<PAGE>
Pursuant to Rule 424 (b)(3)
Registration No. 333-64657
HOST MARRIOTT CORPORATION
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817-1109
(301) 380-9000
November 23, 1998
Dear Fellow Stockholder:
As described in the enclosed Proxy Statement/Prospectus dated November 23,
1998, Host Marriott Corporation, a Delaware corporation ("Host"), has adopted
an overall plan to restructure its business operations in a manner intended to
permit it to qualify as a real estate investment trust ("REIT") for federal
income tax purposes.
In order to help satisfy the REIT requirements, Host proposes to make an
initial taxable distribution to its stockholders (the "Distribution")
consisting, among other things, of shares of common stock of Crestline Capital
Corporation, a Maryland corporation (the "Company") and currently a wholly
owned subsidiary of Host. The Company currently owns Host's 31 senior living
communities and, following the proposed Distribution, also will be engaged in
the business of leasing and subleasing full-service and limited-service hotels
from Host (or the REIT being formed by Host) and asset management of hotels.
The proposed Distribution has not yet been declared by the Board of Directors
of Host.
Details of the proposed Distribution and of the Company's business and
management are contained in the attached Prospectus relating to the Company
dated November 23, 1998.
Sincerely,
/s/ Richard E. Marriott
Richard E. Marriott
Chairman of the Board
<PAGE>
PROSPECTUS
CRESTLINE CAPITAL CORPORATION
COMMON STOCK
----------------
This Prospectus is being furnished to the common stockholders of Host
Marriott Corporation, a Delaware corporation ("Host"), in connection with the
proposed distribution (the "Distribution") by Host to its common stockholders
("Host Stockholders") of approximately 82% of the outstanding shares of common
stock, par value $0.01 per share (the "Common Stock"), of Crestline Capital
Corporation, a Maryland corporation (the "Company"). In the event the
Distribution is declared by the Board of Directors of Host but the proposed
acquisition by Host of certain hotels from The Blackstone Group and certain
affiliated funds is not consummated, the shares of Common Stock of the Company
distributed to Host Stockholders will represent 100% of the outstanding Common
Stock of the Company, subject to the right of Host to cause the Company to
sell such 18% of the Common Stock to the Blackstone Entities at fair market
value if the Distribution is made prior to January 1, 1999 and the proposed
acquisition of hotels from the Blackstone Entities is consummated at a later
date. The Distribution is part of a series of transactions pursuant to which
Host intends to convert into a real estate investment trust ("REIT") for
federal income tax purposes (the "REIT Conversion"). As part of the REIT
Conversion, Host also intends to reincorporate from the State of Delaware to
the State of Maryland by means of a merger (the "Merger") of Host with and
into HMC Merger Corporation, a Maryland corporation ("Host REIT"), pursuant to
an Agreement and Plan of Merger (the "Merger Agreement") and to effect certain
other transactions relating to its conversion into a REIT.
Upon completion of the Distribution, the Company and its subsidiaries will
be engaged in the business of leasing and subleasing full-service and limited-
service hotels from Host REIT, asset management of hotels and owning
independent living, assisted living and healthcare communities. The Company's
leased or subleased hotel properties and senior living communities will be
managed by Marriott International, Inc. or its subsidiaries and certain other
third party managers.
The Distribution is subject to declaration by the Board of Directors of
Host, which is expected to occur on or about December 18, 1998. The Board of
Directors of Host does not intend to declare the Distribution unless the
Merger Agreement is approved by Host Stockholders at a special meeting of Host
Stockholders to be held on or about December 15, 1998 and the other
transactions comprising the REIT Conversion have occurred or are reasonably
likely to occur after the Merger. If declared by the Board of Directors of
Host, Host Stockholders will receive one share of Common Stock of the Company
for each ten shares of common stock, par value $1.00 per share, of Host held
of record on the record date fixed for the Distribution (currently expected to
be 5:00 p.m. (Eastern Standard Time) on December 28, 1998). Cash will be paid
in lieu of fractional shares. The distribution date for the Distribution is
expected to occur not later than December 31, 1998.
The Company's amended and restated articles of incorporation will prohibit
any person (including Host REIT and/or any 10% or greater stockholder of Host
REIT) from owning (directly or by attribution under the applicable provisions
of the Internal Revenue Code of 1986, as amended) more than 9.8% of the lesser
of the number or value of any class or series of capital stock of the Company
(subject to an exception for shares in excess of such limit owned solely by
reason of the Distribution). See "Description of Capital Stock--Restrictions
on Ownership and Transfer."
The Common Stock of the Company has been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange under the symbol
"CLJ."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF MATERIAL RISKS
RELEVANT TO THE DISTRIBUTION OF THE COMMON STOCK OF THE COMPANY.
----------------
NO SEPARATE VOTE OF HOST STOCKHOLDERS IS REQUIRED WITH RESPECT TO THE
DISTRIBUTION, AND NO HOST STOCKHOLDER WILL BE REQUIRED TO MAKE ANY PAYMENT OR
EXCHANGE ANY HOST COMMON STOCK IN ORDER TO RECEIVE COMMON STOCK OF THE COMPANY
OR CASH IN LIEU OF FRACTIONAL SHARES IN THE DISTRIBUTION.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 23, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY....................................................... 1
The Distribution....................................................... 1
The Company............................................................ 6
Risk Factors........................................................... 6
Summary Historical and Pro Forma Financial Data........................ 7
RISK FACTORS............................................................. 8
Dependence on Marriott International................................... 8
Competition with Marriott International................................ 8
Conflicts of Interest in Establishing the Terms of the Hotel Leases.... 8
Inability of Host to Obtain Necessary Third Party Consents Could Affect
the Number of Hotels that Will be Leased to the Company............... 8
Dependence of Hotel Revenues on Continuation of the Hotel Leases....... 8
No Rights of First Refusal or Other Contractual Commitments Enabling
the Company to Lease Additional Hotels from Host REIT................. 9
Potential Adverse Impact on the Company's Profitability of Declines in
Operating Margins of Leased Hotels.................................... 9
Inability of the Company to Terminate the Hotel Leases and the Manage-
ment Agreements....................................................... 10
Inability of the Company to Obtain Financing Secured by the Hotel
Leases without Host REIT's Consent; Other Financing Restrictions...... 10
Risks of Leverage...................................................... 10
Guarantees of the Hotel Leases and Related Pooling Agreements.......... 11
Restrictions on Sales and Other Transfers of Hotel Leasehold Interests
and Communities....................................................... 11
Fraudulent Conveyance Considerations................................... 11
Restrictions on the Company's Business and Future Opportunities........ 12
Competition in the Lodging and Senior Living Industries................ 13
Overbuilding in the Assisted Living Industry .......................... 14
Risks Associated with Investments in Real Estate....................... 14
Seasonality............................................................ 14
Staffing and Labor Costs............................................... 14
Regulation of the Healthcare Industry.................................. 15
Liability and Insurance................................................ 15
Possible Liability for Environmental Matters........................... 16
Absence of a Prior Public Market; Possible Volatility of Stock Price... 16
Absence of Dividends on Common Stock................................... 16
Shares Eligible for Future Sale........................................ 17
Anti-Takeover Effect of Certain Provisions of the Company's Charter and
Bylaws and Maryland Law............................................... 17
Restriction on Ownership and Transfer.................................. 18
Dependence on Key Personnel............................................ 19
Year 2000 Problem ..................................................... 19
THE DISTRIBUTION......................................................... 20
Background of and Reasons for the Distribution......................... 20
Conditions to the Distribution ........................................ 20
Manner of Effecting the Distribution................................... 21
Federal Income Tax Consequences........................................ 21
Restriction on Ownership and Transfer ................................. 22
DIVIDEND POLICY.......................................................... 22
CAPITALIZATION........................................................... 23
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA FINANCIAL STATEMENTS........................................... 24
SELECTED HISTORICAL FINANCIAL DATA....................................... 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 43
Lack of Comparability Following the Distribution ...................... 43
Historical Results of Operations ...................................... 43
First Three Quarters 1998 (Historical)................................. 43
Period from June 21, 1997 through January 2, 1998 (Historical)......... 43
Pro Forma Results of Operations........................................ 44
First Three Quarters 1998 Compared to First Three Quarters 1997 (Pro
Forma)................................................................ 46
1997 Compared to 1996 (Pro Forma)...................................... 47
Pro Forma Results if No Partnerships Participate in the REIT
Conversion............................................................ 48
Pro Forma Results Without Blackstone Acquisition....................... 49
Liquidity and Capital Resources........................................ 49
EBITDA................................................................. 51
Inflation.............................................................. 52
Year 2000 Problem...................................................... 52
Impact of Financial Accounting Standards............................... 54
BUSINESS AND PROPERTIES.................................................. 56
General................................................................ 56
Business of the Company................................................ 56
Business Strategy...................................................... 58
Hotel Lodging Industry................................................. 60
Leased and Subleased Hotel Properties.................................. 61
Blackstone Acquisition................................................. 66
Hotel Properties to be Leased or Subleased by the Company under the
Hotel Leases.......................................................... 67
Senior Living Industry................................................. 69
Senior Living Communities.............................................. 70
Marketing.............................................................. 72
Competition............................................................ 72
Relationship with Host after the Distribution.......................... 73
Relationship with Marriott International............................... 74
Description of the Hotel Leases for Full-Service Hotels Managed by
Marriott International................................................ 74
Description of the Subleases for Limited-Service Hotels Managed by
Marriott International................................................ 80
Description of FF&E Leases............................................. 82
Description of the Hotel Leases for Hotels Managed by Other Management
Companies............................................................. 84
Description of Blackstone Hotel Leases................................. 84
Description of Franchise Agreements with Marriott International........ 84
Description of Marriott International Hotel Management Agreements for
Full-Service Hotels................................................... 86
Description of Marriott International Hotel Management Agreements for
Limited-Service Hotels................................................ 89
Description of Other Hotel Management Agreements....................... 89
Description of Hotel Management Agreements for Blackstone Hotels....... 89
Description of the Operating Agreements for the Communities............ 90
Description of Other Agreements for the Communities.................... 91
Non-Competition Agreements............................................. 92
Staffing and Labor Costs............................................... 94
Regulation of the Healthcare Industry.................................. 94
Environmental Matters.................................................. 96
Employees.............................................................. 96
Legal Proceedings...................................................... 96
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT.............................................................. 97
Directors and Executive Officers...................................... 97
Committees of the Board of Directors.................................. 99
Executive Compensation................................................ 100
Compensation of Directors............................................. 100
Employee Benefit Plans................................................ 100
Limitation of Liability and Indemnification........................... 103
Indemnification Agreements............................................ 103
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AFTER THE
DISTRIBUTION........................................................... 104
CERTAIN RELATIONSHIPS................................................... 106
DESCRIPTION OF CAPITAL STOCK............................................ 106
General............................................................... 106
Common Stock.......................................................... 106
Preferred Stock....................................................... 107
Power to Issue Additional Common Stock and Preferred Stock............ 107
Certain Anti-Takeover Provisions...................................... 107
Restrictions on Ownership and Transfer................................ 111
Registration Rights Agreement......................................... 113
Transfer Agent and Registrar.......................................... 113
SHARES ELIGIBLE FOR FUTURE SALE......................................... 114
FEDERAL INCOME TAX CONSEQUENCES......................................... 115
Introduction.......................................................... 115
Federal Income Tax Consequences of the Distribution................... 116
LEGAL MATTERS........................................................... 119
EXPERTS................................................................. 119
AVAILABLE INFORMATION................................................... 119
INDEX TO FINANCIAL STATEMENTS........................................... F-1
</TABLE>
iii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information set forth elsewhere in this Prospectus, including the discussion of
certain factors set forth under "Risk Factors." Unless the context requires
otherwise: (i) all references to the "Company" in this Prospectus refer to
Crestline Capital Corporation and its consolidated subsidiaries; (ii) all
references to "Host" in this Prospectus refer to Host Marriott Corporation and
its consolidated subsidiaries prior to the Merger of Host with and into Host
REIT and the Distribution; (iii) all references to "Host REIT" in this
Prospectus refer to HMC Merger Corporation and its consolidated subsidiaries
following the Merger, including Host Marriott, L.P., a Delaware limited
partnership, through which HMC Merger Corporation will conduct its business,
and subsidiaries of Host Marriott, L.P.; and (iv) all references to "Marriott
International" in this Prospectus refer to Marriott International, Inc. and its
subsidiaries. HMC Merger Corporation, as the successor and surviving
corporation to Host in the Merger, will change its name to "Host Marriott
Corporation" as part of the Merger. All references in this Prospectus to Host
REIT, as lessor, shall be deemed to refer to Host in the event the Merger of
Host with and into Host REIT is for any reason not consummated. The discussion
in this Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business and Properties," as well as those discussed elsewhere
in this Prospectus.
THE DISTRIBUTION
Distributing Company........ Host Marriott Corporation, a Delaware corporation
("Host"). It is presently contemplated that the
merger (the "Merger") of Host with and into HMC
Merger Corporation, a Maryland corporation ("Host
REIT") will occur on or about December 29, 1998,
assuming the conditions to the Merger, including
approval by Host Stockholders of the Agreement
and Plan of Merger by and among Host, Host REIT
and Host Marriott, L.P. (the "Merger Agreement"),
are satisfied or waived (to the extent legally
permitted) by that date. If the Merger is
consummated, Host REIT will be the successor to
Host and the surviving corporation in the Merger.
Distributed Company......... Crestline Capital Corporation, a Maryland
corporation (the "Company"), which currently is a
wholly owned subsidiary of Host but will become a
separate public company as a result of the
Distribution.
