-------------------------------------
Participant may withdraw his Basic After-tax Savings at any time. However, upon
withdrawing such Basic After-tax Savings, the Participant shall cease to
participate in the Plan and shall in all respects become a Former Participant,
except as otherwise provided in Section 10.5 and subject to the provisions of
Section 2.4.
(c) Valuation of After-tax Savings Account. The After-tax Savings
--------------------------------------
Account of the Participant or Former Participant shall be valued as of the
Valuation Date coinciding with or immediately preceding the date distribution is
made to the Participant or Former Participant.
(d) Form of Payment. Withdrawals of After-tax Savings under this
---------------
Section 10.1 (including the withdrawal of any earnings thereon) shall be
distributed in whole or in part as a single lump sum payment and may be in cash
or employer securities, except that any withdrawal of employer securities shall
be limited to the amount of such securities credited to the Participant's or
Former Participant's account under the Host Marriott Corporation Stock Fund.
(e) Taxation of Withdrawal. After-Tax Savings (including earnings)
----------------------
shall be treated as a "separate contracts" from all other contributions for
purposes of determining the tax consequences of withdrawals.
10.2 Withdrawal of Section 401(k) Contribution. Distribution of a
-----------------------------------------
Participant's or Former Participant's Section 401(k) Contribution Account (and
the earnings thereon) is subject to Section 5.10 and the limitations of Section
401(k) of the Code.
10.3 Withdrawal of Vested Company Contribution Account. A Participant
-------------------------------------------------
or Former Participant may not withdraw his vested Company contributions (or any
earnings thereon) prior to his Separation Date, except as provided in Section
10.5.
10.4 Readmission of Former Participant to Plan. A Former Participant
-----------------------------------------
who terminates participation in the Plan during continued employment shall be
entitled to readmission thereto as provided in Section 2.4.
10.5 Distributions Upon Attainment of Age 59-1/2. Upon attainment of
-------------------------------------------
age 59-1/2, a Participant or Former Participant may elect to withdraw the entire
balance of his After-tax Savings Account, Section 401(k) Contribution Account
and vested Company Contribution Account and
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<PAGE>
continue participation in the Plan. Application for withdrawal under this
Section 10.5 by Participants or Former Participants shall be made in writing and
shall be made in accordance with the distribution requirements set forth in
Article VIII.
10.6 Account Balance. For purposes of this Article X, Account balance
---------------
shall include any rollover account balance.
10.7 Hardship Withdrawals.
--------------------
(a) Terms of Hardship Withdrawals. Any Participant who sustains a
-----------------------------
Hardship may submit a request to the Plan Administrator for a distribution from
the Plan as may be necessary to meet such Hardship. The Plan Administrator
shall have the power in its sole discretion to approve or disapprove (in whole
or in part) any such request, based on the standards set forth in this Section
10.7. Any distribution to a Participant pursuant to this Section 10.7 shall not
exceed the amount required to meet the Hardship, and distribution shall be made
only if participant represents in writing that such amount is not reasonably
available from other resources of the Participant as described in Treas. Reg.
Section 1.401(k)-1(d)(2)(ii)(B). Such distributions shall be limited to the sum
of (1) amounts in the Participant's Section 401(k) Contribution Account
attributable to amounts transferred from the Prior Plan that had accrued on or
before December 31, 1988 (along with earnings attributable thereto), plus (2)
amounts in the Participant's Section 401(k) Contribution Account accrued under
the Prior Plan and this Plan after December 31, 1988 (exclusive of any
earnings), plus (3) amounts in the Participant's Rollover Account.
(b) Restrictions. Participants receiving Hardship distribution under
------------
this Section 10.7 shall be subject to the following restrictions:
(1) The Participant's limit under Section 402(g) of the Code on
Section 401(k) Contributions for the Fiscal Year immediately following the
Fiscal Year in which a distribution is made to the Participant shall be reduced
by the amount of Section 401(k) Contributions for the Fiscal Year in which such
distribution was made; and
(2) The Participant shall be prohibited for twelve (12) months from
the date of a distribution under this Section 10.7 from electing any Section
401(k) Contributions under Article V or making contributions of Basic or
Additional After-tax Savings under Article IV of this Plan. The Participant
shall likewise be prohibited for the same twelve (12) month period from making
employee contributions under any deferred compensation plan of the Company, in
accordance with written guidelines set forth by the Committee.
(c) Committee Guidelines and Determination. The Committee shall set
--------------------------------------
forth written guidelines for the Administrator to make its determination under
this Section 10.7 in accordance with the above standards (and the definition of
Hardship) in a uniform and nondiscriminatory manner. The Committee shall make
its determination under this Section 10.7 in
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<PAGE>
accordance with the above standards (and the definition of Hardship) and in a
uniform and nondiscriminatory manner.
10.8 Special Rule for Rollovers Out of the Plan. Unless otherwise
------------------------------------------
provided by a provision of the Code, the rule provided in Section 8.12 shall
apply to distributions under this Article X.
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<PAGE>
ARTICLE XI
LOANS TO PARTICIPANTS
---------------------
11.1 General Provisions. The Committee shall direct the Trustees to
------------------
make a loan to Participants who are "parties in interest" (as defined in Section
3(14) of ERISA) (and to beneficiaries of such Participants as designated in
written rules set forth by the Committee) as provided in this Section 11.1.
Such loan shall be in an amount that does not exceed the amount set forth in
Section 11.2. Loans shall be made on written application to the Plan
Administrator and on such terms and conditions as set forth in this Article XI,
and in accordance with the rules and procedures established by the Committee in
a written resolution. All such rules and procedures shall be uniform and
nondiscriminatory and shall relate to such matters as:
(a) Procedures for applying for loans;
(b) The basis on which loans will be approved or denied;
(c) Limitations on the types of loans offered;
(d) The procedure for determining a reasonable rate of interest;
(e) The types of collateral which may secure a loan;
(f) The events constituting default;
(g) Minimum loan amounts;
(h) Frequency of loans; and
(I) Any other appropriate matters consistent with this Article XI.
11.2 Maximum Loan Amount. A loan to a Participant (when added to the
-------------------
outstanding balance of all other loans made to the Participant under this Plan)
shall not be in an amount that exceeds the Allocable Portion of the total
balance in the Participant's After-tax Savings Account and Section 401(k)
Contribution Account (valued as of the Valuation Date coinciding with or
immediately preceding the date of such loan). The Allocable Portion shall be
adjusted accordingly in the event the maximum permissible loan amount under
Section 72(p) of the Code (or any successor provision) is decreased.
11.3 Minimum Loan Amount. The minimum loan amount for each loan shall
-------------------
be One Thousand Dollars ($1,000).
11.4 Repayment Period. The term of a loan made under this Article XI
----------------
shall be fixed by the Committee, but in no event shall such term exceed (a) one
hundred twenty (120) months in the
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<PAGE>
case of a loan for the purchase of a principal residence, or (b) sixty (60)
months in the case of a loan for any other purpose.
11.5 Terms and Conditions. Loans made to Participants shall be made
--------------------
in accordance with the following terms and conditions:
(a) The loans shall be secured by the Participant's interest in the
Plan, plus by the Participant's promissory note for the amount of the loan
(including interest) payable to the order of the Trustees. The Plan
Administrator may also require such other collateral which in a normal
commercial setting would be considered adequate for the full protection of the
Trust Fund.
(b) The interest rate for the loan shall be the Federal prime rate as
of the last day of the quarter immediately preceding or ending on the date the
loan is made.
(c) Payment of principal and interest shall be made through
appropriate payroll deductions from the Compensation otherwise payable to the
Participant while the Participant is an Employee. Such payroll deductions shall
continue until the full outstanding balance of any loans is repaid, regardless
of whether the borrower remains a Participant in the Plan. Payment of principal
and interest by an individual who is no longer an Employee shall be made through
such other means (not less frequently than quarterly) as the Committee deems
appropriate.
(d) The loan shall be made to the Participant from his Account and
shall be treated as an investment of assets of such Account. All interest and
all losses attributable to loans shall be charged to the borrowing Participant's
Account, and all loan payments shall be credited to the Participant's Account.
(e) The loan shall not be used as a means of distributing benefits
before they otherwise become due.
(f) Any loan made under the Plan shall be subject to such other terms
and conditions as the Committee shall determine are necessary or appropriate,
including the condition that the Participant pay (through payroll withholding)
the reasonable expenses determined by the Committee incurred by the Plan to make
and service the loan.
(g) Effective on and after December 12, 1994, loan repayments will be
suspended during a period of Qualified Military Service as defined in Section
414(u) of the Code.
11.6 Nondiscrimination. In making loans under this Article XI, the
-----------------
Committee shall not discriminate in favor of or against any Participant or group
of Participant. Accordingly, loans shall be available to all Participants on a
reasonably equivalent basis and shall not be made to Highly-Compensated
Employees of the Company in an amount greater than the amount made available to
other Participants.
11.7 Decision of the Plan Administrator. The Plan Administrator's
----------------------------------
decision to grant or deny a loan under this Article XI shall be final.
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<PAGE>
11.8 Offset of Account Balance. Notwithstanding anything to the
-------------------------
contrary contained elsewhere in the Plan, in determining the amount of any
distribution made in accordance with Article VIII or Article IX, the amount of
any security interest held by the Plan by reason of any loan made against the
Participant's Account under this Article XI, including accrued interest, shall
be collected by the Plan Administrator from any amounts standing to the credit
of the Participant in the Plan in satisfaction of the loan before making any
payments to the Participant or to the Participant's Beneficiary.
11.9 Default. In the event a Participant defaults on the repayment of
-------
a loan (under uniform and nondiscriminatory written standards adopted by the
Committee as to what constitutes default), the Trustees may treat the loan as a
distribution and pay the principal and interest owing under the loan from the
Participant's After-tax Savings Account in the following order of priority:
(a) Current year After-tax Savings;
(b) Prior years' After-tax Savings;
(c) Earnings on prior years' After-tax Savings; and
(d) Earnings on current year After-tax Savings.