Shares to be Distributed.... Approximately 20,450,000 shares of Common Stock
of the Company, representing approximately 82% of
the Common Stock of the Company to be outstanding
at the time of the Distribution. The remaining
approximately 18% of the then outstanding Common
Stock of the Company is expected to be
transferred by Host REIT as part of the
consideration in connection with Host REIT's
proposed acquisition of certain hotel properties
from The Blackstone Group and a series of funds
controlled by Blackstone Real Estate Partners
(collectively, the "Blackstone Entities;" such
acquisition being referred to herein as the
"Blackstone Acquisition"). In the event the
Distribution is declared by the Board of
Directors of Host but the Blackstone Acquisition
does not occur, the shares of Common Stock of the
Company distributed to Host Stockholders in the
Distribution
1
<PAGE>
will represent 100% of the outstanding Common
Stock of the Company, subject to the right of
Host to cause the Company to sell such 18% of the
Common Stock to the Blackstone Entities at fair
market value if the Distribution is made prior to
January 1, 1999 and the Blackstone Acquisition is
consummated at a later date. See "Business and
Properties--Blackstone Acquisition."
Distribution Ratio.......... One share of Common Stock of the Company for each
ten shares of Host common stock held of record on
the Record Date (defined below) fixed by the
Board of Directors of Host for the Distribution.
Cash will be paid in lieu of fractional shares.
Record Date................. Currently expected to be 5:00 p.m. (Eastern
Standard Time) on December 28, 1998 (the "Record
Date").
Distribution Date........... Currently expected to occur not later than
December 31, 1998.
No Payment or Other Action
Required................... No separate vote of Host Stockholders is required
with respect to the Distribution, and no Host
Stockholders will be required to make any payment
or exchange any Host common stock in order to
receive Common Stock of the Company (or cash in
lieu of fractional shares) in the Distribution.
Background of and Reasons
for the Distribution....... The Distribution and the Merger are part of a
series of transactions pursuant to which Host
intends to convert into a real estate investment
trust ("REIT") for federal income tax purposes.
Assuming the Merger and the other transactions
necessary to restructure Host's business
operations so that it will qualify as a REIT are
completed on or prior to December 31, 1998, Host
expects to qualify as a REIT beginning with its
first full taxable year commencing after the REIT
Conversion is completed, which is currently
expected to be the year commencing January 1,
1999 (but which might not be until the year
commencing January 1, 2000).
Because REITs are not permitted under current
federal income tax law to derive revenues
directly from the operation of hotels, Host REIT
will be required to lease and sublease
substantially all of the hotels currently owned
and leased by Host (as well as those acquired in
the Blackstone Acquisition if such transaction is
consummated) to an unrelated party. In addition,
in order for Host REIT to qualify as a REIT for
federal income tax purposes, Host or Host REIT
will be required to distribute to its
stockholders all accumulated "earnings and
profits" ("E&P"), as determined for tax purposes,
of Host prior to the end of the first full
taxable year for which the REIT election of Host
REIT is effective. As a result of these
requirements, Host has determined, as part of the
REIT Conversion, that (i) Host REIT will lease
and sublease substantially all of the hotels
currently owned and leased by Host (as well as
those acquired in the Blackstone Acquisition if
such transaction is consummated) to subsidiaries
of the Company, which will lease or
2
<PAGE>
sublease such hotels from Host REIT under their
existing brand names and pursuant to their
existing management agreements with Marriott
International and certain other third party
managers (the "Non-MI Managers"), and (ii) Host
will make the Distribution to help accomplish the
requisite distribution of the E&P of Host,
subject to approval of the Merger Agreement at
the special meeting of Host Stockholders to be
held on December 15, 1998 (the "Special Meeting")
and certain other conditions. See "--Conditions
to the Distribution." In addition to facilitating
Host's conversion into a REIT for federal income
tax purposes, Host believes that there may be
greater opportunities to expand the Company's
ownership of senior living communities if such
business is owned by a separate public company
whose senior management has a greater focus on
that business.
In connection with the Distribution, subsidiaries
of the Company will lease or sublease
substantially all of the hotels then owned or
leased by Host. The leases and subleases are
expected to be for a term of years (ranging
generally from seven to ten years, depending on
the particular hotel) effective January 1, 1999
(assuming the Merger occurs prior to that date;
otherwise, as soon as practicable following the
Distribution Date). Concurrently with entering
into these leases and subleases, the Company will
assume certain of the rights and obligations
under the existing management and franchise
agreements between Host and Marriott
International or the Non-MI Managers, pursuant to
which Marriott International or the Non-MI
Managers will continue to manage the hotels on
behalf of the Company. Marriott International
also will continue to manage the 31 senior living
communities currently owned by the Company
(collectively, the "Communities").
Conditions to the
Distribution............... Although a number of the transactions comprising
the REIT Conversion are expected to be
consummated immediately prior to, or in certain
instances immediately following, the Merger, the
Merger will not be consummated unless Host
Stockholders have approved the Merger Agreement
and the other conditions to the Merger have been
satisfied or waived. In particular, Host's Board
of Directors will have determined, among other
things, that the transactions constituting the
REIT Conversion which impact Host REIT's status
as a REIT for federal income tax purposes have
occurred or are reasonably likely to occur, and
based on advice of counsel, that Host REIT can
elect to be treated as a REIT for federal income
tax purposes effective no later than the first
full taxable year commencing after the REIT
Conversion is completed (which might not be until
the year commencing January 1, 2000 if the REIT
Conversion is not completed prior to January 1,
1999). Consistent with the foregoing, Host
intends to pursue the transactions constituting
the REIT Conversion at least through the date of
the Special Meeting. If the Merger Agreement is
approved by Host Stockholders at the Special
Meeting, Host intends to continue
3
<PAGE>
pursuing those transactions constituting the REIT
Conversion which have not yet been completed,
including the Blackstone Acquisition (which is
not expected to be consummated any earlier than
December 29, 1998). In addition, if Host's Board
of Directors has determined that the conditions
to the Merger have been or likely will be
satisfied or waived (and, in particular, that the
transactions constituting the REIT Conversion
which impact Host REIT's status as a REIT for
federal income tax purposes have occurred or are
reasonably likely to occur). The Board intends to
declare the Distribution and enter into the
leases and subleases of hotels with subsidiaries
of the Company. Under such circumstances,
however, the Merger and the other transactions
comprising the REIT Conversion still might be
delayed or possibly might never be consummated.
If, however, the Merger Agreement is not approved
by the Host Stockholders at the Special Meeting
or the Host Board does not make the
determinations described above, Host's Board does
not intend to declare the Distribution or enter
into the leases and subleases of hotels with
subsidiaries of the Company.
Assuming the Merger Agreement is approved by Host
Stockholders at the Special Meeting and the Host
Board of Directors makes the determinations
described above, it is currently contemplated
that (i) the Host Board of Directors would
declare the Distribution on or about December 18,
1998 payable no later than December 31, 1998 to
Host Stockholders of record on December 28, 1998
and (ii) the Merger would be consummated on or
about December 29, 1998, subject to satisfaction
or waiver of the remaining conditions. Even under
circumstances where the Distribution is made but
the Merger or other transactions comprising the
REIT Conversion are delayed or possibly never
consummated, the Host Board believes that having
the leasing arrangements in place with the
Company could facilitate any subsequent efforts
by Host to qualify as a REIT for federal income
tax purposes (including efforts to pursue a
merger with another entity or another transaction
that would permit it to commence a new taxable
year and elect REIT status prior to January 1,
2000).
Relationship with Host
after the Distribution..... For purposes of governing certain ongoing
relationships between the Company and Host after
the Distribution and to provide for an orderly
transition, the Company and Host have entered
into or will enter into certain agreements. Such
agreements include: (i) a Distribution Agreement,
providing for, among other things, the
Distribution and the division between the Company
and Host of certain assets and liabilities; (ii)
a Tax Sharing Agreement, pursuant to which the
Company and Host would agree to allocate tax
liabilities that relate to periods prior to the
Distribution Date; (iii) an Employee Benefits and
Other Employment Matters Allocation Agreement,
providing for certain allocations of
responsibilities with respect to employee
compensation, benefit and labor matters; (iv)
Asset Management Agreements, pursuant to which
the Company
4
<PAGE>
would provide to Host REIT and a non-controlled
subsidiary of Host REIT asset management services
related to their rights and responsibilities as
owner of the hotels; (v) a Non-Competition
Agreement, pursuant to which the Company and Host
would agree not to engage in certain businesses;
(vi) Guaranty Agreements, pursuant to which the
Company and certain subsidiaries would guarantee
a certain amount of the lease and related
management agreement obligations of the Company's
subsidiaries that will lease or sublease the
hotels from Host REIT; (vii) a Pooling Agreement,
pursuant to which all leased full- service hotels
would be separated into four identified "pools"
of hotels for purposes of calculating the amount
of each guaranty; and (viii) a Corporate
Transitional Services Agreement, pursuant to
which Host would provide certain limited
administrative services to the Company. See
"Business and Properties--Relationship with Host
after the Distribution."
Relationship with Marriott
International.............. Marriott International will serve as the manager
for a substantial majority of the full-service
and limited-service hotels leased and subleased
by the Company. In addition, Marriott
International is the manager for all 31
Communities. The Company will be bound by certain
existing non-competition agreements with Marriott
International, pursuant to which the Company's
business opportunities will be restricted. See
"Business and Properties--Non-Competition
Agreements" and "--Description of Other
Agreements for the Communities."
Distribution Agent.......... Bank of New York will be the distribution agent
(the "Distribution Agent") for the Distribution.
Transfer Agent and
Registrar.................. Bank of New York will be the Transfer Agent and
Registrar for the Common Stock of the Company.
Federal Income Tax
Consequences............... The Distribution will be a taxable dividend to a
Host Stockholder in an amount equal to the fair
market value of the Common Stock (plus any cash
in lieu of fractional shares) received in the
Distribution (to the extent that the Distribution
is made out of the Host Stockholder's share of
the portion of the E&P of Host and Host REIT
allocable to the Distribution). Host and Host
REIT currently believe that the entire
Distribution (the fair market value of which Host
currently estimates will be approximately $1.30
per share of Host common stock) will be made out
of such E&P, and thus will be a taxable dividend
to Host Stockholders who receive shares of Common
Stock of the Company in the Distribution. See
"Federal Income Tax Consequences."
Trading Market.............. There is currently no public market for the
Common Stock of the Company. The Common Stock of
the Company has been approved for listing,
subject to official notice of issuance, on the
New York Stock Exchange ("NYSE") under the symbol
"CLJ." There can be no assurance that an active
trading market will develop. See "Risk Factors--
Absence of a Prior Public Market; Possible
Volatility of Stock Price."
5
<PAGE>
THE COMPANY
General..................... In June 1997, the Company acquired all of the
outstanding stock of Forum Group, Inc. ("Forum")
from Marriott International. As a result, the
Company currently owns, through Forum and its
wholly or majority owned subsidiaries, 31
Communities located in 13 states. In connection
with the Distribution, the Company expects to
lease from Host REIT approximately 125 full-
service hotels, representing substantially all of
the full-service hotels owned by Host REIT, the
substantial majority of which are managed by
Marriott International under "Marriott" brand
names. In addition, the Company will sublease
from Host REIT 71 limited-service hotels, which
are currently leased by Host from Hospitality
Properties Trust, a separate publicly traded REIT
("HPT"). Substantially all of the leased or
subleased hotels and the Communities will be
managed by Marriott International. If the
Blackstone Acquisition is consummated, the
Company also will acquire from Host REIT a 25%
interest in Swissotel Management (USA) L.L.C., a
management company that manages five Swissotel
hotels in the United States, subject to the right
of Host REIT to repurchase such interest under
certain circumstances. See "Business and
Properties--Relationship with Host after the
Distribution."
The Company's executive offices are located at
10400 Fernwood Road, Bethesda, Maryland 20817,
and its telephone number is (301) 380-9000.
The Company's activities are and will be limited
for certain specified periods by certain
agreements with Host REIT and Marriott
International to which the Company is or will
become a party. See "Business and Properties--
Non-Competition Agreements."
Management of the Company... Following the Distribution, none of the members
of the Company's senior management, including
Bruce D. Wardinski, Chairman of the Board,
President and Chief Executive Officer, and James
L. Francis, Executive Vice President and Chief
Financial Officer, will be a director, officer or
employee of Host REIT, and none of the Company's
directors will be a director, officer or employee
of Host REIT (other than Christopher J. Nassetta,
who is an officer but not a director of Host
REIT).
Dividend Policy............. The Company does not anticipate paying any cash
dividends on the Common Stock in the foreseeable
future. See "Dividend Policy."
RISK FACTORS
Host Stockholders should carefully consider, in addition to the other
information contained in this Prospectus, the matters set forth under the
caption "Risk Factors."
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary historical consolidated financial data
derived from the Company's audited consolidated financial statements and
summary pro forma financial information derived from the Company's unaudited
pro forma financial statements included elsewhere herein. The Company was
formed in 1997 as a subsidiary of Host to own its senior living communities.