In the event the Participant's After-tax Savings Account is insufficient to
repay the full amount of principal and interest owing, the Plan Administrator,
in its sole discretion, may treat the unpaid balance as a distribution from the
vested portion of the Participant's Company Contribution Account.
In the event the Participant's After-tax Savings Account and the vested
portion of the Participant's Company Contribution Account are insufficient to
repay the full amount of principal and interest owing, a determination shall be
made whether the Participant qualifies for a Hardship withdrawal under the
provisions of Section 10.7, and, if so, a distribution shall be made in
accordance therewith. If the Participant fails to qualify for a Hardship
distribution, the Plan Administrator shall take such other collection action as
it deems fit, in accordance with written standards adopted by the Committee;
provided, however, that the Plan Administrator shall defer making any
distribution from the Participant's Section 401(k) Contribution Account to repay
any unpaid loan balance until such time as the Participant has incurred a
Separation Date or has attained age 59 1/2, or until an event described in
Section 401(k)(10) of the Code has occurred.
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<PAGE>
ARTICLE XII
BENEFICIARIES
-------------
12.1 Designation of Beneficiary. Each Participant or Alternate Payee
--------------------------
may designate, on the forms provided by the Plan Administrator, one or more
Beneficiaries and contingent Beneficiaries to receive the Plan benefits in the
event of the Participant's or Alternate Payee's death. Notwithstanding the
preceding sentence, if the Participant is married at the time of his death and
has not elected a Qualified Joint and Survivor Annuity, his Account balance
shall be payable in full to his Surviving Spouse, unless he has designated a
different beneficiary with the consent of his Spouse, if any, in accordance with
Sections 1.65 and 8.6(c).
12.2 Manner of Designation. Such designation may be delivered, on
---------------------
forms provided by the Plan Administrator, at the time such Participant commences
participation in the Plan, or thereafter. A beneficiary designation completed
by an Alternate Payee may be delivered at the time the Administrator notifies
the Alternate Payee that he is entitled to Plan benefits under a Qualified
Domestic Relations Order, or thereafter. A Participant or Alternate Payee may
designate different Beneficiaries at any time by delivering a new written
designation to the Plan Administrator. Any such designation shall become
effective only upon its receipt by the Plan Administrator. The last effective
designation received by the Plan Administrator shall supersede all prior
designations. A designation of a Beneficiary shall be effective only if the
designated Beneficiary survives the Participant or Alternate Payee. All
designations must be signed by either the Participant or Alternate Payee, as
appropriate.
12.3 Absence of Valid Designation of Beneficiary. Except as provided
-------------------------------------------
in section 8.7, if a Participant or Alternate Payee fails to designate a
Beneficiary, if no designated Beneficiary survives the Participant or Alternate
Payee, or if such designation is for any reason illegal or ineffective,
distribution of benefits otherwise payable under this Plan shall be made to the
Participant's or Alternate Payee's estate.
12.4 Beneficiary Bound by Plan Provisions. Whenever the rights of a
------------------------------------
Participant or Alternate Payee are stated or limited in the Plan, the
Participant's or Alternate Payee's Beneficiaries shall be bound thereby.
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<PAGE>
ARTICLE XIII
QUALIFIED DOMESTIC RELATIONS ORDERS
-----------------------------------
13.1 Governing Provisions. Notwithstanding any other provisions of
--------------------
this Plan, a Participant's Account may be assigned in whole or in part pursuant
to the provisions of a Qualified Domestic Relations Order (hereinafter "QDRO").
In such case, the following rules shall apply:
(a) A separate Account shall be established for any Alternate Payee
who has been awarded Plan assets, unless a QDRO obligates the Plan to
distribute, as soon as administratively practicable, all or part of a
Participant's Account to the Alternate Payee. In such cases, a pro rata portion
of the amount payable to the Alternate Payee shall be withdrawn from each Fund
in which the Participant, pursuant to Section 14.1, has invested. This pro rata
withdrawal from each Fund shall be calculated according to the percentage of the
Participant's total Account which the Participant has placed in each Fund.
Thus, for example, if a Participant with an Account of $200,000 has invested
fifty percent (50%) in the Balanced Fund and fifty percent (50%) in the Bond
Fund, and a QDRO awards $100,000 to an Alternate Payee, fifty percent (50%) of
the Alternate Payee's award shall be deducted from the Bond Fund and fifty
percent (50%) from the Balanced Fund.
(b) All such payments pursuant to a QDRO shall be subject to
reasonable rules and regulations promulgated by the Committee respecting the
time of payment pursuant to such order and the valuation of the Participant's
Account from which payment is made, provided that all such payments are made in
accordance with such order and Section 414(p) of the Code.
(c) The balance of a Participant's Account subject to any QDRO shall
be reduced by the amount of any payment made pursuant to such order.
An Alternate Payee for whom a separate Account is established pursuant to this
Article XIII shall be entitled to file an election with regard to investment of
that Account in the manner specified by Article XIV and subject to the terms of
the QDRO. All such elections shall be subject to the same terms and conditions
as Article XIV imposes upon Participant elections, and all such elections shall
be carried out by the Administrator in accordance with Article XIV.
Upon the death of an Alternate Payee, the Alternate Payee's Beneficiaries shall
be entitled to payment of benefits in an amount and in the manner provided by
the Plan.
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<PAGE>
ARTICLE XIV
PARTICIPANT'S DIRECTED INVESTMENTS
----------------------------------
14.1 Election by Participants. Subject to the terms and conditions of
------------------------
this Article XIV, each Participant shall have the right to direct that his (a)
Account balance, (b) share of future allocations of Company contributions, (c)
share of future forfeitures, and (d) future After-tax Savings and Section 401(k)
Contributions, be invested, in specified multiples of one percent (1%), in any
of the Funds maintained under the Plan, provided the Participant elects to do
so. The Plan Administrator shall carry out the election in accordance with the
provisions of this Article XIV. For the purposes of making elections under this
Article XIV, the term "Participant" shall include a Beneficiary, and an
Alternate Payee for whom a separate account has been established in accordance
with Article XIII.
14.2 Election Rules.
--------------
(a) Election to be in Writing. A Participant's election to direct
-------------------------
investments shall be in writing, on a form furnished by the Plan Administrator,
or shall be made under such other procedures as specified by the Plan
Administrator. The election shall state the percentage to be transferred to or
from a Fund.
(b) Effective Date of Election. An election shall become effective
--------------------------
upon the next subsequent Transfer Date (as described in Section 14.3) occurring
within a reasonable time (as determined under procedures specified by the Plan
Administrator) after the receipt of the Participant's valid election by the Plan
Administrator, unless such election is revoked before such Transfer Date.
(c) Revocation of Election. A Participant may revoke an election, in
----------------------
whole or in part, any time prior to the Transfer Date. Thereafter, a revocation
shall become effective as of the next ensuing Transfer Date occurring within a
reasonable time (as determined under procedures specified by the Plan
Administrator) after the Plan Administrator's receipt of such revocation.
(d) Change in Election. Each Participant may elect to change the
------------------
Funds (and/or the percentage to be allocated thereto) in which his (1) Account
balance, (2) share of future allocations of Company contributions, (3) share of
future forfeitures, and (4) future After-tax Savings and Section 401(k)
Contributions, are to be invested. Upon the receipt by the Plan Administrator
of a Participant's request for a change in writing or in some other form
authorized by the Plan Administrator, the election shall be effective as
provided in paragraph (b) of this Section.
(e) Default Election. In the event that a Participant does not make
----------------
an initial election to direct investments, his (1) Account balance, (2) share of
future allocations of Company contributions (3) share of future forfeitures, and
(4) future After-tax Savings and Section 401(k)
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<PAGE>
Contributions, shall be invested in the Fund(s) determined in the sole
discretion of the Committee until an election is made pursuant to this Article.
14.3 Transfer Date. The Committee on behalf of the Named Fiduciary
-------------
shall establish one or more Transfer Dates in each Fiscal Year; provided,
however, that such Transfer Dates shall occur no less frequently than quarter-
annually.
14.4 Confirmation. The Plan Administrator shall provide written
------------
confirmation to a Participant within a reasonable time after an election or
change of election is made by such Participant.
14.5 Subdivision of Accounts.
-----------------------
(a) Establishment of Subaccounts. The Account of a Participant
----------------------------
who has made an election pursuant to this Article shall be subdivided as of the
Transfer Date into a Subaccount corresponding to each of the Funds maintained
under the Plan into which the Participant has made an election to have his
Account invested. Such Participant's Fund Subaccounts shall each have a balance
as of the Transfer Date giving effect to the percentages indicated by the
Participant's election. If a Participant has not made an election as to any
Fund, such Participant's Account shall be placed into the Fund(s) determined
under Section 14.2(e) and the Participant's Fund Subaccount(s) shall have an
aggregate value equal to the Participant's entire Account balance.
(b) Allocation of After-tax Savings, Section 401(k)
---------------------------------------------------
Contributions, Company Contributions and Forfeitures Among Subaccounts. The
- ----------------------------------------------------------------------
following amounts shall be further allocated among such Participant's Fund
Subaccounts in the appropriate percentages in accordance with the Participant's
election: (1) that portion of any Company contribution which is allocated
pursuant to Section 6.4 to the Company Contribution Account of a Participant who
has made an election; (2) the Participant's After-tax Savings; (3) the
Participant's Section 401(k) Contributions; and (4) forfeitures allocated under
Section 6.9 to the Company Contribution Account of a Participant.
14.6 Investment Funds.
----------------
(a) Committee's Responsibility for Funds. The Committee shall be
------------------------------------
responsible for designating Funds in the Trust Fund into which Participants may
elect to invest their Accounts as provided in this Article. The Plan
Administrator shall provide sufficient information to Participants concerning
the Funds to permit them to make informed investment decisions, or, if
appropriate, provide Participants with directions as to how such information may
be obtained.