Although the Company currently owns 31 Communities, none of these properties
were owned by the Company or Host prior to June 21, 1997. The historical
financial data reflect the operating results of the acquired senior living
communities for the periods during which the properties have been owned by the
Company and do not reflect the leases and subleases to be entered into by the
Company and Host REIT at the time of the Distribution. See "Selected Historical
Financial Data" for a summary of historical information of the Company and its
predecessors. The pro forma financial data set forth below may not necessarily
be indicative of the results that would have been achieved had the transactions
been consummated as of the dates indicated or that may be achieved in the
future. The information in the table should be read in conjunction with
"Selected Historical Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Pro Forma Financial
Statements," the consolidated financial statements of the Company and the
financial statements of certain acquired senior living communities included
elsewhere herein. The Company's fiscal year ends on the Friday closest to
December 31.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------------- ---------------------------------------------
WITH BLACKSTONE WITHOUT BLACKSTONE
---------------------- ----------------------
PERIOD FROM
JUNE 21, 1997
FIRST THREE THROUGH FIRST THREE FIRST THREE
QUARTERS JANUARY 2, QUARTERS FISCAL QUARTERS FISCAL
1998 1998 1998 YEAR 1997 1998 YEAR 1997
----------- ------------- ----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $57,800 $36,900 $3,041,031 $4,088,093 $2,713,146 $3,683,593
Total operating costs
and expenses.......... 29,803 20,929 2,982,467 4,015,071 2,657,882 3,608,071
Operating profit....... 27,997 15,971 58,564 73,022 55,264 75,522
Corporate expenses..... 2,937 2,304 10,885 13,500 10,885 13,500
Interest expense....... 17,560 13,396 16,302 22,932 16,094 22,633
Interest and dividend
income................ 1,120 336 1,518 1,501 1,518 1,501
Net income............. 5,086 358 19,408 22,474 17,584 24,125
OTHER OPERATING DATA:
Cash provided by
operations............ 19,024 25,376
Cash used in investing
activities............ (7,529) (33,412)
Cash provided by (used
in) financing
activities............ (2,635) 25,680
Depreciation and
amortization.......... 14,759 10,635 14,787 22,687 14,787 22,687
EBITDA(2).............. 40,939 24,638 66,753 87,710 63,453 90,210
Cash interest
expense(3)............ 18,633 14,231 17,375 23,584 17,167 23,284
RATIO DATA:
Ratio of earnings to
fixed charges(4)...... 1.5x 1.1x 1.1x 1.1x 1.1x 1.1x
EBITDA to cash interest
expense............... 2.2x 1.7x 3.8x 3.7x 3.7x 3.9x
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 11, 1998
---------------------------------------------
PRO FORMA(1)
----------------------------------
HISTORICAL WITH BLACKSTONE WITHOUT BLACKSTONE
---------- --------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................... $694,419 $794,419 $789,419
Total debt........................ 213,034 213,034(5) 213,034(5)
Stockholder's equity.............. 392,071 407,071 407,071
</TABLE>
- --------
(1) See "Pro Forma Financial Statements." Amounts assume all Partnerships (as
defined herein) participate in the REIT Conversion.
(2) Earnings before interest expense, taxes, depreciation, amortization and
certain other non-cash items ("EBITDA"). There are no non-cash items, other
than depreciation and amortization, included in EBITDA for the periods
presented. EBITDA data is presented because such data is used by certain
investors to determine the Company's ability to meet debt service
requirements. The Company considers EBITDA to be an indicative measure of
the Company's operating performance due to the significance of the
Company's long-lived assets and because EBITDA can be used to measure the
Company's 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 flows from operations, or
any other operating or liquidity performance measure prescribed by
generally accepted accounting principles ("GAAP"). In addition, EBITDA as
calculated by the Company may not be comparable to similarly titled
measures reported by other companies. Cash expenditures for various long-
term assets, interest expense and income taxes have been, and will be,
incurred which are not reflected in the EBITDA presentation.
(3) Cash interest expense is calculated as GAAP interest expense less
amortization of deferred financing costs and the amortization of debt fair
value adjustments.
(4) The ratio of earnings to fixed charges is computed by dividing income
before taxes, interest expense and other fixed charges by total fixed
charges, including interest expense, amortization of debt issuance costs
and the portion of rent expense that is deemed to represent interest.
(5) Amount excludes approximately $85 million due to Host to pay for hotel
working capital purchased from Host.
7
<PAGE>
RISK FACTORS
Host Stockholders should carefully consider and evaluate all of the
information set forth in this Prospectus, including the risk factors listed
below.
DEPENDENCE ON MARRIOTT INTERNATIONAL
Marriott International will manage substantially all of the hotels to be
leased or subleased by the Company from Host REIT and all of the Communities
owned by the Company under long-term management agreements. Therefore, the
Company's revenue, profitability and ability to make lease payments to Host
REIT will depend upon the ability of Marriott International to effectively
manage such hotels and the Communities. Factors that may affect Marriott
International's performance and the Company's results of operations include
the following: the general economic climate; local market conditions (such as
an oversupply of, or a reduction in demand for, hotel space and senior living
communities); the attractiveness of the hotels and the Communities to
consumers; the quality, philosophy and performance of management; competition
from comparable hotels and senior living communities; changes in room rates;
and increases in operating costs or reductions in operating margins due to
inflation, market conditions and other factors, which increases may not
necessarily be passed through fully to guests of the hotels or residents of
the Communities.
COMPETITION WITH MARRIOTT INTERNATIONAL
As of the date hereof, Marriott International operates or franchises
approximately 1,600 hotel properties, approximately 175 of which are owned or
leased by Host and will be leased or subleased to the Company, and owns or
operates approximately 100 senior living communities, 31 of which are owned by
the Company. Because Marriott International may operate hotels and senior
living communities that compete with the hotels to be leased or subleased by
the Company from Host or Host REIT and the senior living communities owned by
the Company, certain situations could arise where actions taken by Marriott
International, in its capacity as manager of competing hotels and senior
living communities, would not be in the best interest of the Company.
CONFLICTS OF INTEREST IN ESTABLISHING THE TERMS OF THE HOTEL LEASES
The terms of the hotel leases and subleases (collectively, the "Hotel
Leases") to be entered into by subsidiaries of the Company with subsidiaries
of Host REIT were negotiated by the Company with Host, but because the Company
was a wholly owned subsidiary of Host at such time, such negotiation may not
necessarily have been on an arms-length basis and, accordingly, may not
necessarily reflect fair market value or terms. The lease payments required to
be made by the subsidiaries of the Company under the Hotel Leases were
negotiated based upon historical and projected operating and financial
performance of the hotels. There can be no assurance, however, that the
projected operating and financial performance of the hotels used in
negotiating the lease payments will be met, and any failure to do so could
have a material adverse effect on the Company's financial condition and
results of operations.
INABILITY OF HOST TO OBTAIN NECESSARY THIRD PARTY CONSENTS COULD AFFECT THE
NUMBER OF HOTELS THAT WILL BE LEASED TO THE COMPANY
There are numerous third party consents which are required to be obtained by
Host in order to consummate the various transactions comprising the REIT
Conversion. These include consents of many hotel project lenders, ground
lessors, joint venture partners, Marriott International and others. Failure of
Host to obtain the necessary consents in order to permit Host to lease one or
more of its hotels to the Company could have a material adverse impact on the
Company's financial condition and results of operations, depending on the
specific hotels for which consents to lease the hotels to the Company cannot
be obtained.
DEPENDENCE OF HOTEL REVENUES ON CONTINUATION OF THE HOTEL LEASES
Revenues from operation of the hotels will comprise a substantial portion of
the Company's revenues, and the Company will be able to continue to earn such
revenues only as long as the Hotel Leases remain in effect. On a pro forma
basis after giving effect to the Hotel Leases, hotel revenues comprised
approximately 95% of the
8
<PAGE>
Company's revenues for the First Three Quarters 1998 and for Fiscal Year 1997
(assuming all Partnerships (as defined herein) participate and the Blackstone
Acquisition is consummated). The Hotel Leases generally have terms ranging
from seven to ten years and do not provide the Company with any renewal
rights. Upon an event of default under a Hotel Lease (which includes certain
defaults under any other Hotel Lease in the same "pool" of hotels and a
default under certain other agreements), Host REIT may, among other remedies,
terminate the Hotel Lease without penalty. Host REIT also may terminate the
Hotel Leases in a pool of leases at any time after the Company's guaranty of
the Hotel Leases in such pool has been exhausted and the Company elects to
terminate the pooling arrangements with respect to that pool; such termination
right to be without penalty if exercised by Host REIT within 12 months after
the Company's notice of its election to terminate the pooling arrangements
becomes effective. In addition, Host or Host REIT may terminate a Hotel Lease
upon payment to the Company of a termination fee equal to the fair market
value of the Company's leasehold interest for the remaining term of the lease
if Host REIT enters into an agreement to sell or otherwise transfer the
particular hotel free and clear of the lease and in certain other
circumstances. Host REIT also may elect to terminate the Hotel Leases upon a
"Change in Control" of the Company or any of its subsidiaries that will lease
the hotels from Host REIT. Host REIT would be required to pay a termination
fee equal to the previous year's operating profit of the lessee in connection
with any such lease termination unless an "Adverse Party" is the acquiring
person, in which event no termination fee would be payable by Host REIT. A
"Change in Control" includes (i) a change of a majority of the Board of
Directors of the Company during the longer of any twelve month period and the
period during which two consecutive annual meetings of the stockholders of the
Company at which directors are elected have been held, (ii) the accumulation
of more than 35% of the Company's voting stock and (iii) the merger or
consolidation of the Company resulting in a change in ownership or more than
35% of the Company's voting stock or any change of ownership of a lessee, and
an "Adverse Party" includes, among other persons, any hotel ownership,
management or franchisor company. Moreover, if Host REIT does not elect to
terminate the Hotel Lease upon a "Change in Control," Marriott International
may require Host REIT to exercise its termination rights if, as a result of
such Change in Control, the hotel lessee is in control or is controlled by
persons who are convicted felons or who are engaged (or affiliated with
persons who are engaged) in operating a branded hotel chain having 5,000 or
more guest rooms in competition with Marriott International. In addition, in
the event that changes in the federal income tax laws allow Host REIT, or
subsidiaries or affiliates of Host REIT, to directly operate the hotels
without jeopardizing Host REIT's status as a REIT, Host REIT will have the
right to terminate the Hotel Leases in return for paying the Company the fair
market value of the Company's leasehold interests for the remaining terms of
such leases. The payment would be payable in cash or shares of Host REIT, at
the election of Host REIT. (Host has been pursuing the enactment of
legislation that would allow such operation for more than one year, but there
is no bill currently pending in Congress and no reliable prediction can be
made as to whether any such legislation will be enacted in the future.) Host
REIT and the Company also will each have the right to terminate up to 12 Hotel
Leases without being required to pay any fee or other compensation as a result
of such termination, but Host REIT will be permitted to exercise such right
only in connection with a sale of a hotel to an unrelated third party or the
transfer of a hotel to a joint venture in which Host Marriott, L.P., Host
REIT's operating subsidiary, does not have a two-thirds or greater interest.
See "Business and Properties--Description of the Hotel Leases for Full-Service
Hotels Managed by Marriott International." The Company's financial condition
and results of operations would be materially and adversely affected by
termination of a substantial number of the Hotel Leases.
NO RIGHTS OF FIRST REFUSAL OR OTHER CONTRACTUAL COMMITMENTS ENABLING THE
COMPANY TO LEASE ADDITIONAL HOTELS FROM HOST REIT
There are no rights of first refusal or other contractual arrangements
enabling the Company to lease any hotels acquired by Host REIT in the future.
In the absence of such commitments, there can be no assurance that Host REIT
will lease any additional hotels to the Company, which could adversely affect
the Company's ability to expand its leasing business.
POTENTIAL ADVERSE IMPACT ON THE COMPANY'S PROFITABILITY OF DECLINES IN
OPERATING MARGINS OF LEASED HOTELS
At the time of the Distribution, the Company expects to lease approximately
125 full-service hotels and to sublease 71 limited-service hotels from Host
REIT. Substantially all of the hotels to be leased or subleased from
9
<PAGE>
Host REIT will be managed for the Company by Marriott International. On a pro
forma basis after giving effect to the Hotel Leases, the Company would have
had total hotel revenues of $3,865 million and total hotel operating costs and
expenses, including pro forma lease payments payable to Host REIT and pro
forma management fees payable to Marriott International, of $3,826 million for
Fiscal Year 1997, or an operating margin of $39 million. For the First Three
Quarters 1998, on a pro forma basis after giving effect to the leases and
subleases, total hotel revenues would have been $2,875 million and total hotel
operating costs and expenses would have been $2,844 million, or an operating
margin of $31 million (assuming all Partnerships (as defined herein)
participate and the Blackstone Acquisition is consummated). In view of the
size of the portfolio to be leased and the magnitude of the lease payments due
to Host REIT, the management fees payable to Marriott International and the
other costs and expenses associated with the Hotel Leases, any material
increase in hotel operating costs and expenses that is not offset by a
corresponding increase in hotel revenues, or a material decline in hotel
revenues which is not offset by a corresponding decrease in hotel operating
costs and expenses, would have a material adverse impact on the Company's
financial condition and results of operations.
INABILITY OF THE COMPANY TO TERMINATE THE HOTEL LEASES AND THE MANAGEMENT
AGREEMENTS
A substantial amount of the Company's operating expenses will consist of
lease payments to Host REIT, management and hotel franchise fees payable to
Marriott International and the Non-MI Managers in connection with their
management of the hotels and management fees payable to Marriott International
in connection with its management of the Communities. On a pro forma basis,
lease payments to Host REIT totaled $887 million and $1,175 million for the
First Three Quarters 1998 and for Fiscal Year 1997, respectively (assuming all
Partnerships (as defined herein) participate and the Blackstone Acquisition is
consummated). Management fees payable to Marriott International and the Non-MI
Managers for these periods totaled approximately $156 million and
approximately $202 million, respectively, on a pro forma basis. Under the
Hotel Leases and the management agreements for the hotels, the Company will be
responsible for paying all the expenses of operating the hotels, including all
personnel costs, utility costs and general repair and maintenance (other than
capital expenditures, furniture, fixtures and equipment expenditures (with
certain exceptions), property and casualty insurance, real estate taxes and
other assessments and ground lease rent payments, for which Host REIT will be
responsible). The Company will be solely responsible for the expenses of
operating the Communities. Except in certain events specified therein, the
Company will not be able to terminate the Hotel Leases or the management
agreements prior to the expiration of their respective terms.