(b) Investment Policy of Funds. The Committee shall determine the
--------------------------
Funds to be made available under the Plan; provided however, that at all times
that in addition to the Host Marriott Corporation Stock Fund, three (3) or more
Funds shall be maintained which (1) shall not invest in Qualifying Employer
Securities or Qualifying Employer Real Property; (2) shall be designed to enable
Participants, by choosing among them, to minimize the risk of large losses in
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<PAGE>
their Accounts; (3) shall be designed to enable Participants, by combining them,
to achieve general risk and return characteristics in their Accounts as desired
by Participants; and (4) shall be designed to permit Participants to generally
minimize the risk to their Accounts at any level of expected return.
The Named Fiduciary, acting by and through the Committee, shall establish
an investment policy and method consistent with the objectives of the Plan and
the requirements of Title I of ERISA. Such objectives shall include, those set
forth in Article XIV with respect to the Funds. The Committee acting on behalf
of the Named Fiduciary shall at least annually review such investment policy and
method. In establishing and reviewing such investment policy and method, the
Named Fiduciary shall endeavor to determine the Plan's short-term and long-term
objectives and financial needs, taking into account the need for liquidity to
pay benefits and the need for investment growth. All actions of the Committee
acting on behalf of the Named Fiduciary taken pursuant to this subsection (b)
and the reasons therefor shall be recorded and shall be communicated to the
Trustees and to the Board of Directors.
(c) Funds. The Committee shall make available to the Participants the
-----
following Funds or such other Funds as the Committee shall determine from time
to time:
(1) Stable Value Fund. The assets of the Stable Value Fund shall
-----------------
be invested in a manner that emphasizes a high level of stability and
preservation of principal over capital appreciation or income.
(2) Spectrum Income Fund. The assets of the Spectrum Income
--------------------
Fund are invested in a number of other T. Rowe Price mutual funds which invest
principally in fixed income securities. The fund seeks a high level of current
income consistent with moderate price fluctuation.
(3) Balanced Fund. The assets of the Balanced Fund shall be
-------------
invested in a manner that emphasizes long-term growth of capital as well as
providing income, with a moderate level of risk.
(4) Blue Chip Growth Fund. The assets of the Blue Chip Growth
---------------------
Fund shall be invested in a manner that emphasizes long-term growth of capital.
(5) Host Marriott Corporation Common Stock. Host Marriott
--------------------------------------
Corporation common stock which constitutes Qualifying Employer Securities.
(6) International Stock Fund. The assets of the International
------------------------
Stock Fund shall be invested in a manner that emphasizes long-term capital
growth, principally through investment in a portfolio of diversified common
stocks of established non-U.S. companies.
(7) New Horizons Fund. The assets of the Aggressive Growth Fund
-----------------
shall be invested in a manner that emphasizes high growth by investing in stocks
of small, rapidly growing companies.
14.7 Voting Rights.
-------------
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<PAGE>
(a) Generally, all shares (including fractional shares) held in a
Participant's Host Marriott Corporation Stock Fund Subaccount shall be voted in
accordance with the written direction of the Participant.
(1) The Committee shall notify the Participants in writing of each
occasion for the exercise of voting rights as soon as practicable, and generally
not less than thirty (30) days, before such rights are to be exercised. Such
notification shall include all the information that the Corporation distributes
to shareholders regarding the exercise of such rights.
(2) Each Participant shall be entitled to direct the exercise of
rights other than voting rights (such as, for example, a conversion privilege)
with respect to all shares held in the Participant's Host Marriott Corporation
Stock Fund Subaccount in the same manner as prescribed in this Section 14.7, to
the extent required by the provisions of the Plan and applicable laws.
(3) Notwithstanding the above, in the event of a tender offer for
Host Marriott Corporation common stock with time limits that do not permit
voting rights with respect to the offer to be passed through to Participants,
the Committee shall instruct the Trustee regarding the exercise of rights with
respect to the tender offer.
(b) The Trustee shall exercise voting rights with respect to all
investments other than Qualifying Employer Securities held in the Host Marriott
Corporation Stock Fund.
14.8 Allocation of Income of Funds. The net income of each Fund shall
-----------------------------
be allocated among the Fund Subaccounts as provided in Section 6.8.
14.9 Investment Authority of Former Employees. Any Participant who
----------------------------------------
ceases to be an Employee shall continue to have the authority to direct the
investment of his Account in accordance with the provisions of this Article.
14.10 Investment for the Benefit of Incompetents. If the Plan
------------------------------------------
Administrator receives notice that any person entitled to direct investments
hereunder has been determined to be legally incompetent, his Account shall be
placed in a Fund(s) determined under Section 14.2(e) until such time as the
person's legal representative files an election in the manner specified in this
Article.
14.11 Rules of Committee. The Committee may establish such rules as it
------------------
deems necessary to carry out the provisions of this Article and to comply with
the requirements of ERISA.
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<PAGE>
ARTICLE XV
PLAN FIDUCIARIES
-----------------
15.1 Plan Fiduciaries.
----------------
(a) Named Fiduciary. The Committee is hereby named as the fiduciary
---------------
of the Plan to have authority to control and manage the operation and
administration of the Plan. As such, the Committee may hereinafter be referred
to as the "Named Fiduciary". The Named Fiduciary shall have all of the legal
liabilities and obligations set forth in ERISA with respect to employee benefit
plan fiduciaries.
(b) Profit Sharing Committee. The function of the Committee shall be
------------------------
to advise and assist the Plan Administrator in the day-to-day discharge of its
duties hereunder. The Committee shall consist of not more than ten (10) persons
appointed by the Board of Directors. The Plan Administrator shall attend all
meetings of the Committee and shall act as the secretary of the Committee ex
officio to record minutes of all action taken at any such meeting. Each member
of the Committee shall sit at the pleasure of the Board of Directors and may be
removed at any time with or without cause.
(c) Trustees. The Named Fiduciary shall appoint one or more trustees
--------
("Trustees") under the terms of the Trust Agreement.
15.2 Fiduciary Duty. Subject to Section 403(c) of ERISA, the Named
--------------
Fiduciary and each other Fiduciary shall discharge its duties with respect to
the Plan solely in the interest of the Participants and their Beneficiaries and:
(a) For the exclusive purpose of providing benefits to Participants
and their Beneficiaries and defraying reasonable expenses of administering the
Plan;
(b) With the care, skill, prudence, and diligence under the
circumstances then prevailing, that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims;
(c) By diversifying the investments of the Plan so as to minimize the
risk of large losses, unless under the circumstances it is clearly prudent not
to do so; and
(d) In accordance with the provisions of this Plan insofar as they are
consistent with the provisions of ERISA.
The diversification requirement of subsection (c) of this Section and the
prudence requirement (only to the extent that it requires diversification) of
subsection (b) of this Section shall not be violated by
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<PAGE>
acquisition or holding of Qualifying Employer Real Property or by acquisition or
holding of Qualifying Employer Securities.
15.3 Agents and Advisors.
-------------------
(a) Employment of Agents. The Named Fiduciary and the Committee shall
--------------------
have the power to employ suitable agents and advisors for themselves including
but not limited to auditors, accountants, investment advisors and custodians and
legal and other counsel, and to pay reasonable compensation for their services.
Such agents may be persons acting in a similar capacity for the Company, or may
be employees of the Company. The opinion of any such agent shall be complete
authority and protection for any action taken or omitted by the Named Fiduciary
and the Committee acting in good faith and in accordance with such opinion.
(b) Delegation to Agents and Plan Administrator. The Named Fiduciary
-------------------------------------------
acting by and through the Committee may employ agents and delegate to them
ministerial duties. The Named Fiduciary may also designate persons, including a
Plan Administrator and the Committee, to carry out both ministerial and
fiduciary responsibilities; provided, however, that the Trustees' responsibility
to manage or control the assets of the Plan may not be so delegated except to an
investment manager or managers pursuant to subsection (c) of this Section.
(c) Appointment of Investment Manager. The Named Fiduciary shall have
---------------------------------
the power as provided in the Trust Agreement to appoint an investment manager or
managers with the power to manage, acquire or dispose of any assets of the Plan
so long as each such investment manager (1)(i) is registered as an investment
advisor under the Investment Advisors Act of 1940; (ii) is a bank, as defined in
that Act; or (iii) is an insurance company qualified to manage, acquire, or
dispose of assets of employee pension benefit plans under the laws of more than
one State; and (2) has acknowledged in writing to the Named Fiduciary that he or
she or it is a fiduciary with respect to the Plan.
15.4 Administrative Action.
---------------------
(a) Action by Majority. The action of a majority of the Board of
------------------
Directors or the Committee at the time acting hereunder, and any instrument
executed by a majority of such Directors or Committee members shall be
considered the action or instrument of the Board of Directors or the Committee
as the case may be. Action may be taken by the Board of Directors or the
Committee at a meeting or in writing without a meeting.
(b) Right to Vote. No Director or Committee member or Plan
-------------
Administrator shall have the right to vote or decide upon any matter relating
solely to himself or solely to any of his rights or benefits under the Plan.
(c) Authority to Execute Documents. The Named Fiduciary or the
------------------------------
Committee may authorize in writing any one or more of their number to execute
any document or documents on their behalf, and anyone dealing with the Named
Fiduciary, Committee or Trustees may accept and rely upon any document executed
by such member or members as representing action by the Named Fiduciary,
Committee or Trustees, as the case may be.
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<PAGE>
15.5 Liabilities and Indemnifications.
--------------------------------
(a) Liability of Fiduciaries. The Named Fiduciary and their
------------------------
assistants and representatives including members of the Committee and the Plan
Administrator (other than any Investment Manager) shall be free from all
liability for their acts and conduct in the administration of the Plan except
for acts of willful misconduct; provided, however, that the foregoing shall not
relieve any of them from any responsibility or liability for any responsibility,
obligation or duty that they may have pursuant to ERISA.
(b) Indemnity by Company. In the event, and to the extent not insured
--------------------
against by any insurance company pursuant to provisions of any applicable
insurance policy, the Company shall indemnify and hold harmless the Named
Fiduciary and their assistants and representatives including members of the
Committee and the Plan Administrator from any and all claims, demands, suits or
proceedings in connection with the Plan that may be brought by the Company's (or
Affiliated Company's) employees, Participants or their Beneficiaries or legal
representatives, or by any other person, corporation, entity, government or
agency thereof; provided, however, that such indemnification shall not apply to
any such person for such person's acts of willful misconduct in connection with
the Plan.
15.6 Plan Expenses and Taxes.
-----------------------
(a) Plan Expenses. The administrative expenses (and the Investment
-------------
Expenses) incurred by the Named Fiduciary, the Committee and Trustees in the
performance of their duties, including recordkeeping fees and fees for legal
services rendered to the Named Fiduciary and Trustees, such compensation to the
Named Fiduciary and Trustees as may be agreed upon in writing from time to time
between themselves and the Board of Directors, and all other proper charges and
disbursements of the Named Fiduciary, the Committee and Trustees, shall be paid
by the Trust Fund to the extent not paid from forfeitures as provided in Section
6.9 or by the Company.
(b) Taxes. All taxes of any and all kinds whatsoever that may be
-----
levied or assessed under existing or future laws upon or with respect to the
Trust Fund or the income thereof shall be paid from the Trust Fund, subject to
the making of appropriate charges.
15.7 Records and Financial Reporting.
-------------------------------
(a) Book of Account. The Named Fiduciary acting by and through the
---------------
Committee and the Trustees shall keep accurate and detailed accounts of all
investments, receipts, disbursements and other transactions hereunder. Within
ninety (90) days following the close of each Fiscal Year and at the request of
the Company ninety (90) days after the removal or resignation of any Trustee as
provided in Section 15.1(c), the Trustees shall file with the Company a written
account setting forth all investments, receipts, disbursements, allocations and
other transactions effected by the Trustees during such Fiscal Year or during
the period from the close of the last Fiscal Year to the date of such removal or
resignation.
(b) Financial Reporting Under ERISA. The Named Fiduciary shall if
-------------------------------
required by ERISA cause the Plan to engage, on behalf of the Participants, an
independent qualified public
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accountant, who shall conduct such examinations and give such opinions as are
required in connection with the Plan's reporting and filing requirements under
ERISA. The Named Fiduciary shall make available or cause to be made available to
each Participant and each beneficiary who is receiving benefits under this Plan,
such information, financial and otherwise, and in such manner and at such times
as is required under ERISA.
15.8 Compliance with ERISA and Code. The Named Fiduciary shall cause
------------------------------
the Plan to comply with all filing requirements as provided in ERISA and in the
Code and all regulations promulgated thereunder. All authority granted to the
Named Fiduciary, the Committee and the Trustees hereunder is subject to their
compliance with Sections 15.2, 15.9 and 15.10 and with ERISA.
15.9 Prohibited Transactions. A Fiduciary shall not engage in any
-----------------------
prohibited transaction within the meaning of Sections 406 and 407 of ERISA, or
Section 4975(c) of the Code, unless such transaction is exempt under Section 408
or Section 414(c) of ERISA or Section 4975(d) of the Code, or acquire or hold
any Company securities or real property except to the extent permitted under
Section 407 of ERISA.
15.10 Foreign Assets. No Fiduciary may maintain the indicia of ownership
--------------
of any assets of the Plan outside the jurisdiction of the district courts of the
United States, except as may be authorized by the Secretary of Labor by
regulation.
15.11 Exclusive Benefit of Trust Fund. The assets of the Trust Fund
-------------------------------
shall never inure to the benefit of the Company and shall be held for the
exclusive purposes of providing benefits to Participants and their Beneficiaries
and defraying reasonable expenses of administering the Plan.
15.12 Board of Directors Resolution. Any action by the Company pursuant
-----------------------------
to any of the provisions hereof shall be evidenced by a resolution of its Board
of Directors certified to the Committee or the Trustees over the signature of
its secretary or of any assistant secretary. The Committee and the Trustees
shall be fully protected in acting in accordance with such certified resolution.
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ARTICLE XVI
PLAN ADMINISTRATION
--------------------
16.1 Administration of the Plan.
--------------------------
(a) Authority to Administer. On behalf of the Named Fiduciary, the
-----------------------
Committee shall administer the Plan in accordance with its terms and shall have
all powers and discretionary authority necessary to carry out the provisions of
the Plan, including but not limited to, the power to: (1) interpret and construe
the provisions of the Plan, including making factual determinations; (2) prepare
any rules and regulations which may become necessary or desirable in the
operation of the Plan, including but not limited to specifying procedures to be
followed by eligible Employees in electing to participate in the Plan and in
revoking such participation; (3) determine eligibility for benefits and
determine the amounts and manner of payment thereof under the provisions of the
Plan; (4) keep individual accounts; (5) establish investment policies to be
followed by the Trustees; and (6) perform such other duties as may be required
for the proper administration of the Plan. The Committee shall have absolute
discretion in interpreting the provisions of the Plan and administering the Plan
in accordance with such provisions, including by way of illustration and not of
limitation, the making of determinations of eligibility to participate and the
calculation of benefits accruing or payable under this Plan.
(b) Delegation of Authority to Plan Administrator. In accordance with
---------------------------------------------
Section 15.3(b), the duties described in subsection (a) of this Section shall be
exercised by the Plan Administrator acting on behalf of the Committee, subject
to review by the Committee under Section 16.2(c) of a denial of a claim for
benefits.
(c) Finality of Decision. Any decision of the Named Fiduciary or of
--------------------
the Committee on its behalf, in matters within its jurisdiction shall be final,
binding and conclusive upon the Company and upon all persons who have
participated or have any interest or concern, whatsoever, in the Plan.
16.2 Claims.
------
(a) Claims for Benefits. Any claim for benefits under the Plan shall
-------------------
be made in writing to the Plan Administrator. Except as to his own account, no
claimant shall have any legal right to inquire as to any payment under the Plan
having been made or as to determining the amount of such payment.
(b) Notice of Claim Denied. If a claim for benefits is denied, in
----------------------
whole or in part, the Plan Administrator shall, within sixty (60) days after
receipt of the claim, notify the claimant of the denial of the claim. The
notice shall be written in language calculated to be understood by the claimant
and shall include the following information:
(1) The specific reason or reasons for denial of the claim;
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(2) Specific reference to the pertinent Plan provisions upon
which the denial is based;
(3) A description of any additional material or information
necessary for the claimant to perfect the claim, along with an explanation of
why such material or information is necessary; and
(4) An explanation of the Plan's claim review procedure with
respect to the denial of benefits.
(c) Request for Review of Denial. Within sixty (60) days after the
----------------------------
receipt by the claimant of a written notice of denial of the claim, or such
later time as shall be deemed reasonable taking into account the nature of the
benefit subject to the claim and any other attendant circumstances, the claimant
may file a written request with the Plan Administrator requesting that the
Committee conduct a full and fair review of the denial of the claim for
benefits. In connection with the claimant's appeal of the denial of the claim
for benefits, the claimant (or his authorized representative) may review
permanent documents and may submit issues and comments regarding the claim in
writing.
(d) Decision on Review of Denial. The Committee shall deliver to the
----------------------------
claimant a written decision on the claim within sixty (60) days after the
receipt of the aforesaid request for review, except that if there are special
circumstances (such as the need to hold a hearing, if necessary) which require
an extension of time for processing, the aforesaid sixty (60) day period shall
be extended to sixty (60) days. If an extension of time is necessary, written
notice shall be furnished to the claimant before the extension period commences.
If the claim is denied on review, in whole or in part, the decision shall be
written in a manner calculated to be understood by the claimant and shall
include the following information: (1) the specific reason or reasons for
denial; and (2) specific references to the pertinent Plan provisions on which
the decision is based.
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ARTICLE XVII
PARTICIPATING COMPANY WITHDRAWAL FROM PLAN;
------------------------------------------
TERMINATION OR MERGER OF THE PLAN
---------------------------------
17.1 Voluntary Withdrawal from Plan.
------------------------------
(a) Withdrawal By Participating Company. Any Participating Company
-----------------------------------
may at any time withdraw from the Plan upon giving the Named Fiduciary at least
thirty (30) days notice in writing of its intention to withdraw, unless the
Named Fiduciary shall waive such thirty (30) days notice. The withdrawal of
such Participating Company shall be effective on the last day of the Month in
which the foregoing thirty (30) day period ends.
(b) Segregation of Trust Assets Upon Withdrawal. Upon the withdrawal
-------------------------------------------
of a Participating Company pursuant to subsection (a) of this Section, the Plan
Administrator shall segregate the share of the assets in the Trust Fund, the
value of which, determined on the day the withdrawal of such Participating
Company shall be effective, shall equal the total credited to the accounts of
Participants of the withdrawing Participating Company. The determination of
which assets are to be so segregated shall be made by the Committee acting on
behalf of the Named Fiduciary in its sole discretion.
(c) Exclusive Benefit of Participants. Neither the segregation and
---------------------------------
transfer of the Trust assets upon the withdrawal of a Participating Company nor
the execution of a new agreement and declaration of trust by such withdrawing
Participating Company shall operate to permit any part of the Trust Fund to be
used for or diverted to purposes other than for the exclusive benefit of the
Participants.
(d) Applicability of Withdrawal Provisions. The withdrawal provisions
--------------------------------------
contained in this Section 17.1 shall be applicable only if the withdrawing
Participating Company continues to cover its Participants and eligible employees
in another profit-sharing plan or pension plan and trust qualified under
Sections 401 and 501 of the Code. Otherwise, the termination provisions of
Section 17.3 shall apply.