INABILITY OF THE COMPANY TO OBTAIN FINANCING SECURED BY THE HOTEL LEASES
WITHOUT HOST REIT'S CONSENT; OTHER FINANCING RESTRICTIONS
Pursuant to the terms of the Hotel Leases, the Company will not be entitled
to obtain financing secured by its leasehold interests in the hotels without
the consent of Host REIT, which may be withheld in its sole discretion. Even
if Host REIT were to consent to the Company obtaining financing secured by its
leasehold interests, a number of hotels have pre-existing third-party
financing that prohibits any additional secured financing. The management
agreements with Marriott International and the Non-MI Managers typically
require a secured lender to keep the management agreement in effect following
a foreclosure. The rights of each lessee will be expressly subordinate to
qualifying mortgage debt and any refinancing of property level debt of the
hotel. A default under the loan documents may result in the termination of the
Hotel Lease by the lender. The lender will not be required to provide a non-
disturbance agreement to the lessee.
RISKS OF LEVERAGE
The Company will have substantial indebtedness. As of September 11, 1998, on
a pro forma basis assuming the Distribution, the Company had outstanding
indebtedness, excluding the amount due to Host to pay for hotel working
capital purchased from Host of approximately $85 million, totaling
approximately $213 million (assuming all Partnerships (as defined herein)
participate and the Blackstone Acquisition is consummated). Giving effect to
the Hotel Leases with Host REIT and the management agreements with Marriott
International and the Non-MI Managers, pro forma interest, lease and hotel
management fee expenses would have been $1,060 million and $1,400 million for
the First Three Quarters 1998 and Fiscal Year 1997, respectively. The
Company's
10
<PAGE>
existing leverage, together with its obligation to make lease and management
fee payments under the Hotel Leases and related management agreements, could
affect its ability to obtain financing in the future or undertake refinancings
on terms and subject to conditions favorable to the Company. In addition, two
of the Company's subsidiaries that own a total of eight Communities are
parties to a loan agreement in the original principal amount of approximately
$125 million. The lender has a security interest in all eight Communities. The
loan agreement contains cross-default provisions so that a default by one
subsidiary can result in the acceleration of the entire amount of the
indebtedness.
GUARANTEES OF THE HOTEL LEASES AND RELATED POOLING AGREEMENTS
The Company and certain subsidiaries will enter into certain limited
guaranty agreements of the obligations of the Lessees under the Hotel Leases.
For each of four identified "pools" of full-service hotels, the cumulative
limit of the Company's guaranty at any time will be the greater of 10% of the
aggregate rents paid in the immediately preceding Fiscal Year under all Hotel
Leases in the pool or 10% of the aggregate rents paid under all Hotel Leases
in the pool in 1999.
As a result of these guaranty and pooling arrangements, the Company will be
required to apply excess cash flow from profitable Hotel Leases in a pool (and
potentially assets from outside a Hotel Lease pool) to meet rent shortfalls on
other Hotel Leases in the same pool, subject to the specified limits. In
addition, the agreements require that reserves be maintained within a Hotel
Lease pool in certain circumstances, which would restrict the availability of
excess cash to the Company for payment of operating expenses and other
purposes.
The Company also will guarantee the payment of certain rental obligations
with respect to the subleases of the limited-service hotels.
RESTRICTIONS ON SALES AND OTHER TRANSFERS OF HOTEL LEASEHOLD INTERESTS AND
COMMUNITIES
The Hotel Leases and the management agreements with Marriott International
and the Non-MI Managers of the hotels and the Communities impose certain
conditions and restrictions on sales, leases and other transfers of the Hotel
Leases and the Communities. These conditions and restrictions, or the
Company's inability to obtain a consent, modification or waiver from Host
REIT, Marriott International or the Non-MI Managers, could adversely affect
the Company's ability to consummate such sale, lease or other transfer.
FRAUDULENT CONVEYANCE CONSIDERATIONS
It is a condition to the consummation of the Distribution that the Board of
Directors of Host shall have received a satisfactory opinion regarding the
solvency of Host. There is no certainty, however, that a court would find the
solvency opinion rendered by Host's financial advisor to be binding on
creditors of Host or that a court would reach the same conclusions set forth
in such opinion in determining whether Host was insolvent at the time of, or
after giving effect to, the Distribution.
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time Host
effected the Distribution, Host (i) was insolvent; (ii) was rendered insolvent
by reason of the Distribution; (iii) was engaged in a business or transaction
for which Host's remaining assets constituted unreasonably small capital; or
(iv) intended to incur, or believed it would incur, debts beyond its ability
to pay as such debts matured, such court may be asked to void the Distribution
(in whole or in part) as a fraudulent conveyance and require, among other
possible remedies, that the Host Stockholders return the Distribution or the
value thereof (in whole or in part) to Host. The measure of insolvency for
purposes of the foregoing will vary depending upon the jurisdiction whose law
is being applied. Generally, however, Host would be considered insolvent if
the fair value of its assets were less than the amount of its liabilities or
if it incurred debt beyond its ability to repay such debt as it matures. No
assurance can be given as to what standard a court would apply in determining
insolvency. In addition, under Section 170 of the Delaware General Corporation
Law (the "DGCL") (which is applicable to the Distribution), a corporation
generally may make distributions to its stockholders only out of its surplus
(net assets minus capital) and not out of capital.
11
<PAGE>
Host's Board of Directors and management believe that Host will be solvent
at the time of the Distribution (in accordance with the foregoing
definitions), will be able to repay its debts as they mature following the
Distribution and will have sufficient capital to carry on its businesses, and
the Distribution will be made entirely out of surplus, as provided under
Section 170 of the DGCL.
RESTRICTIONS ON THE COMPANY'S BUSINESS AND FUTURE OPPORTUNITIES
The Company's activities are and will be limited by certain non-competition
agreements with Marriott International and Host REIT to which it is or will
become a party. In general, these non-competition agreements restrict the
Company for prescribed periods described below from (i) competing with the
hotel management business of Marriott International (but not from leasing
hotel properties or contracting with third parties to manage leased hotel
properties, subject to certain limitations for hotel properties operated under
a common name), (ii) operating or managing assisted living communities (but
not owning or leasing such communities) and (iii) owning or acquiring full-
service hotels that are not leased from Host REIT.
NON-COMPETITION AGREEMENT WITH MARRIOTT INTERNATIONAL REGARDING THE
HOTELS. Host and Marriott International entered into a non-competition
agreement in 1993 when Host and Marriott International became separate public
companies, as amended and restated in March 1998 (the "Hotel Non-Competition
Agreement"). The Company is currently bound by the Hotel Non-Competition
Agreement as a subsidiary of Host. In connection with the Distribution, the
Company will enter into an amendment to the Hotel Non-Competition Agreement
agreeing to be bound by the agreement once it is no longer a subsidiary of
Host. Marriott International requested that the Company enter into such
amendment to ensure that the Company would continue to be bound by the
agreement once it ceased to be a subsidiary of Host. No separate consideration
was paid to the Company for this amendment. Under the Hotel Non-Competition
Agreement, as supplemented by an agreement to be entered into between Host
REIT and the Company allocating between them the exceptions to the non-
competition provisions, the Company and its subsidiaries generally will be
prohibited prior to October 8, 2000, subject to certain limited exceptions,
from entering into or acquiring any business that competes with the hotel
management business (i.e., managing, operating or franchising full-service and
limited service hotels) of Marriott International. Certain activities are
permitted, however, including: (i) the operation by the Company of an
unlimited number of hotel properties so long as the Company does not operate
more than ten such properties under a common name; (ii) contracting by the
Company with a third party manager for operation of an unlimited number of
limited-service hotel properties, so long as the number of properties under
such third party management is not more than the greater of (a) ten such
properties operated under a common name or (b) 25% of the system operated by
such third party manager under a common name; (iii) contracting by the Company
with a third party manager for operation of an unlimited number of full-
service hotels having the same brand name as one of Host REIT's currently
owned hotels (including the hotels to be acquired in the Blackstone
Acquisition), so long as the number of properties under such third party
management is not more than the greater of (a) five such properties operated
under a common name or (b) 12.5% of the system operated by such third party
under a common name; and (iv) franchising by the Company of an unlimited
number of limited-service hotel properties so long as the Company is not
franchisor for more than ten such properties under a common name.
NON-COMPETITION AGREEMENT WITH HOST OR HOST REIT REGARDING THE HOTELS. The
Company, Host REIT and the non-controlled subsidiaries of Host REIT, which
will lease to the Company certain excess furniture, fixtures and equipment
(collectively, the "Initial FF&E Lessors"), will enter into a non-competition
agreement in connection with the Distribution. Pursuant to this non-
competition agreement, the Company will agree, among other things, that until
the earlier of December 31, 2008 or the date upon which the Company is not the
lessee of more than 25% of the number of hotels owned by Host on the
Distribution Date, the Company may not: (i) own, acquire, develop or construct
for ownership any full-service hotel (except for (a) investments which
represent an immaterial portion of a merger or similar transaction, (b) a
minimal portfolio investment or (c) the provision of limited financing); (ii)
without the consent of Host or Host REIT in its sole discretion, manage or
operate (other than through a third party manager) any limited-service or
full-service hotel properties owned by Host or Host
12
<PAGE>
REIT; or (iii) conduct, participate in, engage in or have a financial interest
in any person that engages in the ownership or operation of any single or
multiple full-service hotel franchise system operating under one or more
common brand names. The restrictions described in (i) and (iii) above do not
apply to any activities of the Company related to limited-service hotels. The
Company generally is permitted to act as a manager with respect to full-
service hotels, subject to certain restrictions intended to preclude the
Company from using the management agreement relationship to take a disguised
equity ownership position in full-service hotels. The Company also generally
is permitted to act as a lessee with respect to full-service hotels owned (i)
by any party under an arrangement where the Company also manages the hotel or
(ii) by a REIT, whether or not the Company also manages the hotel, subject in
each case to certain restrictions intended to preclude the Company from using
those leasing arrangements to take significant disguised equity ownership
positions in full-service hotels.
Until the earlier of December 31, 2008 or the date upon which the Company is
not the lessee of more than 25% of the number of hotels owned by Host on the
Distribution Date, Host or Host REIT and the FF&E Lessors have agreed that
they will not conduct, participate in, engage in or have a financial interest
in any person that engages in the business of leasing, operating or
franchising limited-service or full-service hotel properties; provided,
however, that this restriction does not prevent Host or Host REIT or the FF&E
Lessors from (i) managing, operating or franchising limited-service or full-
service hotels with respect to matters incident to the operation of such
properties (e.g., management services with respect to food and beverages,
plant and equipment operation and maintenance, reservations, sales and
marketing) on behalf of third parties or (ii) leasing full-service or limited-
service hotels to and from each other or (iii) in the case of Host or Host
REIT, leasing full-service and limited-service hotels from certain other
related parties. Until December 31, 2003, Host or Host REIT and the FF&E
Lessors also have agreed that they may not conduct, participate in, engage in
or have a financial interest in any person that engages in the ownership,
acquisition or operation of senior living communities (except for (a)
investments which represent an immaterial portion of a merger or similar
transaction, (b) a minimal portfolio investment or (c) the provision of
limited financing). In addition, both the Company and Host REIT will agree not
to hire or attempt to hire any of the other company's senior employees at any
time prior to December 31, 2000. See "Business and Properties--Relationship
with Host after the Distribution--Non-Competition Agreement" and "Business and
Properties--Non-Competition Agreements."
NON-COMPETITION AGREEMENT WITH MARRIOTT INTERNATIONAL REGARDING SENIOR
LIVING COMMUNITIES. In connection with the Company's acquisition of Forum from
Marriott International in 1997, Host and Marriott International entered into a
non-competition agreement (the "Community Non-Competition Agreement"). This
agreement, in general, provided that Marriott International, through its
subsidiary MSLS, would continue in its capacity as operator of the senior
living business previously conducted by Forum and, except as otherwise
provided in the agreement, Host and its subsidiaries would limit their
activities in the senior living area to owning, having equity interests in or
lending money or otherwise financing the Communities acquired from Marriott
International in the Forum Acquisition or subsequently acquired communities.
Under the agreement, Host and its subsidiaries were prohibited, subject to
certain limited exceptions, from competing with Marriott International in the
continental United States by (i) financing, conducting, participating or
engaging in the business of operating, managing or franchising senior living
communities or (ii) providing operational or managerial services relating
thereto with respect to health care, therapy, home health care, assisted
living, nursing and related medical, residential, supportive and personal care
services. In addition, Host and its subsidiaries were prohibited from entering
into a transaction or a series of transactions whereby ten or more Communities
or a controlling interest therein would be transferred to another party unless
such party agreed to be bound by the Community Non-Competition Agreement. The
Company, as the owner of all of Host's senior living communities, is currently
bound by the Community Non-Competition Agreement. In connection with the
Distribution, the Company will enter into an amended restated Community Non-
Competition Agreement with Marriott International and Host REIT pursuant to
which the Company will agree to be bound by the Community Non-Competition
Agreement until June 17, 2010.
COMPETITION IN THE LODGING AND SENIOR LIVING INDUSTRIES
The profitability of the hotels leased and subleased by the Company and the
profitability of the Communities are subject to general economic conditions,
the management abilities of Marriott International and the Non-MI
13
<PAGE>
Managers (in the case of certain hotels), competition, the desirability of
particular locations and other factors relating to their operation. The full-
service segment of the lodging industry, in which the hotels primarily
operate, is highly competitive, and the hotels generally operate in
geographical markets that contain numerous competitors. The success of the
hotels will be dependent, in large part, upon the ability to compete in such
areas as access, location, quality of accommodations, room rate structure, the
quality and scope of food and beverage facilities and other services and
amenities. Further, competing properties may be built or existing projects
enhanced. The lodging industry, including the hotels to be leased or subleased
by the Company, also may be adversely affected in the future by (i) national
and regional economic conditions, (ii) changes in travel patterns, (iii) taxes
and government regulations which influence or determine wages, prices,
interest rates, construction procedures and costs, (iv) the availability of
credit and (v) other factors beyond the control of the Company.
The long-term care industry, including the senior living segment, also is
highly competitive. The Company competes with numerous other companies
providing long-term care alternatives to the elderly, such as home health care
agencies, facility-based service programs, retirement communities,
convalescent centers, nursing home operators and other assisted living
companies. In general, regulatory and other barriers to competitive entry in
the senior living industry are not substantial. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than the Company. Consequently, there can be no
assurance that the Company will not encounter increased competition that could
limit its ability to attract residents or expand its senior living business in
the future. See "Business and Properties--Competition--Lodging" and "--Senior
Living."
OVERBUILDING IN THE ASSISTED LIVING INDUSTRY
The Company believes that many assisted living markets have become or are on
the verge of becoming overbuilt. Approximately 23% of the Company's senior
living units are assisted living units. Overbuilding in the assisted living
market could cause the Company's assisted living units to experience decreased
occupancy, depressed margins and lower operating results.
RISKS ASSOCIATED WITH INVESTMENTS IN REAL ESTATE
The stockholders of the Company will bear risks associated with real estate
investments. Real estate investments are relatively illiquid and, therefore,
will tend to limit the ability of the Company to sell and purchase senior
living communities promptly in response to changes in economic or other
conditions. This could make it difficult for the Company to sell any of its
Communities, even if a sale were in the interest of the stockholders.
SEASONALITY
The hotel industry is seasonal in nature. The seasonality of the hotel
industry may, from time to time, affect the ability of the Company to make
timely rent payments under the Hotel Leases. The failure of subsidiaries of
the Company to pay rent within 10 days of the date it is due is an event of
default and Host REIT may terminate the applicable full-service Hotel Lease or
exercise any other remedy available to it as a result of any such default. The
full-service Hotel Leases also contain cross-default provisions with respect
to defaults by the Company or its subsidiaries under (i) the hotel management
agreements between Marriott International and Host that will be assigned to
the Company, (ii) the Company's limited guaranty of the Hotel Leases, (iii)
the non-competition agreement to be entered into between the Company and Host
REIT and (iv) certain other related agreements between the parties or their
affiliates.
STAFFING AND LABOR COSTS
Marriott International competes with various other lodging companies in
attracting and retaining qualified and skilled personnel to operate the hotels
managed by it. Marriott International also competes with various health care
services providers, including other elderly care providers, in attracting and
retaining qualified personnel for the Communities. A shortage of such
personnel or general inflationary pressure may require Marriott International
to enhance its wage and benefits package to compete effectively for personnel
necessary to operate the hotels and the Communities, which could adversely
affect the Company's net income attributable to the hotels and the
Communities.
14
<PAGE>
REGULATION OF THE HEALTHCARE INDUSTRY
The long-term care segment of the healthcare industry is highly regulated.
Operators of skilled nursing facilities, including some of the healthcare
facilities operated as a part of the Company's Communities, are subject to
federal, state and local laws relating, among other things, to licensure and
Certificates of Need, the delivery and adequacy of medical care, fraud and
abuse, distribution of pharmaceuticals, operating policies and rate-setting
and reimbursement. Such facilities also are subject to periodic inspection by
governmental and other authorities to assure continued compliance with various
standards. The failure of an operator of a Company Community to obtain or
maintain any required regulatory approvals or licenses could prevent an
operator from offering services or adversely affect its ability to receive
reimbursement for services and could result in the denial of reimbursement,
temporary suspension of admission of new patients, suspension or
decertification from Medicaid, Medicare or other federal healthcare programs,
fines, restrictions on the ability to acquire new facilities or expand
existing facilities and, in extreme cases, revocation of the facility's
license or closure of a facility. On a historical basis, Medicare/Medicaid
reimbursements have accounted for approximately 7% of the Company's total
senior living community revenues.
Although not currently regulated at the federal level (except under laws of
general applicability to businesses, such as work place safety and income tax
requirements), assisted living communities are increasingly becoming subject
to more stringent regulation and licensing by state and local health and
social service agencies and other regulatory authorities. Like skilled nursing
facilities, assisted living communities are subject to periodic inspection by
government authorities. In most states, assisted living communities, as well
as skilled nursing facilities also are subject to state or local building
code, fire code and food service licensure or certification requirements. Any
failure by the managers of the Company's Communities to meet applicable
regulatory requirements may result in the imposition of fines, imposition of a
provisional or conditional license or suspension or revocation of a license or
other sanctions or adverse consequences, including delays in expanding a
community. Any failure by the managers of the Company's Communities to comply
with such requirements could have a material adverse effect on the Company's
financial condition and results of operations.
Operators of the Company's Communities also are subject to federal and state
anti-remuneration laws and regulations, such as the Federal Health Care
Programs anti-kickback law, which govern certain financial arrangements among
healthcare providers and others who may be in a position to refer or recommend
patients to such providers. These laws prohibit, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Federal Health Care Program patients or the purchasing,
leasing, ordering or arranging for any goods, facilities, services or items
for which payment can be made under a Federal Health Care Program (such as
Medicare or Medicaid). A violation of the federal anti-kickback law could
result in the loss of a provider's eligibility to participate in a Federal
Health Care Program or in civil or criminal penalties on the provider or other
entity. The federal government, private insurers and various state enforcement
agencies are devoting increased resources to enforcing compliance with these
laws. Furthermore, some states restrict certain business corporations from
providing, or holding themselves out as a provider of, medical care. State
laws vary from state to state, are often vague and have seldom been
interpreted by the courts or regulatory agencies. There can be no assurance
that these federal and state laws will ultimately be interpreted in a manner
consistent with the Company's practices. See "Business--Government
Regulation."
LIABILITY AND INSURANCE
The provision of personal and healthcare services entails an inherent risk
of liability. In recent years, participants in the long-term care industry
have become subject to an increasing number of lawsuits alleging malpractice
or related legal theories, many of which have involved large claims and
resulted in the incurrence of significant defense costs. In addition, compared
to more institutional long-term care facilities, assisted living communities
of the type operated by the Company offer residents a greater degree of
independence in their daily lives. This increased level of independence,
however, may subject the resident and the Company to certain risks that would
be reduced in more institutionalized settings. The Company currently maintains
liability insurance intended to cover such claims, which it believes is
adequate based on the nature of the risks, historical experience and industry
standards.
15
<PAGE>
As lessee of the hotels, the Company also will carry comprehensive general
liability insurance with policy specifications and insured limits required
under the leases. There can be no assurance, however, that claims in excess of
such insurance or claims not covered by insurance will not arise. A successful
claim against the Company not covered by, or in excess of, its insurance could
have a material adverse effect upon the Company's financial condition and
results of operations.
POSSIBLE LIABILITY FOR ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations,
owners or operators of real estate may be required to investigate and clean up
certain hazardous substances released at a property, and may be held liable to
a governmental entity or to third parties for property damage or personal
injuries and for investigation and clean-up costs incurred by the parties in
connection with any contamination. In addition, some environmental laws create
a lien on a contaminated site in favor of the government for damages and costs
it incurs in connection with the contamination. The presence of contamination
or the failure to remediate contamination may adversely affect the owner's
ability to sell or lease real estate or to borrow using the real estate as
collateral. No assurances can be given that (i) a prior owner, operator or
occupant, such as a tenant, did not create a material environmental condition
not known to the Company, (ii) a material environmental condition with respect
to any leased hotel or community owned by the Company does not exist or (iii)
future uses or conditions (including, without limitation, changes in
applicable environmental laws and regulations) will not result in the
imposition of environmental liability.
No assurances can be given that all potential environmental liabilities have
been identified or properly quantified or that no prior owner, operator or
past or current guest or occupant has created an environmental condition not
known to the Company. Moreover, no assurances can be given that (i) future
laws, ordinances, or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the leased hotels or
the Communities will not be affected by the condition of land or operations in
the vicinity of the leased hotels or the Communities (such as the presence of
underground storage tanks) or by third parties unrelated to the Company.
ABSENCE OF A PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There is currently no public market for the Common Stock. The Common Stock
of the Company has been approved for listing, subject to official notice of
issuance, on the NYSE under the symbol "CLJ." Until the Common Stock is fully
distributed and an orderly trading market develops, the prices at which
trading in such stock occurs may fluctuate significantly. There can be no
assurance that an active trading market in the Common Stock will develop or be
sustained in the future. In the event no active trading market develops for
the Common Stock, holders of shares of Common Stock may not be able to sell
their shares promptly at a reasonable price. Accordingly, holders of Common
Stock should consider the Common Stock a long-term investment.
The prices at which the Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
the Company's performance and prospects, the depth and liquidity of the market
for the Common Stock, investor perception of the Company and of the industries
in which the Company operates and economic conditions in general, changes in
earnings estimates by securities analysts or the Company's ability to meet
those estimates, the Company's dividend policy and general financial and other
market conditions. In addition, financial markets have experienced extreme
price and volume fluctuations that have affected the market price of the
stocks of many companies and that, at times, could be viewed as unrelated or
disproportionate to the operating performance of such companies. Such
fluctuations have also affected the share prices of many newly public issuers.
Such volatility and other factors may materially adversely affect the market
price of the Common Stock.
ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company does not expect to pay cash dividends in the foreseeable future.
See "Dividend Policy."
16
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Distribution could adversely affect the prevailing market price of the
Common Stock and the Company's ability to raise capital in the future. Upon
completion of the Distribution, the Company will have a total of approximately
24,820,000 shares of Common Stock outstanding assuming the Blackstone
Acquisition is consummated (approximately 20,450,000 shares if the Blackstone
Acquisition is not consummated), of which approximately 20,375,000 shares will
be freely tradable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), by persons other than "affiliates" of the
Company, as defined under the Securities Act. The remaining approximately
4,370,000 shares of Common Stock to be outstanding, representing shares held
by affiliates and the shares to be transferred by Host REIT to the Blackstone
Entities if the Blackstone Acquisition is consummated, will be "restricted
securities" as that term is defined by Rule 144 promulgated under the
Securities Act.
If the Blackstone Acquisition is consummated by Host REIT, the Blackstone
Entities will have certain registration rights with respect to approximately
18% of the outstanding shares of Common Stock of the Company. If such holders
cause a large number of shares to be sold in the public market, such sales
could have an adverse effect on the trading price of the Common Stock. In
addition, if the Company is required, pursuant to such registration rights, to
include shares held by such persons in any registration statement that the
Company files to raise additional capital, the inclusion of such shares could
have an adverse effect on the Company's ability to raise needed capital.
Following the Distribution, the Company intends to register on one or more
registration statements on Form S-8 under the Securities Act the shares of
Common Stock issuable under the Company's stock option and other benefit plans
for directors, officers and employees of the Company and its subsidiaries. Of
the 4,537,000 shares to be reserved for issuance under these plans,
approximately 630,000 shares will be subject to stock options or restricted
stock expected to be granted by the Company concurrently upon completion of
the Distribution. Officers and employees of Host who become officers and
employees of the Company at the time of the Distribution also will have their
existing awards held under the Host stock option and other benefit plans
converted into awards for Common Stock in accordance with the terms of the
Employee Benefits and Other Employment Matters Allocation Agreement to be
entered into by Host and the Company. See "Description of Capital Stock--
Registration Rights Agreement," "Management--Employee Benefit Plans" and
"Shares Eligible for Future Sale."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
AND MARYLAND LAW
The Company's amended and restated articles of incorporation (the "Charter")
and Bylaws, as well as Maryland law, contain certain provisions that could
have the effect of delaying, deferring or preventing a change in control of
the Company. These provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain
of these provisions provide for a staggered board and allow the Company to
issue, without stockholder approval, preferred stock having rights senior to
those of the Common Stock. Other provisions include: fixing the size of the
Board of Directors within a range set forth in the Company's Charter; removal
of directors by stockholders only for cause upon the affirmative vote of at
least two-thirds of all of the votes entitled to be cast; approval by
stockholders of mergers, consolidations, share exchanges and transfers of
assets by the affirmative vote of at least two-thirds of all of the votes
entitled to be cast, to the extent a stockholder vote is required for a
particular transaction under Maryland law; the ability of the Board of
Directors, without a stockholder vote, to classify or reclassify unissued
shares of capital stock, including Common Stock into Preferred Stock and vice
versa; the exclusive authority of the Board of Directors to amend the Bylaws;
advance notice provisions for stockholders to nominate directors or propose
new business; a limitation on the ability of stockholders to call special
meetings; and a two-thirds stockholder vote required to amend certain
provisions of the Charter. These provisions could make it difficult for
stockholders to effect certain corporate actions. The Company also intends to
adopt a Stockholder Rights Plan, pursuant to which stockholders would be
entitled to purchase from the Company a newly created series of junior
preferred stock upon the occurrence of certain events.