17.2 Amendment of Plan. The Board of Directors may amend the Plan
-----------------
with respect to all Participating Companies or with respect to a particular
Participating Company at any time, and from time to time, pursuant to written
resolutions adopted by the Board of Directors (and all Employees and persons
claiming any interest hereunder shall be bound thereby); provided, however, that
no such amendment shall:
(a) Alter the rights, duties or responsibilities of the Named
Fiduciary or Trustees without their written consent;
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<PAGE>
(b) Permit any portion of the Trust Fund to inure to the benefit of
the Company or permit any portion of the Trust Fund to be held or used other
than for the exclusive purpose of providing benefits to Participants and their
Beneficiaries and defraying reasonable costs of administering the Plan; or
(c) Have the effect of decreasing the "accrued benefit" of any
Participant as proscribed in Section 411(d)(6) of the Code;
(d) Have the effect of reducing any then vested percentage of benefits
of any Participant as computed in accordance with the vesting schedule under
Article VII of the Plan.
If the vesting schedule under Article VII of the Plan shall be amended and
such an amendment would, at any time, decrease the percentage of vested benefits
which any Participant would have been entitled to receive had the vesting
schedule not been so amended, then each Participant who is an Employee on the
date such amendment is adopted, or the date such amendment is effective,
whichever is later, and who has three (3) or more Periods of Service as of the
end of the period within which such Participant may make the election provided
for herein, shall be permitted, beginning on the date such amendment is adopted,
to irrevocably elect to have the Participant's vested interest computed without
regard to such amendment. Written notice of such amendment and the availability
of such election must be given to each such Participant, and each such
Participant shall be granted a period of sixty (60) days after the later of:
(1) The Participant's receipt of such notice; or
(2) The effective date of such amendment within which to make such
election.
Such election shall be exercised by the Participant by delivering or sending
written notice thereof to the Named Fiduciary prior to the expiration of such
sixty (60) day period.
17.3 Voluntary Termination of Plan.
-----------------------------
(a) Right to Terminate Plan. Each Participating Company contemplates
-----------------------
that the Plan shall be permanent and that it shall be able to make contributions
to the Plan. Nevertheless, in recognition of the fact that future conditions
and circumstances cannot now be entirely foreseen, each Participating Company
reserves the right to terminate (as to such Participating Company) either the
Plan (exclusive of the Trust Fund) or both the Plan and the Trust Fund, at any
time, by resolution of the board of directors of the Participating Company.
(b) Merger or Consolidation of Plan and Trust. Neither the Plan nor
-----------------------------------------
the Trust Fund may be merged or consolidated with, nor may its assets or
liabilities be transferred to, any other plan or trust, unless each Participant
would (if the Plan then terminated) receive a benefit immediately after the
merger, consolidation, or transfer which is equal to or greater than the benefit
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<PAGE>
the Participant would have been entitled to receive immediately before the
merger, consolidation, or transfer (if the Plan had then terminated).
(c) Termination of Plan and Trust Fund. If the board of directors of
----------------------------------
a Participating Company determines to terminate (as to such Participating
Company) the Plan and Trust Fund completely, the Plan and Trust Fund shall be
terminated insofar as they are applicable to such Participating Company as of
the date specified in certified copies of resolutions of such board of directors
delivered to the Named Fiduciary, the Committee and the Trustees. Upon such
termination of the Plan and Trust Fund, after payment of all expenses and
proportional adjustment of accounts of Participants employed by such
Participating Company to reflect such expenses, Trust Fund earnings or losses,
and allocations of any previously unallocated funds to the date of termination,
such Participating Company's Participants shall be entitled to receive the
amount then credited to their respective accounts in the Trust Fund. The Named
Fiduciary, in its sole discretion, may make payment of such amount in cash, in
assets of the Trust Fund, or in the form of immediate or deferred payment term
annuity contracts for such Participants.
17.4 Discontinuance of Contributions. Whenever a Participating
-------------------------------
Company determines that it is impossible or inadvisable for it to make further
contributions as provided in the Plan, the board of directors of such
Participating Company may, without terminating the Trust Fund, adopt an
appropriate resolution permanently discontinuing all further contributions by
such Participating Company. A certified copy of such resolution shall be
delivered to the Named Fiduciary, the Committee and the Trustees. Thereafter,
the Named Fiduciary, the Committee and the Trustees shall continue to administer
all the provisions of the Plan which are necessary and remain in force, other
than the provisions relating to contributions by such Participating Company.
However, the Trust Fund shall remain in existence with respect to such
Participating Company and all of the provisions of the Plan relating to the
Trust Fund shall remain in force.
17.5 Rights to Benefits Upon Termination of Plan or Complete
-------------------------------------------------------
Discontinuance of Contributions. Upon the termination or partial termination of
- -------------------------------
the Plan or the complete discontinuance of contributions by a Participating
Company, the rights of each of such Participating Company's Participants
affected by such termination or partial termination to the amount credited to
such Participant's Account at such time shall be nonforfeitable without
reference to any formal action on the part of such Participating Company, the
Named Fiduciary, the Committee or the Trustees.
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<PAGE>
ARTICLE XVIII
ELECTION TO PARTICIPATE BY SUBSIDIARIES
----------------------------------------
18.1 Consent Required for Subsidiaries to Join Plan. The Plan
----------------------------------------------
Administrator, upon receiving a written resolution of the board of directors of
a Subsidiary electing to become a Participating Company, may approve or
disapprove such election acting as the delegate of the Board of Directors. The
Board of Directors shall retain the final authority to override such action and
approve or disapprove the Subsidiary's request.
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ARTICLE XIX
MISCELLANEOUS PROVISIONS
------------------------
19.1 Status of Employment. The adoption and maintenance of the Plan
--------------------
shall not be deemed to constitute a contract of employment between the Company
and any Employee or Participant, or to be a consideration for, or an inducement
or condition of, any employment. Nothing contained herein shall be deemed to
give any Employee the right to be retained in the service of the Company or to
interfere with the right of the Company to discharge any Employee or Participant
at any time.
19.2 Liability of Company. Except as may be determined by the Board
--------------------
of Directors, in its sole discretion from time to time, all benefits payable
under this Plan shall be paid or provided solely from the Trust Fund and the
Company (other than Host Marriott, L.P. in its role as Named Fiduciary) assumes
no liability or responsibility therefor; its obligation which is expressly
stated to be non-contractual is limited solely to the making of contributions to
the Trust Fund as provided in this Plan.
19.3 Information.
-----------
(a) Supplied by Named Fiduciary, the Committee or Trustees. A
------------------------------------------------------
certification in writing to the Named Fiduciary, Plan Administrator, the
Committee or the Trustees, executed in accordance with the provisions of this
Plan, certifying to the existence, occurrence or happening of any event, shall
constitute evidence of such existence, occurrence or happening; and the Named
Fiduciary, Plan Administrator, the Committee, the Trustees and the Company shall
be fully protected in accepting and relying upon such certification and shall
incur no liability or responsibility for so doing.
(b) Supplied by Company. At the request of the Named Fiduciary,
-------------------
the Committee or the Trustees, the Company shall furnish in writing to the Named
Fiduciary, the Committee or the Trustees such information as may be necessary or
desirable in order that the Named Fiduciary, the Committee or the Trustees may
be able to carry out their respective duties hereunder. The Named Fiduciary,
the Committee and the Trustees shall be entitled to rely upon such information
as being correct.
19.4 Provisions of Plan to Control. In event of any conflict between
-----------------------------
the terms of the Plan as set forth in this instrument and in any description of
the Plan which may be furnished to Participants or others, the Plan set forth
herein shall control.
19.5 Payment for Benefit of Incompetent. The Trustees may make
----------------------------------
payment to any incompetent who is entitled to receive payments hereunder by
making the same to the legal representative of such incompetent or to his parent
or Spouse or may apply them for the incompetent benefit.
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19.6 Account to be Charged Upon Payment. When any distribution or
----------------------------------
other payment is made to or for the benefit or on behalf of any party entitled
to receive payments hereunder, the account held for the benefit of such party
shall be charged accordingly.
19.7 Tax Qualification of Plan. The Plan is intended to qualify as a
-------------------------
tax exempt profit sharing plan pursuant to the provisions of Section 401, the
cash or deferred arrangement provisions of the Plan set forth in Article V and
elsewhere are intended to satisfy the requirements of Sections 401(k) and
401(m), and the Trust created hereunder is intended to qualify as a tax exempt
trust under the provisions of Section 501(a) of the Code together with any
amendments thereto and all provisions of the Plan shall be construed to obtain
those results.
19.8 Deductibility of Company Contributions. The Contributions made
--------------------------------------
by the Company under this Plan are intended to be deductible as business
expenses, under the provisions of Section 404 of the Code, together with any
amendments thereto, and all provisions of the Plan shall be construed
accordingly.
19.9 Restriction on Alienation or Assignment. Benefits provided under
---------------------------------------
the Plan may not be assigned or alienated, except as permitted by Article XIII
and the following:
(a) A loan made by the Plan to a Participant in accordance with
Article XI shall be secured by the Participant's After-tax Savings Account and
Company Contribution Account as provided in Article XI.
(b) If a Participant is indebted to the Company or to the Marriott
Employees Federal Credit Union at the time any payments are to be made to such
Participant or to the Participant's Beneficiary hereunder and if the
Participant, prior to September 2, 1974 has executed in favor of such creditor
an irrevocable security assignment of the Participant's account balances in the
Plan, the Trustees are authorized to pay to such creditor all or such portion of
said payments as may be required to discharge such indebtedness.
(c) An offset to a Participant's benefit against an amount the
Participant is required to pay the Plan with respect to a judgment, order,
decree or settlement entered into or against a Participant on or after August 5,
1997 shall be permitted in accordance with Code section 401(a)(13)(C).
19 .10 Unclaimed Benefits. In the event that benefit payments owing to a
------------------
Participant have not been claimed by the Participant within three (3) years of
the date on which such benefits first became payable, the Plan Administrator
shall, at the end of the Fiscal Year during which such three (3) year
anniversary occurs reallocate such benefits to the remaining Participants in the
manner provided in Section 6.10(a). If subsequent to such reallocation, the
Participant entitled to such benefits makes claim therefor, the Plan
Administrator shall promptly pay such forfeited benefit. Funds with which to pay
any such benefits shall be provided as set forth in Section 6.10(b).
19.11 Recovery of Plan Benefits Payment Made by Mistake. A Participant
-------------------------------------------------
or Beneficiary shall be required to return to the Plan any payments made under
the Plan made by a mistake of fact or law.
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19.12 Bonding. Every Fiduciary of the Plan and every person who handles
-------
funds or other property of the Plan shall be bonded if and to the extent
required by Section 412 of ERISA.
19.13 Titles and Captions. The titles and captions to the Articles,
-------------------
Sections and subsections in the Plan are placed herein for convenience of
reference only, and in case of any conflict the text of this instrument, rather
than such titles, shall control.
19.14 Execution of Counterparts. This instrument may be executed in any
-------------------------
number of counterparts, each of which shall be deemed to be an original.
19.15 Governing Law. The Plan shall be governed, construed, administered
-------------
and regulated in all respects by and under the laws of the State of Maryland.
19.16 Separability. If any provisions of the Plan shall for any reason
------------
be invalid or unenforceable, the remaining provisions shall nevertheless remain
in full force and effect.
19.17 Supplements and Appendices. Supplements and Appendices to the Plan
--------------------------
or the Trust may be adopted, attached to and incorporated in the Plan or the
Trust at any time. The provisions of any such Supplements or Appendices shall
have the same effect that such provisions would have if they were included
within the basic text of the Plan or the Trust. Supplements and Appendices
shall be adopted by the Board pursuant to the amendment authority set forth in
Section 17.2 of the Plan and shall specify the persons affected.
19.18 Military Service. Notwithstanding any other provision of the Plan
----------------
to the contrary, contributions, benefits and service credit with respect to
qualified military service will be provided in accordance with section 414(u) of
the Internal Revenue Code.
19.19 Employer Securities. Notwithstanding any provision of the Plan or
Trust to the contrary, the Plan may invest in Qualifying Employer Securities and
Qualifying Employer Real Property up to 100% of the Plan's assets or otherwise
the maximum permitted by ERISA.
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ARTICLE XX
TOP HEAVY PROVISIONS
--------------------
20.1 Determination of Top Heavy Status. For purposes of this Article,
---------------------------------
the Plan shall be a Top Heavy Plan if, as of the Determination Date, either:
(a) The sum of the aggregated accounts of Participants who are
"key employees" (as defined in Section 416(i) of the Code) exceeds sixty percent
(60%) of the sum of the aggregated accounts of all Plan Participants; or
(b) The Plan is included in a Top Heavy Group.
If a Participant has received no compensation from the Company during the five
(5) year period preceding the Determination Date, his account balance may be
disregarded for purposes of determining whether the Plan is top-heavy. Solely
for purposes of determining which Participants are "key employees," the term
"compensation" (as used in Section 416(I) of the Code) shall mean the
compensation stated on an Employee's Form W-2 for the calendar year that ends
with or within the Plan Year.
20.2 Definitions. For purposes of this Article, the following terms
-----------
shall have the meanings set forth herein:
(a) "Aggregation Group" means:
-----------------
(1) Each Section 401 Plan of the Company in which a "key
employee" (as defined in Section 416(i) of the Code) is a participant; and
(2) Each Section 401 Plan of the Company which enables any
plan described in subsection (a)(i) of this Section to meet the requirements of
Section 401(a)(4) or 410 of the Code.
(b) "Determination Date" means, with respect to any Plan Year,
------------------
the last day of the preceding Plan Year. In the case of the Plan Year which
includes the Effective Date of the Plan, the last day of such Plan Year.
(c) "Section 401 Plan" means any stock bonus, pension, or profit
----------------
sharing plan subject to the qualification requirements of Section 401 of the
Code.
(d) "Top Heavy Group" means any Aggregation Group determined to
---------------
be a Top Heavy Group in accordance with the test set forth in Code Section
416(g)(2)(B).
(e) "Valuation Date" shall have the same meaning as set forth in
--------------
Section 1.72.
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<PAGE>
20.3 Requirements if Plan a Top Heavy Plan. Notwithstanding any other
-------------------------------------
provision of this Plan, for any Plan Year for which the Plan is a Top Heavy
Plan, a minimum allocation shall be made on behalf of each Participant who is
not a "key employee" (as defined in Section 416(i) of the Code) and who is
employed on the last day of such Plan Year in an amount equal to the lesser of
(a) three percent (3%) of such Participant's Compensation or (b) the largest
percentage of Compensation allocated to any key employee during such Plan Year.
The minimum allocation shall not apply to any non-key employee who receives a
minimum contribution or a minimum benefit under any other plan of the Company or
a Subsidiary. Notwithstanding the above, if a non-key employee participates in
this Plan and a defined benefit plan that is included in an Aggregation Group,
the non-key employee shall receive a minimum benefit under the defined benefit
plan rather than a minimum allocation under this Plan, provided that if the
defined benefit plan does not provide for a minimum benefit, the non-key
employee shall receive a minimum allocation under this Plan of five percent (5%)
of Compensation.
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<PAGE>
COMMITTEE ACKNOWLEDGMENT AND CONSENT
The undersigned as a member of the Profit Sharing Committee under the Host
Marriott, L.P. Retirement and Savings Plan (the "Plan"), on his own behalf and
on behalf of the other members of said Committee, hereby acknowledges receipt of
the Plan, and consents thereto.
Dated this _____ day of _______________, 199__
By___________________________________
Attest:
_____________________________________
Plan Administrator
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<PAGE>
COMMITTEE ACKNOWLEDGMENT AND CONSENT
The undersigned as a member of the Profit Sharing Committee under the Host
Marriott, L.P. Retirement and Savings Plan (the "Plan"), on his own behalf and
on behalf of the other members of said Committee, hereby acknowledges receipt of
the Plan, and consents thereto.
Dated this _____ day of _______________, 199__
By___________________________________
Attest:
_____________________________________
Plan Administrator
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<PAGE>
COMMITTEE ACKNOWLEDGMENT AND CONSENT
The undersigned as a member of the Profit Sharing Committee under the Host
Marriott, L.P. Retirement and Savings Plan (the "Plan"), on his own behalf and
on behalf of the other members of said Committee, hereby acknowledges receipt of
the Plan, and consents thereto.
Dated this _____ day of _______________, 199__
By___________________________________
Attest:
______________________________________
Plan Administrator
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<PAGE>
CERTIFICATE OF SECRETARY
------------------------
I, the undersigned secretary of Host Marriott Corporation, the General
Partner of Host Marriott, L.P., do hereby certify that the foregoing Host
Marriott, L.P. Retirement and Savings Plan (the "Plan") is a true and correct
copy of the Plan and that there have been no amendments or modifications to the
Plan that are not reflected in this copy.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of Host Marriott
Corporation as of the _____ day of _______________, 199__.
___________________________________
Secretary
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<PAGE>
Exhibit 10.34
Amendment to the
Employee Benefits & Other Employment Matters
Allocation Agreement
WHEREAS, Sodexho Marriott Services, Inc. previously called Marriott
International, Inc., a Delaware corporation ("Sodexho"), and Host Marriott
Corporation ("Host Marriott"), made and entered into an Employee Benefits &
Other Employment Matters Allocation Agreement (the "Allocation Agreement") as of
October 8, 1993;
WHEREAS, the Allocation Agreement was amended as of March 27, 1998 (i)
to reflect the conversions and redenominations relating to the benefits and
awards covered by the Allocation Agreement which were necessary as a result of
certain transactions arising from the spin-off of Marriott International, Inc.,
previously called New Marriott MI, Inc., and Sodexho's acquisition of
International Catering Corporation and Sodexho Financiere du Canada, Inc., and
(ii) to add New Marriott MI, Inc. as a party to the Allocation Agreement; and
WHEREAS, Section 5.12 of the Allocation Agreement provides that the
Allocation Agreement may be amended in writing executed by the parties; and
WHEREAS, Host Marriott intends to enter into certain transactions
pursuant to a plan to reorganize its business operations so that it will qualify
as a real estate investment trust as of January 1, 1999 ("Host REIT
Conversion"); and
WHEREAS, as part of the Host REIT Conversion, Host Marriott intends to
transfer the employment of certain Retained Employees to the various entities
that are or will be formed to complete the Host REIT Conversion and to transfer
substantially all its liabilities (other than liabilities relating to Crestline
Capital Corporation) to Host Marriott, L.P. ("HMLP");
WHEREAS, pursuant to the Employee Benefits and other Employment
Matters Allocation Agreement to be entered into by and between Host Marriott,
HMLP and Crestline Capital Corporation ("New Host Agreement") (i) certain
persons who are Host Individuals (as such term is defined in the Allocation
Agreement, as amended) will become employees of Crestline Capital Corporation
("Crestline"); and (ii) certain persons who are Marriott International Employees
or Marriott Terminees (as such terms are defined in the Allocation Agreement, as
amended) and who hold awards under the Host Marriott Corporation 1997
Comprehensive Stock Incentive Plan denominated in shares of Host Marriott Common
Stock will receive Conversion Awards ("Host REIT Conversion Awards") denominated
in shares of Host REIT common stock, $.01 par value per share ("Host REIT
Stock").
<PAGE>
NOW, THEREFORE, BE IT
RESOLVED, that the Allocation Agreement be, and it hereby is, amended
as follows, effective as of the Contribution Date:
1. Section 1.01 shall be amended by deleting the definitions of
Marriott International Employee of Host Individual in their entirety and
replacing them with the following:
Marriott International Employee: any individual who was an Employee
--------------------------------
of Marriott International (renamed Sodexho Marriott Services, Inc. after the New
Marriott Distribution Date) on the Distribution Date.