17
<PAGE>
Under the Maryland General Corporation Law (the "MGCL"), unless an exemption
is available, certain "business combinations" (including certain issuances of
equity securities) between a Maryland corporation and any person who
beneficially owns 10% or more of the voting power of the corporation's then
outstanding shares (an "Interested Stockholder") or an affiliate of the
Interested Stockholder are prohibited for five years after the most recent
date on which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be approved by (i) 80% of the
outstanding voting shares and (ii) two-thirds of the voting shares (other than
voting shares held by the Interested Stockholder), unless certain conditions
are satisfied. A business combination that is approved by the board of
directors of a Maryland corporation at any time before an Interested
Stockholder first becomes an Interested Stockholder is not subject to the
special voting requirements. The Company has not "opted-out" of the business
combination provisions of the MGCL, and, accordingly, will be subject to such
provisions although the Company may elect to opt-out of these provisions in
the future. The Board of Directors has adopted a resolution exempting from the
operation of the "business combination" statute transactions involving Host
REIT, Marriott International, J.W. Marriott, Jr. and Richard E. Marriott;
provided that any such transaction with Marriott International that is not in
the ordinary course of business or with J.W. Marriott, Jr. or Richard E.
Marriott must be approved by a majority of the directors of the Company
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 the MGCL.
In addition, under the MGCL, unless the 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, excluding shares owned by the
acquiror, by officers or by directors who are employees of the corporation.
"Control shares" are voting shares which, if aggregated with all other such
shares previously acquired by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third; (ii) one-third or more
but less than a majority; or (iii) a majority or more of all voting power. The
Company has not opted out of the "control share acquisition" provisions of the
MGCL, and, accordingly, will be subject to such provisions although the
Company may elect to opt-out of these provisions in the future. See
"Description of Capital Stock--Certain Anti-Takeover Provisions."
RESTRICTION ON OWNERSHIP AND TRANSFER
For Host REIT to qualify as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), Host REIT cannot own, either directly or by
attribution from one or more actual or constructive owners (actually or
constructively) of 10% or more of Host REIT, 10% or more of the Company or any
other tenant of Host REIT. In order to assist Host REIT in meeting this
requirement, the Company's Charter includes a restriction on transfer and
ownership (the "Ownership Limit"), which provides that no person or persons
acting as a group may own, or be deemed to own by virtue of certain
attribution rules of the Code, more than (i) 9.8% of the lesser of the number
or value of the issued and outstanding shares of Common Stock of the Company
or (ii) 9.8% of the lesser of the number or value of the issued and
outstanding preferred shares of any class or series of Company capital stock.
The ownership attribution rules under the Code are complex and may cause the
Common Stock of the Company owned actually or constructively by a group of
related individuals and/or entities to be owned constructively by one
individual entity. As a result, the acquisition of less than 9.8% of the
Common Stock of the Company (or the acquisition or ownership of an interest in
an entity that owns, actually or constructively, the Common Stock of the
Company) by an individual or entity could, nevertheless, cause that individual
or entity, or another individual or entity, to own constructively in excess of
9.8% of the outstanding Common Stock of the Company and thus subject such
Common Stock of the Company to the Ownership Limit.
Pursuant to the terms of the Charter, the Ownership Limit will become
effective as to all stockholders of the Company as of the Distribution Date,
with an exception for a person who would exceed the Ownership Limit solely by
reason of the receipt of shares of the Common Stock of the Company in the
Distribution. The Board of Directors of the Company also may grant an
exemption from the Ownership Limit with respect to a person if it is satisfied
that such ownership will not cause the Company or a subsidiary of the Company
that is a tenant of
18
<PAGE>
Host REIT to be considered a "related tenant" for purposes of the REIT
qualification rules and Host REIT concurs with such determination. The
Ownership Limit also will not apply if Host REIT no longer qualifies as a
REIT, if the Board of Directors of Host REIT determines that it is no longer
in the best interests of Host REIT to attempt to qualify, or to continue to
qualify, as a REIT, or if the Company determines, and Host REIT concurs, that
Host REIT derives less than 1% of its gross income pursuant to the Hotel
Leases. The Ownership Limit could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of Common Stock of the Company 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. See "Description of Capital
Stock--Restrictions on Ownership and Transfer."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts of its executive officers, most of
whom previously served as officers of Host. While the Company believes that it
could find replacements for these key personnel, the loss of their services
could have an adverse effect on the operations of the Company.
YEAR 2000 PROBLEM
The "Year 2000 Problem" has 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.
Following the Distribution, the Company, as the lessee of Host REIT's
hotels, will deal directly with Year 2000 matters material to the operation of
the hotels, and the Company has agreed to adopt and implement the Host
compliance program outlined below with respect to third-party systems for all
hotels for which it is the lessee. Host adopted its Year 2000 compliance
program because it recognized the importance of minimizing the number and
seriousness of any disruptions that may occur as a result of the Year 2000
issue. There can be no assurances that Year 2000 remediation by Host (and
following the Distribution, the Company) or third parties will be properly and
timely completed, and failure to do so could have a material adverse effect on
the Company, its business and its financial condition. The Company cannot
predict the actual effects of the Year 2000 problem, which depends on numerous
uncertainties such as: (i) whether significant third parties properly and
timely address the Year 2000 issue; and (ii) whether broad-based or systematic
economic failures may occur. The Company also is 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 services 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 the
Company's dependence on third parties, the Company is unable to determine at
this time whether the consequences of Year 2000 failure will have a material
impact on the Company. Although the Company efforts to work with Host in
pursuit of its Year 2000 compliance program are expected to significantly
reduce the level of uncertainty concerning Year 2000 issues and management
believes that the possibility of significant interruptions of normal
operations should be reduced, there is no assurance that this will be the
case.
19
<PAGE>
THE DISTRIBUTION
BACKGROUND OF AND REASONS FOR THE DISTRIBUTION
The Distribution and the Merger are part of a series of transactions
pursuant to which Host intends to convert into a REIT for federal income tax
purposes. Assuming the Merger and the other transactions necessary to
restructure Host's business operations so that it will qualify as a REIT are
completed on or prior to December 31, 1998, Host expects to qualify as a REIT
beginning with its first full taxable year commencing after the REIT
Conversion is completed, which is currently expected to be the year commencing
January 1, 1999 (but which might not be until the year commencing January 1,
2000).
Because REITs are not permitted under current federal income tax law to
derive revenues directly from the operation of hotels, Host REIT will be
required to lease and sublease the hotels currently owned and leased by Host
(as well as those acquired in the Blackstone Acquisition if such transaction
is consummated) to an unrelated party. In addition, in order for Host REIT to
qualify as a REIT for federal income tax purposes, Host or Host REIT will be
required to have distributed to its stockholders all E&P, as determined for
tax purposes, of Host prior to the end of the first full taxable year for
which the REIT election of Host REIT is effective. As a result of these
requirements, Host has determined, as part of the REIT Conversion, that (i)
Host REIT will lease and sublease substantially all of the hotels currently
owned and leased by Host (as well as those acquired in the Blackstone
Acquisition if such transaction is consummated) to subsidiaries of the
Company, which will lease or sublease the hotels from Host REIT under their
existing brand names and pursuant to their existing management agreements with
Marriott International and the Non-MI Managers, and (ii) Host will, subject to
approval of the Merger Agreement by Host Stockholders and declaration of the
Distribution by the Board of Directors of Host after the date of the Special
Meeting, make the Distribution to help accomplish the requisite distributions
of E&P of Host. In addition to facilitating Host's conversion into a REIT for
federal income tax purposes, Host believes that there may be greater
opportunities to expand the Company's ownership of senior living communities
if such business is owned by a separate public company whose senior management
has a greater focus on that business.
In connection with the Distribution, subsidiaries of the Company will lease
and sublease substantially all of the hotels then owned and leased by Host.
The Hotel Leases are expected to be for a term of years (ranging generally
from seven to ten years, depending on the particular hotel) commencing on or
before January 1, 1999 (assuming the Merger occurs prior to that date;
otherwise, as soon as practicable following the Distribution Date).
Concurrently with entering into the Hotel Leases, the Company will assume
certain of the rights and obligations under the existing management and
franchise agreements between Host and Marriott International or the Non-MI
Managers, pursuant to which Marriott International or the Non-MI Managers will
continue to manage the hotels on behalf of the Company. Marriott International
also will continue to manage the 31 Communities currently owned by the
Company.
CONDITIONS TO THE DISTRIBUTION
Although a number of the transactions comprising the REIT Conversion are
expected to be consummated immediately prior to, or in certain instances
immediately following, the Merger, the Merger will not be consummated unless
Host Stockholders have approved the Merger Agreement and the other conditions
to the Merger have been satisfied or waived. In particular, Host's Board of
Directors will have determined, among other things, that the transactions
constituting the REIT Conversion which impact Host REIT's status as a REIT for
federal income tax purposes have occurred or are reasonably likely to occur,
and based on advice of counsel, that Host REIT can elect to be treated as a
REIT for federal income tax purposes effective no later than the first full
taxable year commencing after the REIT Conversion is completed (which might
not be until the year commencing January 1, 2000 if the REIT Conversion is not
completed prior to January 1, 1999). Consistent with the foregoing, Host
intends to pursue the transactions constituting the REIT Conversion at least
through the date of the Special Meeting. If the Merger Agreement is approved
by Host Stockholders at the Special Meeting, Host intends to continue pursuing
those transactions constituting the REIT Conversion which have not yet been
completed, including the Blackstone Acquisition (which is not expected to be
consummated any earlier than
20
<PAGE>
December 29, 1998). In addition, Host's Board of Directors has determined that
the conditions to the Merger have been or likely will be satisfied or waived
(and, in particular, that the transactions constituting the REIT Conversion
which impact Host REIT's status as a REIT for federal income tax purposes have
occurred or are reasonably likely to occur). The Board intends to declare the
Distribution and enter into the leases and subleases of hotels with
subsidiaries of the Company. Under such circumstances, however, the Merger and
the other transactions comprising the REIT Conversion still might be delayed
or possibly might never be consummated. If, however, the Merger Agreement is
not approved by the Host Stockholders at the Special Meeting or the Host Board
does not make the determinations described above, Host's Board does not intend
to declare the Distribution or enter into the leases and subleases of hotels
with subsidiaries of the Company.
Assuming the Merger Agreement is approved by Host Stockholders at the
Special Meeting and the Host Board of Directors makes the determinations
described above, it is currently contemplated that (i) the Host Board of
Directors would declare the Distribution on or about December 18, 1998 payable
no later than December 31, 1998 to Host Stockholders of record on December 28,
1998 and (ii) the Merger would be consummated on or about December 29, 1998,
subject to satisfaction or waiver of the remaining conditions. Even under
circumstances where the Distribution is made but the Merger or other
transactions comprising the REIT Conversion are delayed or possibly never
consummated, the Host Board believes that having the leasing arrangements in
place with the Company could facilitate any subsequent efforts by Host to
qualify as a REIT for federal income tax purposes (including efforts to pursue
a merger with another entity or other transaction that would permit it to
commence a new taxable year and elect REIT status prior to January 1, 2000).
MANNER OF EFFECTING THE DISTRIBUTION
On the Distribution Date, Host will make the Distribution to Host
Stockholders pro rata in accordance with their respective interests in Host
held of record as of 5:00 p.m. (Eastern Standard Time) on the Record Date, and
will cause the Distribution Agent to mail certificates representing shares of
Common Stock of the Company to the Host Stockholders entitled thereto. Cash
will be paid in lieu of fractional shares. The Common Stock distributed in the
Distribution will represent approximately 82% of the then outstanding Common
Stock of the Company. The remaining approximately 18% of the then outstanding
Common Stock of the Company will be transferred by Host REIT to the Blackstone
Entities in connection with the Blackstone Acquisition. (If the Blackstone
Acquisition does not occur, the shares of Common Stock of the Company
distributed in the Distribution will represent 100% of the then outstanding
Common Stock of the Company and the remaining approximately 18% of the Common
Stock will be repurchased by the Company from Host at a purchase price of
$0.01 per share, subject to the right of Host to cause the Company to sell
such 18% of the Common Stock to the Blackstone Entities at fair market value
if the Distribution is made prior to January 1, 1999 and the Blackstone
Acquisition is consummated at a later date.) See "Business and Properties--
Blackstone Acquisition."
Inquiries relating to the Distribution should be directed to the
Distribution Agent, at Bank of New York, 101 Barclay Street, New York, New
York 10286, Attention: Ralph Chianese; or by telephone at 212-495-1784, Monday
through Friday, 9:00 a.m. to 5:00 p.m. (Eastern Standard Time).
NO SEPARATE VOTE OF HOST STOCKHOLDERS IS REQUIRED WITH RESPECT TO THE
DISTRIBUTION, AND NO HOST STOCKHOLDER WILL BE REQUIRED TO MAKE ANY PAYMENT OR
EXCHANGE ANY HOST COMMON STOCK IN ORDER TO RECEIVE COMMON STOCK OF THE COMPANY
OR CASH IN LIEU OF FRACTIONAL SHARES IN THE DISTRIBUTION.
The Company expects to have approximately 48,206 stockholders of record
immediately following the Distribution, based on the number of record holders
of Host common stock as of September 30, 1998. The Transfer Agent and
Registrar and the Distribution Agent for the Common Stock will be Bank of New
York.
FEDERAL INCOME TAX CONSEQUENCES
The Distribution will be a taxable dividend to a Host Stockholder in an
amount equal to the fair market value of the Common Stock (plus any cash in
lieu of fractional shares) received in the Distribution (to the extent
21
<PAGE>
that the Distribution is made out of the Host Stockholder's share of the
portion of the E&P of Host through the end of 1998 allocable to the
Distribution). Host and Host REIT currently believe that the entire
Distribution (the fair market value of which Host currently estimates will be
approximately $1.30 per share of Host common stock) will be made out of such
E&P and will be a taxable dividend. There can be no assurance, however, that
Host and Host REIT's calculation of such E&P or Host's estimate of the fair
market value of the Distribution will be respected by the Internal Revenue
Service (the "IRS") or that a challenge by the IRS to either such calculation
or such estimate would not be sustained by a court. To the extent that the
fair market value of a Host Stockholder's share of the Distribution exceeds
his or her share of the portion of the E&P of Host and Host REIT through the
end of 1998 allocable to the Distribution, the Distribution would be treated
first as a tax-free return of capital to such Host Stockholder, reducing the
adjusted basis in his or her Host common stock by the amount of such excess
(but not below zero) and then, if such basis is reduced to zero and there is
remaining excess, as capital gain to the extent of such remaining excess
(provided that such Host Stockholder has held the Host common stock as a
capital asset). A Host Stockholder's initial tax basis in the Common Stock
received in the Distribution will equal the fair market value of such stock on
the Distribution Date, and its holding period in the Common Stock will begin
on the date after the Distribution Date. THE SPECIFIC TAX ATTRIBUTES OF A
PARTICULAR HOST STOCKHOLDER COULD HAVE A MATERIAL IMPACT ON THE TAX
CONSEQUENCES TO THAT HOST STOCKHOLDER OF THE DISTRIBUTION. THEREFORE, IT IS
ESSENTIAL THAT EACH HOST STOCKHOLDER CONSULT WITH HIS OR HER OWN TAX ADVISORS
WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
STOCKHOLDER'S PARTICULAR TAX SITUATION, AS WELL AS ANY TAX CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. For
a more detailed discussion of the federal income tax consequences reasonably
anticipated by Host to be material to a Host Stockholder in connection with
the Distribution, see "Federal Income Tax Consequences."
RESTRICTION ON OWNERSHIP AND TRANSFER
For Host REIT to qualify as a REIT under the Code, Host REIT cannot own,
either directly or by attribution from one or more actual or constructive
owners (actually or constructively) of 10% or more of Host REIT, 10% or more
of the Company or any other tenant of Host REIT. In order to assist Host REIT
in meeting this requirement, the Charter includes an Ownership Limit, which
provides that no person or persons acting as a group may own, or be deemed to
own by virtue of certain attribution rules of the Code, more than (i) 9.8% of
the lesser of the number or value of shares of the outstanding Common Stock of
the Company or (ii) 9.8% of the lesser of the number or value of the issued
and outstanding preferred shares of any class or series of Company capital
stock. Pursuant to the terms of the Charter, the Ownership Limit will become
effective to all stockholders of the Company as of the Distribution Date. A
person who would exceed the Ownership Limit solely by reason of the receipt of
shares of Common Stock of the Company in the Distribution is excepted from the
Ownership Limit to the extent such person holds such shares. The Board of
Directors of the Company may grant an exemption from the Ownership Limit with
respect to a person if it is satisfied that such ownership will not cause the
Company or a subsidiary of the Company that is a tenant of Host REIT to be
considered a "related party tenant" for purposes of the REIT qualification
rules. The Ownership Limit also will not apply if (i) Host REIT no longer
qualifies as a REIT, (ii) the Board of Directors of Host REIT determines that
it is no longer in the best interests of Host REIT to attempt to qualify, or
continue to qualify, as a REIT or (iii) the Company determines, and Host REIT
concurs, that Host REIT derives less than 1% of its gross income pursuant to
the Hotel Leases. See "Description of Capital Stock--Restrictions on Ownership
and Transfer."
DIVIDEND POLICY
The Company intends to use its available funds to pursue investment and
business opportunities and, therefore, does not anticipate the payment of any
cash dividends on the Common Stock in the foreseeable future. The declaration
of any cash dividends in the future will be subject to the discretion of the
Company's Board of Directors.
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 11, 1998, and pro forma capitalization as of September 11, 1998,
after giving effect to the transactions described in the "Pro Forma Financial
Statements." The capitalization of the Company should be read in conjunction
with the Company's consolidated financial statements and the notes thereto,
the "Pro Forma Financial Statements" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," each contained elsewhere
herein.
<TABLE>
<CAPTION>
AS OF SEPTEMBER
11, 1998
-------------------
PRO
HISTORICAL FORMA(1)
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Debt.................................................. $213,034 $213,034(2)
Equity................................................ 392,071 407,071
-------- --------
Total capitalization................................ $605,105 $620,105
======== ========
</TABLE>
- --------
(1) See "Pro Forma Financial Statements." Amounts assume all Partnerships (as
defined herein) participate in the REIT Conversion.
(2) Amount excludes approximately $85 million due to Host to pay for working
capital purchased from Host.
23
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The REIT Conversion involves a complex series of transactions not all of
which necessarily have to occur in order for the REIT Conversion to be
consummated. For example, there is no requirement that any of the eight public
partnerships (the "Partnerships") and the private partnerships proposed to be
acquired in the REIT Conversion (the Partnerships and such private
partnerships collectively, the "Hotel Partnerships") actually participate in
order for the REIT Conversion to be consummated (but if a Hotel Partnership
does not participate in the REIT Conversion, its hotel properties would not be
leased to the Company), nor is there a requirement that the Blackstone
Acquisition occur in order for the REIT Conversion to be consummated. In
addition, the consent of a number of lenders and several outside partners in
certain key Hotel Partnerships are required in order for certain hotel
properties owned by Host to be leased to the Company, and there can be no
assurance that all such consents will be obtained. Accordingly, the number of
hotel properties that will be leased by the Company may vary, perhaps
substantially.
In light of the number of possible variations, the Company is not able to
describe all possible combinations of Hotels that could be leased. However, to
assist in analyzing the Distribution, the Company has prepared two separate
sets of unaudited pro forma financial statements to show the impact of the
Distribution assuming that all Partnerships participate in the REIT Conversion
("All Partnerships Participate"), the Blackstone Acquisition is consummated,
and all required lender and outside partner consents are obtained and a second
scenario showing no Partnerships participate in the REIT Conversion (but that
the Blackstone Acquisition is consummated and all required lender and outside
partner consents (other than for the Partnerships) are obtained) ("No
Partnership Participation").
The unaudited pro forma condensed consolidated statements of operations of
the Company reflect the following transactions for the First Three Quarters
1998 and for the fiscal year ended January 2, 1998, as if such transactions
had been completed at the beginning of the fiscal year:
. 1997 acquisition of Forum (the "Forum Acquisition") and one additional
senior living community;
. 1998 retirement of $26 million of debt through a capital contribution
from Host;
. 1998 repayment and forgiveness of $92 million of unsecured debt and a
$14.8 million intercompany note treated as a capital contribution by
Host;
. 1998 acquisition of one senior living community;
. 1998 acquisition of minority interests in certain consolidated
subsidiaries of the Company through contributions from Host;
. 1998 spin-off of the Company by Host and the concurrent lease or sublease
of hotels from Host REIT;
. 1998 adoption of Emerging Issues Task Force ("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." to reflect the change in presentation to
present property-level sales and operating expenses;
. 1998 acquisition from Host of a 5% interest in a joint venture which
holds an approximate $130 million mortgage note from a consolidated
subsidiary of Host in connection with the Distribution; and
. Adjustment to corporate expenses as if the Company were operated on a
stand-alone basis, partially offset by the asset management fee to be
charged to Host REIT.
The adjustments to the unaudited pro forma balance sheet of the Company
reflect the lease and sublease of substantially all of Host's owned or leased
hotels and certain other transactions as described herein in conjunction with
the Distribution.
In 1998, the Company acquired one senior living community for $21 million.
Also, during 1998, Host prepaid approximately $26 million of the Company's
mortgage debt and repaid $92 million of unsecured debt to Marriott
International. The prepayment was recorded as a capital contribution to the
Company and the $92 million was repaid in exchange for a $92 million note due
to Host with similar terms. The $92 million note and an additional $14.8
million intercompany note were forgiven by Host and treated as a capital
contribution in the First Three Quarters 1998.
24
<PAGE>
In 1997, Host acquired 29 senior living communities from Marriott
International and concurrently contributed all of the assets and liabilities
obtained in the Forum Acquisition to the Company. In addition, during 1997,
the Company acquired 49% of the remaining 50% interest in Leisure Park Venture
Limited Partnership which owns a 418-unit retirement community in New Jersey
for approximately $23 million, including the assumption of approximately $15
million in debt. The Company currently owns 99% of the partnership.
If all components of Host's conversion to a REIT are not completed prior to
January 1, 1999, Host REIT may be precluded from electing REIT status until
January 1, 2000 and the Blackstone Acquisition may not be consummated.
Accordingly, a separate column ("Pro Forma without Blackstone") has been
included in the pro forma financial statements that assumes that the
Blackstone Acquisition does not occur.
The unaudited pro forma financial statements present the financial position
and the results of operations of the Company as if the transactions described
above were completed. These presentations do not purport to represent what the
Company's results of operations would actually have been if the transactions
described above had in fact occurred on such date or at the beginning of such
period or to project the Company's results of operations for any future date
or period.
The unaudited pro forma financial statements are based upon certain
assumptions, as set forth in the notes to the unaudited pro forma financial
statements, that the Company believes are reasonable under the circumstances
and should be read in conjunction with the consolidated financial statements
and notes thereto of the Company included elsewhere herein.
25
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 11, 1998
ALL PARTNERSHIPS PARTICIPATE
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WITHOUT
HISTORICAL ADJUSTMENTS PRO FORMA BLACKSTONE (I)
---------- ----------- --------- --------------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment,
net....................... $649,528 $ -- $649,528 $649,528
Amounts due from Marriott
International............. 4,097 -- 4,097 4,097
Other assets............... 14,290 85,000(A) 105,772 100,772
6,482(B)
Cash and cash equivalents.. 26,504 15,000(B) 35,022 35,022
(6,482)(B)
-------- -------- -------- --------
Total assets............. $694,419 $100,000 $794,419 $789,419
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Debt....................... $213,034 $ -- $213,034 $213,034
Deferred income taxes...... 61,376 -- 61,376 61,376
Due to Host Marriott Corpo-
ration, net............... 12,989 85,000(A) 97,989 92,989
Accounts payable and other
accrued liabilities....... 13,639 -- 13,639 13,639
Deferred revenue........... 1,310 -- 1,310 1,310
-------- -------- -------- --------
Total liabilities........ 302,348 85,000 387,348 382,348
-------- -------- -------- --------
Stockholder's equity
Common stock, 100 shares
authorized, issued and
outstanding (on a pro-
forma basis 75 million
shares of common stock
authorized; 24.8 million
issued and
outstanding)(1)........... -- -- -- --
Additional paid-in capi-
tal....................... 386,627 15,000(B) 401,627 401,627
Retained earnings.......... 5,444 -- 5,444 5,444
-------- -------- -------- --------
Total stockholder's equi-
ty...................... 392,071 15,000 407,071 407,071
-------- -------- -------- --------
Total liabilities and
stockholder's equity.... $694,419 $100,000 $794,419 $789,419
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
26
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
ALL PARTNERSHIPS PARTICIPATE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
D E F G H I
DEBT HOTEL PRO FORMA
REFINANCING/ COMMUNITY CORPORATE LEASES AND ADOPTION OF WITHOUT
HISTORICAL REPAYMENTS ACQUISITIONS EXPENSES SUBLEASES EITF 97-2 PRO FORMA BLACKSTONE
---------- ------------ ------------ --------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Rooms............... $ -- $ -- $ -- $ -- $ -- $1,847,650 $1,847,650 $1,636,922
Food and beverage... -- -- -- -- -- 863,953 863,953 765,417
Other............... -- -- -- -- -- 163,268 163,268 144,647
House profit........ -- -- -- -- 1,123,100 (1,123,100) -- --
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total hotels........ -- -- -- -- 1,123,100 1,751,771 2,874,871 2,546,986
-------- ------- ----- ------- --------- ---------- ---------- ----------
Senior living
communities
Routine............. 54,872 -- 84 -- -- 94,792 149,748 149,748
Ancillary........... 2,928 -- 1 -- -- 13,483 16,412 16,412
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total senior living
communities........ 57,800 -- 85 -- -- 108,275 166,160 166,160
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total revenues...... 57,800 -- 85 -- 1,123,100 1,860,046 3,041,031 2,713,146
-------- ------- ----- ------- --------- ---------- ---------- ----------
OPERATING COSTS AND
EXPENSES
Hotels
Property-level costs
and expenses
Rooms............... -- -- -- -- -- 729,475 729,475 647,105
Food and beverage... -- -- -- -- -- 766,688 766,688 680,116
Other department
costs and
deductions......... -- -- -- -- -- 255,608 255,608 226,746
Management fees and
other.............. -- -- -- -- 205,169 -- 205,169 193,888
Lease expense....... -- -- -- -- 887,400 -- 887,400 771,900
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total hotels....... -- -- -- -- 1,092,569 1,751,771 2,844,340 2,519,755
-------- ------- ----- ------- --------- ---------- ---------- ----------
Senior living
communities
Property-level costs
and expenses
Routine............. -- -- -- -- -- 94,792 94,792 94,792
Ancillary........... -- -- -- -- -- 13,483 13,483 13,483
Other operating
costs and
expenses........... 29,803 -- 49 -- -- -- 29,852 29,852
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total senior living
communities....... 29,803 -- 49 -- -- 108,275 138,127 138,127
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total operating
costs and
expenses.......... 29,803 -- 49 -- 1,092,569 1,860,046 2,982,467 2,657,882
-------- ------- ----- ------- --------- ---------- ---------- ----------
Operating profit .... 27,997 -- 36 -- 30,531 -- 58,564 55,264
Corporate expenses... (2,937) -- -- (7,948) -- -- (10,885) (10,885)
Interest expense..... (17,560) 4,789 -- -- (3,531) -- (16,302) (16,094)
Interest and dividend
income.............. 1,120 -- 6 -- 392 -- 1,518 1,518
-------- ------- ----- ------- --------- ---------- ---------- ----------
Income (loss) before
income taxes........ 8,620 4,789 42 (7,948) 27,392 -- 32,895 29,803
Benefit (provision)
for income taxes.... (3,534) (1,963) (18) 3,259 (11,231) -- (13,487) (12,219)
-------- ------- ----- ------- --------- ---------- ---------- ----------
Income (loss) before
extraordinary item.. $ 5,086 $ 2,826 $ 24 $(4,689) $ 16,161 $ -- $ 19,408 $ 17,584
======== ======= ===== ======= ========= ========== ========== ==========
Pro forma earnings
per share........... $ .21(2) $ .78(2) $ .86(3)
======== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
27
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1998
ALL PARTNERSHIPS PARTICIPATE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
C D E F G H
HOTEL
DEBT LEASES
FORUM REFINANCING/ COMMUNITY CORPORATE AND ADOPTION OF PRO
HISTORICAL ACQUISITION REPAYMENT ACQUISITIONS EXPENSES SUBLEASES EITF 97-2 FORMA
---------- ----------- ------------ ------------ --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Room............. $ -- $ -- $ -- $ -- $ -- $ -- $ 2,460,816 $2,460,816
Food and
beverage........ -- -- -- -- -- -- 1,156,017 1,156,017
Other............ -- -- -- -- -- -- 248,471 248,471
House profit..... -- -- -- -- -- 1,475,300 (1,475,300) --
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total hotels.... -- -- -- -- -- 1,475,300 2,390,004 3,865,304
-------- ------- ------- ------- ------- ---------- ----------- ----------
Senior living
communities......