Host Individual: any individual who (i) is or was an employee of Host
----------------
Marriott Corporation or Host Marriott Services Corporation on or before the
Distribution Date, (ii) is or was an employee of Host Marriott Corporation or
its affiliates on or before the Contribution Date, or (iii) is a beneficiary of
any individual described in clause (i) or (ii).
2. Section 1.01 shall be amended by adding the following terms and
their definitions:
Crestline: Crestline Capital Corporation, a Maryland corporation.
----------
Contribution Date: the Contribution Date, as defined in the New Host
------------------
Agreement.
HMLP: means Host Marriott, L.P., a Delaware limited partnership.
-----
Host Marriott: Host Marriott Corporation, a Delaware corporation for
--------------
the period before the Contribution Date and Host Marriott Corporation, a
Maryland corporation for the period beginning on or after the Contribution Date.
HMLP: Host Marriott, L.P., a Delaware limited partnership.
-----
Host REIT Conversion: certain transactions entered into by Host
---------------------
Marriott pursuant to a plan to reorganize its business operations so that it
will qualify as a real estate investment trust as of January 1, 1999.
Host REIT Conversion Award: an adjustment of an award of an option,
---------------------------
restricted share or deferred stock under the Host REIT Stock Plan, in accordance
with Section 2.5 of the New Host Agreement.
2
<PAGE>
Host REIT Conversion Entity: the entities that will be formed prior
----------------------------
to, substantially concurrent with or within a reasonable time after the
Contribution Date as part of the Host REIT Conversion. A Host REIT Conversion
Entity shall include, but not be limited to, Crestline and HMLP.
Host REIT Deferred Compensation Plan: the Host Marriott Corporation
-------------------------------------
Executive Deferred Compensation Plan, maintained by HMLP and renamed the Host
Marriott, L.P. Executive Deferred Compensation Plan following the Contribution
Date.
Host REIT Stock: Host Marriott Corporation common stock, $.01 par
----------------
value per share.
Host REIT Stock Plan: the HMC Comprehensive Stock Incentive Plan, as
---------------------
defined in the New Host Agreement, as may be amended from time to time.
New Host Agreement: the Employee Benefits and Other Employment
-------------------
Matters Allocation Agreement to be entered into by and between Host Marriott
Corporation, Host Marriott, L.P., and Crestline Capital Corporation as part of
the Host REIT Conversion, as amended from time to time.
3. Section 2.03(b) shall be amended by adding a new paragraph to the
end to read as follows:
Notwithstanding any other provision to the contrary, effective as of
the Contribution Date, HMLP shall assume, in accordance with the New
Host Agreement, responsibility for all liabilities and obligations of
Host Marriott with respect to Host Individuals covered by the Host
Marriott Corporation Executive Deferred Compensation Plan.
4. Section 2.03 shall be amended by adding the following new section
(d) to the end thereof:
(d) Host REIT Conversion Terminations and Transfers. Notwithstanding
-----------------------------------------------
any other provision to the contrary, a Host Individual shall not be
considered to have a termination of employment or severance under the
terms of any provision of the New Marriott Deferred Compensation Plan
requiring continued employment if the employment of such Host
Individual with Host Marriott or its subsidiaries is terminated as
part of the Host REIT Conversion and immediately after the termination
such individual is employed by a Host REIT Conversion Entity. In
addition, all earnings from and periods of service with a Host REIT
Conversion Entity shall be considered in determining a Host
Individual's benefits under the New Marriott Deferred Compensation
Plan.
3
<PAGE>
5. Clause (i) of Section 2.05(c) shall be amended by adding the
following paragraph at the end thereof:
Effective as of the Host REIT Conversion Date, each restricted
share of Host Marriott Common Stock held by or on behalf of Marriott
International Employees or Marriott Terminees and each restricted
share of New Marriott Stock held by or on behalf of Host Individuals
shall be subject to the terms of this Section 2.05(i), except that:
(1) restricted shares of Host Marriott Common Stock held by or on
behalf of Marriott International Employees or Marriott Terminees shall
be adjusted to a Host REIT Conversion Award in accordance with the New
Host Agreement, (2) release of restricted shares of New Marriott Stock
held by a Host Individual who is employed by a Host REIT Conversion
Entity shall be contingent upon a finding by the Compensation Policy
Committee (or a delegate of such Committee) of such entity or its
affiliate that of such individual has satisfied the conditions of such
release, and (3) release of restrictions imposed on the Host REIT
Conversion Awards granted pursuant to section (1) of this paragraph
shall be contingent upon a finding by the Compensation Policy
Committee (or a delegate of such Committee) of New Marriott that a
grantee who is an employee of New Marriott has satisfied conditions
for such release.
6. Clause (ii) of Section 2.05(c) shall be amended by adding the
following paragraph at the end thereof:
Effective as of the Contribution Date, an award of deferred shares
of Host Marriott Common Stock held by or on behalf of New Marriott
Employees or on behalf of Host Individuals shall be subject to the
terms of this Section 2.05(ii), except that: (1) an award of deferred
shares of Host Marriott Common Stock held by or on behalf of Marriott
International Employees or Marriott Terminees shall be adjusted to a
Host REIT Conversion Award in accordance with the New Host Agreement,
(2) vesting in or distribution of such shares held by a Host
Individual who is employed by a Host REIT Conversion Entity shall be
contingent upon a finding by the Compensation Policy Committee (or a
delegate of such Committee) of such entity that such individual has
satisfied the conditions of such release, and (3) release of
restrictions imposed on the Host REIT Conversion Awards granted
pursuant to subparagraph (1) of this paragraph shall be contingent
upon a finding by the Compensation Policy Committee (or a delegate of
such Committee) of New Marriott that a grantee who is an employee of
New Marriott has satisfied the conditions for such release.
4
<PAGE>
7. Clause (iii) of Section 2.05(c) shall be amended by adding the
following paragraph at the end thereof:
Effective as of the Contribution Date, with respect to options to
acquire stock subject to Conversion Awards or Host REIT Conversion
Awards service with Host Marriott or a Host REIT Conversion Entity
shall be recognized for purposes of the terms and conditions of such
options regarding continuing employment, termination from employment,
approved retirement status or expiration following termination of
employment or a leave of absence for a period of greater than 12
months (other than a leave of absence approved by the board of
directors (or its compensation committee) of the employer of the
holder of the options).
8. Section 2.05 shall be amended by adding the following new sections
(e) and (f) to the end thereof:
(e) Effect of Host REIT Conversion Terminations and Transfers.
---------------------------------------------------------
Notwithstanding any other provision of this Agreement to the contrary,
a Host Individual shall not be considered to have a termination of
employment if such individual leaves the employ of Host Marriott or
its affiliates to begin employment with a Host REIT Conversion Entity
during the transition period and any service with a Host REIT
Conversion Entity shall be considered for purposes of determining such
individual's vesting or Service Credit. The transition period, for
purposes of the preceding sentence, shall mean the period beginning
one day prior to the Contribution Date and ending 7 business days
following the Contribution Date. Any termination or transfer of
employment relating to a Host Individual that is not part of or in
relation to the Host REIT Conversion shall be treated as a termination
of employment of such individual.
(f) Effective as of the Contribution Date, Host Marriott shall
take all action necessary or appropriate in accordance with the Host
REIT Stock Plan and the New Host Agreement to provide each Marriott
International Employee or Marriott Terminee who held an award of
option, restricted stock or deferred stock under the Host REIT Stock
Plan immediately before the Contribution Date with a Host REIT
Conversion Award.
5
<PAGE>
9. Section 5.07 shall be amended by adding the following new Sections
(d) and (e) to the end thereof:
(d) if to Crestline
CRESTLINE CAPITAL CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Tracy Colden
(e) if to HMLP
HOST MARRIOTT, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher Townsend
10. Section 5 shall be amended by adding new Sections 5.14 and 5.15
to read as follows:
Section 5.14 Limit on Payment. This Section 5.14 shall be
----------------
effective as of the Contribution Date. Notwithstanding any other
provision of this Agreement to the contrary, the payments otherwise to
be made by Marriott International or New Marriott to Host Marriott
under this Agreement, if any, (the "Required Payments"), shall not
exceed (i) the sum of (A) the maximum amount that can be paid to Host
Marriott in any taxable year without causing Host Marriott to fail to
meet the requirements of Code Sections 856(c)(2) and (3), determined
as if the payment of such amount did not constitute income described
in Code Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) ("Qualifying
Income") , as determined by independent accountants to Host Marriott,
and (B) in the event Host Marriott receives a letter from outside
counsel (the "Indemnification Payment Tax Opinion") indicating that
Host Marriott has received a ruling from the IRS holding that Host
Marriott's receipt of the Required Payments otherwise to be paid under
this Agreement would either constitute Qualifying Income or would be
excluded from gross income of Host Marriott within the meaning of Code
Sections 856(c)(2) and (3) (the "REIT Requirements") or that the
receipt by Host Marriott of the remaining balance of the Required
Payments to be made under this Agreement following the receipt of and
pursuant to such ruling would not be deemed constructively received
prior thereto, the Required Payments less the amount otherwise paid or
payable under clause (A) above. The obligation to pay any unpaid
portion of any Required
6
<PAGE>
Payment shall terminate three years from the date such payment
otherwise would have been made but for this Section 5.14. In the event
that Host Marriott is not able to receive the full Required Payment
that otherwise would be due under this Agreement as and when such
payments otherwise would be required to be made, Marriott
International or New Marriott, shall place the unpaid amount in escrow
and shall not release any portion thereof to Host Marriott unless and
until Marriott International or New Marriott, receive(s) either one of
the following: (i) a letter from Host Marriott's independent
accountants indicating the maximum amount that can be paid at that
time to Host Marriott without causing Host Marriott to fail to meet
the REIT Requirements or (ii) an Indemnification Payment Tax Opinion,
in either of which events Marriott International or New Marriott shall
pay to Host Marriott the lesser of the unpaid Required Payments or the
maximum amount stated in the letter referred to in (i) above.
Section 5.15 Addition of HMLP and Crestline. Effective as of the
------------------------------
Contribution Date, HMLP and Crestline shall be added as parties to
this Agreement and shall be considered as such for purposes of this
Agreement, including but not limited for purposes of references to
"parties".
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Allocation Agreement as of December 28, 1998.
HOST MARRIOTT CORPORATION
By:________________________________
Name: Christopher G. Townsend
Title: Vice President
SODEXHO MARRIOTT SERVICES, INC.
By:___________________________________
Name: Robert A. Stern
Title: Senior Vice President and General
Counsel
MARRIOTT INTERNATIONAL, INC.
By:_____________________________________
Name: Myron D. Walker
Title: Vice President
CRESTLINE CAPITAL CORPORATION
By:_____________________________________
Name: Bruce Wardinski
Title: President and Chief Executive Officer
8
<PAGE>
HOST MARRIOTT, L.P.
By:_____________________________________
Name: Christopher G. Townsend
Title: Vice President
9
<PAGE>
EXHIBIT 12.1
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(in millions, except ratio amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income from operations before income taxes....... $174 $ 82 $ (8) $(75) $(16)
Add (deduct):
Fixed charges.................................. 415 365 285 206 184
Capitalized interest........................... (4) (1) (3) (5) (10)
Amortization of capitalized interest........... 6 5 7 6 8
Net gains (losses) related to certain 50% or
less owned affiliate.......................... (1) (1) 1 2 5
Minority interest in consolidated affiliates... 52 32 6 2 1
---- ---- ---- ---- ----
Adjusted earnings.............................. $642 $482 $288 $136 $172
==== ==== ==== ==== ====
Fixed charges:
Interest on indebtedness and amortization of
deferred financing costs...................... $335 $289 $239 $178 $165
Dividends on convertible preferred securities
of subsidiary trust........................... 37 37 3 -- --
Portion of rents representative of the interest
factor........................................ 43 39 33 17 11
Debt service guarantee interest expense of
unconsolidated affiliates..................... -- -- 10 11 8
---- ---- ---- ---- ----
Total fixed charges and preferred stock
dividends..................................... $415 $365 $285 $206 $184
==== ==== ==== ==== ====
Ratio of earnings to fixed charges and preferred
stock dividends................................. 1.54 1.32 1.01 -- --
Deficiency of earnings to fixed charges and
preferred stock dividends....................... -- -- -- 70 12
</TABLE>
<PAGE>
EXHIBIT 21
Page 1 of 4
HOST MARRIOTT CORPORATION
SUBSIDIARIES
<TABLE>
<C> <S>
1) Camelback Inn Associates Limited Partnership
2) Hanover Hotel Acquisition Corporation
3) HMC AP GP, Inc.
4) HMC AP GP LLC
5) HMC Atlanta Marquis Corporation
6) HMC BN Corporation
7) HMC Charlotte GP, Inc.
8) HMC Charlotte GP LLC
9) HMC Gateway, Inc.
10) HMC MHP II, Inc.
11) HMC Toronto Airport GP, Inc.
12) HMC Toronto Airport GP LLC
13) HMC Toronto EC GP, Inc.
14) HMC Toronto EC GP LLC
15) Host Marriott Financial Trust
16) Host Marriott, L.P.
17) Hotel Properties Management Inc.
18) Marriott Hanover Hotel Corporation
19) Marriott MDAH One Corporation
20) Marriott Properties Inc.
21) Marriott MHP Two Corporation
22) MHP Acquisition Corporation
23) MHP II Acquisition Corporation
24) HMC MHP II LLC
25) MOHS Corporation
26) Mutual Benefit/Marriott Hotel Associates I, L.P.
27) Philadelphia Airport Hotel Corporation
28) Philadelphia Market Street Hotel Corporation
29) S.D. Hotels, Inc.
30) Airport Hotels LLC
31) Host of Boston, Ltd.
32) Host of Houston, Ltd.
33) Host of Houston 1979
34) Chesapeake Financial Services LLC
35) CHLP Finance LP
36) City Center Interstate Partnership LLC
37) Host/Interstate Partnership, L.P.
38) Deerfield Capital Trust
39) Farrell's Ice Cream Parlor Restaurants LLC
40) HMC Amelia I LLC
41) HMC Amelia II LLC
42) Ameliatel
43) HMC Atlanta LLC
44) Atlanta Marriott Marquis II L.P.
45) Ivy Street Hotel L.P.
46) HMA-GP LLC
47) HMA Realty L.P.
</TABLE>
<PAGE>
EXHIBIT 21
Page 2 of 4
HOST MARRIOTT CORPORATION
SUBSIDIARIES--(Continued)
<TABLE>
<C> <S>
48) Ivy Street MPF LLC
49) HMC Burlingame LLC
50) HMC Burlingame II LLC
51) HTKG Development Associates, L.P.
52) HMC California Leasing LLC
53) HMC Cambridge LLC
54) HMC Capital LLC
55) HMC Capital Resources LLC
56) HMC Park Ridge LLC
57) HMC Park Ridge II LLC
58) HMC Park Ridge LP
59) HMC Partnership Holdings LLC
60) HMC/Interstate Ontario, L.P.
61) Host Park Ridge LLC
62) HMC Suites LLC
63) Marriott Suites L.P.
64) PRM LLC
65) Wellsford Park Ridge Marriott Hotel L.P.
66) YBG Associates LLC
67) HMC Chicago LLC
68) Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
69) HMC Desert LLC
70) Desert Springs Marriott L.P.
71) HMC DSM LLC
72) DS Hotel LLC
73) HMC Diversified LLC
74) Marriott Diversified American Hotels, L.P.
75) HMC East Side II LLC
76) HMC East Side LLC
77) East Side Hotel Associates, L.P.
78) HMC Gateway LLC
79) HMC Grand LLC
80) HMC Hanover LLC
81) Hanover Marriott L.P.
82) HMC Hartford LLC
83) HMC/RGI Hartford, L.P.
84) HMC Hotel Development LLC
85) HMC HT LLC
86) HMC IHP Holdings LLC
87) IHP Holdings Partnership, L.P.
88) HMC Manhattan Beach LLC
89) HMC/Interstate Manhattan Beach L.P.
90) HMC Market Street LLC
91) New Market Street L.P.
92) Philadelphia Market Street Marriott Hotel L.P.
93) HMC Mexpark LLC
94) HMC Polanco LLC
</TABLE>
<PAGE>
EXHIBIT 21
Page 3 of 4
HOST MARRIOTT CORPORATION
SUBSIDIARIES--(Continued)
<TABLE>
<C> <S>
95) HMC NGL LLC
96) HMC OLS I LLC
97) HMC OLS I L.P.
98) HMC OLS II L.P.
99) HMC OP BN LLC
100) HMC Pacific Gateway LLC
101) Pacific Gateway Ltd.
102) Marina Hotel LLC
103) San Diego HMC Marina LLC
104) HMC Potomac LLC
105) Potomac Hotel L.P.
106) HMC Properties I LLC
107) Marriott Hotel Properties L.P.
108) Lauderdale Beach Association
109) HMC Properties II LLC
110) HMC Properties II LLC
111) HMC MHP II LLC
112) Marriott Hotel Properties II L.P.
113) Santa Clara Marriott Hotel L.P.
114) HMC Reston LLC
115) HMC Retirement Properties LLC
116) HMC Retirement Properties L.P.
117) HMH Marina LLC
118) HMC RTZ Loan I LLC
119) HMC RTZ Loan II LLC
120) HMC RTZ Loan L.P.
121) HMC RTZ II LLC
122) RAJ Boston Associates
123) HMC Seattle LLC
124) HMC SFO LLC
125) HMC Swiss Holdings LLC
126) BRE/Swiss LLC
127) HMC Waterford LLC
128) HMC/Interstate Waterford
129) HMH General Partner Holdings LLC
130) HMH HPT Courtyard LLC
131) HMH HPT Residence Inn LLC
132) HMH Norfolk LLC
133) HMH Norfolk L.P.
134) HMH Pentagon LLC
135) HMH Restaurants LLC
136) HMH Rivers LLC
137) HMH Rivers, L.P.
138) HMH WTC LLC
139) HMP Capital Ventures LLC
140) HMP Financial Services LLC
141) Host La Jolla LLC
</TABLE>
<PAGE>
EXHIBIT 21
Page 4 of 4
HOST MARRIOTT CORPORATION
SUBSIDIARIES--(Continued)
<TABLE>
<C> <S>
142) City Center Hotel L.P.
143) Times Square LLC
144) Ivy Street LLC
145) Market Street HMC LLC
146) HMC Desert Springs LLC
147) MDSM Finance LLC
148) MFR of Illinois LLC
149) MFR of Vermont LLC
150) MFR of Wisconsin LLC
151) HMC HPP LLC
152) HMC Partnership Properties LLC
153) HMC Marquis LLC
154) HMC PLP LLC
155) Chesapeake Hotel L.P.
156) HMC SBM Two LLC
157) Philadelphia Airport Hotel LLC
158) Philadelphia Airport Hotel L.P.
159) PM Financial LLC
160) PM Financial LP
161) Saga Property Leasing LLC
162) Saga Restaurants LLC
163) Santa Clara HMC LLC
164) S.D. Hotels LLC
165) Times Square GP LLC
166) Times Square Marquis Hotel L.P.
167) HMC AP LP
168) HMC AP Canada Company
169) HMC Charlotte LP
170) HMC Charlotte (Calgary) Company
171) Calgary Charlotte Holdings Company
172) HMC Grace (Calgary) Company
173) Calgary Charlotte Partnership
174) HMC Toronto Airport LP
175) HMC Toronto Air Company
176) HMC Toronto EC LP
177) HMC Toronto EC Company
178) Ivy Street NPF LLC
179) Durbin LLC
180) HMC MHP II, Inc.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K, into the Company's
previously filed Registration Statements File Nos. 333-50729, 333-28683-99,
333-66622-99, 333-75059, 333-75057, 333-75055.
Arthur Andersen LLP
Washington, DC
March 25, 1999