Routine.......... 35,473 30,859 -- 7,031 -- -- 127,135 200,498
Ancillary........ 1,427 1,983 -- 188 -- -- 18,693 22,291
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total senior
living
communities.... 36,900 32,842 -- 7,219 -- -- 145,828 222,789
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total revenues.. 36,900 32,842 -- 7,219 -- 1,475,300 2,535,832 4,088,093
-------- ------- ------- ------- ------- ---------- ----------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ -- -- -- -- -- -- 993,374 993,374
Food and
beverage........ -- -- -- -- -- -- 1,047,903 1,047,903
Other department
costs and
deductions...... -- -- -- -- -- -- 348,727 348,727
Management fees
and other....... -- -- -- -- -- 260,500 -- 260,500
Lease expense.... -- -- -- -- -- 1,175,100 -- 1,175,100
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total hotels.... -- -- -- -- -- 1,435,600 2,390,004 3,825,604
-------- ------- ------- ------- ------- ---------- ----------- ----------
Senior living
communities
Property-level costs and expenses
Routine.......... -- -- -- -- -- -- 127,135 127,135
Ancillary........ -- -- -- -- -- -- 18,693 18,693
Other operating
costs and
expenses........ 20,929 17,977 -- 4,733 -- -- -- 43,639
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total senior
living
communities.... 20,929 17,977 -- 4,733 -- -- 145,828 189,467
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total operating
costs and
expenses....... 20,929 17,977 -- 4,733 -- 1,435,600 2,535,832 4,015,071
-------- ------- ------- ------- ------- ---------- ----------- ----------
Operating profit
................. 15,971 14,865 -- 2,486 -- 39,700 -- 73,022
Corporate
expenses......... (2,304) (5,115) -- 745 (6,826) -- -- (13,500)
Interest expense.. (13,396) (9,630) 7,312 (2,118) -- (5,100) -- (22,932)
Interest and
dividend income.. 336 598 -- -- -- 567 -- 1,501
-------- ------- ------- ------- ------- ---------- ----------- ----------
Income (loss)
before income
taxes............ 607 718 7,312 1,113 (6,826) 35,167 -- 38,091
Benefit
(provision) for
income taxes..... (249) (294) (2,998) (456) 2,799 (14,419) -- (15,617)
-------- ------- ------- ------- ------- ---------- ----------- ----------
Income (loss)
before
extraordinary
item............. $ 358 $ 424 $ 4,314 $ 657 $(4,027) $ 20,748 $ -- $ 22,474
======== ======= ======= ======= ======= ========== =========== ==========
Pro forma earnings
per share........ $ .01(2) $ .91(2)
======== ==========
<CAPTION>
I
PRO
FORMA
WITHOUT
BLACKSTONE
-------------
<S> <C>
REVENUES
Hotels
Room............. $2,203,294
Food and
beverage........ 1,035,041
Other............ 222,469
House profit..... --
-------------
Total hotels.... 3,460,804
-------------
Senior living
communities......
Routine.......... 200,498
Ancillary........ 22,291
-------------
Total senior
living
communities.... 222,789
-------------
Total revenues.. 3,683,593
-------------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ 886,763
Food and
beverage........ 935,440
Other department
costs and
deductions...... 311,301
Management fees
and other....... 246,500
Lease expense.... 1,038,600
-------------
Total hotels.... 3,418,604
-------------
Senior living
communities
Property-level costs and expenses
Routine.......... 127,135
Ancillary........ 18,693
Other operating
costs and
expenses........ 43,639
-------------
Total senior
living
communities.... 189,467
-------------
Total operating
costs and
expenses....... 3,608,071
-------------
Operating profit
................. 75,522
Corporate
expenses......... (13,500)
Interest expense.. (22,633)
Interest and
dividend income.. 1,501
-------------
Income (loss)
before income
taxes............ 40,890
Benefit
(provision) for
income taxes..... (16,765)
-------------
Income (loss)
before
extraordinary
item............. $ 24,125
=============
Pro forma earnings
per share........ $ 1.18(3)
=============
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
ALL PARTNERSHIPS PARTICIPATE
A. Represents the adjustment to increase working capital and record a loan
payable to Host of $85 million to record the transfer of hotel working capital
to the Company related to the leasing of Host's hotels.
B. Represents the following transactions in connection with the
Distribution:
. Host's contribution of $15 million in cash to the Company.
. Acquisition from Host of a 5% limited partner interest in a joint
venture with Host that owns an approximate $130 million note
receivable from a consolidated subsidiary of Host.
C. Represents the adjustment to reflect the historical revenues, operating
expenses, corporate expenses, interest expense and interest income for the
Forum Acquisition as if such acquisition occurred at the beginning of 1997
(actual acquisition date was June 21, 1997).
D. Represents the adjustment to eliminate interest expense on $133 million
of debt repaid during 1998 by Host on behalf of the Company and treated as a
capital contribution by Host.
E. Represents the adjustment to record the historical revenues, operating
expenses, corporate expenses and interest income related to the acquisition of
one senior living community in 1998 and the acquisition of one senior living
community in 1997. The adjustment also includes the elimination of $745,000 of
minority interest expense included in corporate expenses related to the
purchase of minority interests in certain consolidated subsidiaries of the
Company in 1997.
F. Represents the adjustment to record additional corporate expenses
anticipated to be incurred when the Company is operated on a stand-alone basis
subsequent to the Distribution, net of the asset management contract of $4.5
million per annum. The adjustment includes the following (in thousands):
<TABLE>
<CAPTION>
FIRST THREE FISCAL YEAR
QUARTERS 1998 1997
------------- -----------
<S> <C> <C>
Payroll costs......................................... $ 6,748 $ 6,894
Rent and insurance.................................... 1,218 1,267
Other general and administrative costs................ 3,097 3,165
------- -------
11,063 11,326
Less: asset management fee............................ (3,115) (4,500)
------- -------
Net corporate expense adjustment.................... $ 7,948 $ 6,826
======= =======
</TABLE>
G. Represents the adjustment to record the historical hotel revenues and
hotel expenses and pro forma lease expense associated with the leasing and
subleasing of certain hotel properties from Host, interest expense on the $85
million working capital loan at 6%, and income from the 5% investment in the
joint venture with Host that owns a $130 million note receivable from a
consolidated subsidiary of Host.
Rental revenues under the leases are based on the greater of Percentage Rent
or Minimum Rent. Total rent in the pro forma statement of operations is
calculated based on the historical gross sales of the property and the
negotiated rental rates and thresholds by property as if the leases were
entered into on the first day of fiscal year 1997. There are generally three
sales categories utilized in the rent calculation: rooms, food and beverage
and other. For rooms and food and beverage, there are three tiers of rent with
two thresholds, while the other category generally has two tiers of rent and
one threshold. The percentage rent thresholds are increased annually on the
first day of each year after the initial lease year based on a blended
increase of the Consumer Price Index ("CPI") and a wage and benefit index. For
purposes of the pro formas, 1997 is the assumed initial lease year
29
<PAGE>
and the blended increase applied to the thresholds at January 3, 1998 is
assumed to be 3%. Minimum rent is expressed as a fixed dollar amount that
increases annually on the first day of each year after the initial lease year
at 50% of the CPI increase. Accordingly, the 1998 rent thresholds and minimum
rent included in the pro formas were adjusted as of January 3, 1998 for the
1997 increases in the indices. Rental revenues are recognized only for leases
to be executed with Host REIT at or prior to completion of the Distribution.
The execution of the leases is dependent upon the consummation of the
Distribution, which is subject to contingencies that are outside the control
of the Company, including approval of the Merger Agreement by Host
Stockholders and consent to certain aspects of the REIT Conversion by lenders,
debt holders, partners and ground lessors of Host. The Company believes that
negotiations by Host with third parties to complete the REIT Conversion will
not result in any material change to the leases. The table below details gross
sales, minimum rent and total rent for all full-service properties to be
leased and summarized amounts for the limited-service properties to be
subleased:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
-------------------- --------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- ------ ------- ----- ------ ------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Grand Hotel Resort and
Golf Club.............. $ 23.4 $ 2.8 $ 4.2 $ 18.0 $ 2.0 $ 3.7
Scottsdale Suites....... 11.9 3.0 5.0 8.2 2.1 3.4
The Ritz-Carlton,
Phoenix................ 23.3 4.6 7.2 17.3 3.2 5.5
Coronado Island Resort.. 22.0 2.1 2.1 16.2 1.5 3.6
Costa Mesa Suites....... 9.7 1.9 3.3 7.2 1.3 2.3
Desert Springs Resort
and Spa................ 103.3 21.3 30.3 80.3 15.0 22.6
Manhattan Beach......... 16.3 2.4 4.8 12.2 1.7 3.6
Marina Beach ........... 21.1 4.6 7.1 16.9 3.2 6.2
Newport Beach........... 33.5 5.5 8.7 24.0 3.9 6.8
Newport Beach Suites.... 11.0 2.6 4.1 8.0 1.8 3.0
Ontario Airport......... 12.1 1.8 3.4 8.3 1.3 2.2
San Diego Marriott Hotel
and Marina............. 103.3 38.0 39.6 78.6 26.7 31.1
San Diego Mission
Valley................. 16.7 3.4 5.1 12.6 2.4 5.6
San Francisco Airport... 43.8 8.2 13.2 32.2 5.8 9.5
San Francisco
Fisherman's Wharf...... 17.8 4.0 6.4 12.1 2.8 4.3
San Francisco Moscone
Center................. 120.2 20.7 37.9 90.5 14.6 28.5
San Ramon............... 19.7 4.4 5.1 14.4 3.1 4.0
Santa Clara............. 47.3 7.8 16.5 37.2 5.5 13.5
The Ritz-Carlton, Marina
del Rey................ 32.4 5.5 10.8 23.4 3.9 7.9
The Ritz-Carlton, San
Francisco.............. 50.1 9.6 14.7 34.2 6.7 10.3
Torrance................ 20.5 2.3 3.5 15.0 1.6 5.1
Denver Southeast........ 21.5 3.0 6.2 14.9 2.1 4.1
Denver Tech Center...... 26.8 5.1 8.3 20.1 3.6 6.0
Denver West............. 13.7 1.8 4.0 9.6 1.2 2.7
Marriott's Mountain
Resort at Vail......... 17.6 3.0 5.1 14.1 2.1 4.5
Hartford/Farmington..... 18.4 3.5 4.7 13.4 2.4 3.5
Hartford/Rocky Hill..... 11.6 1.5 2.7 8.5 1.1 2.0
Fort Lauderdale Marina.. 28.5 4.3 7.9 20.4 3.0 5.7
Harbor Beach Resort..... 58.1 16.5 19.3 43.2 11.6 14.0
Jacksonville............ 11.8 1.8 3.6 8.0 1.2 2.4
Miami Airport........... 29.7 3.9 8.4 21.6 2.8 6.1
Orlando World Center.... 128.2 23.5 39.6 98.7 16.5 30.4
Palm Beach Gardens...... 11.8 1.9 3.7 8.5 1.4 3.0
Singer Island (Holiday
Inn)................... 6.6 1.4 2.5 5.2 1.0 2.1
Tampa Airport........... 17.1 1.6 3.5 13.1 1.1 2.7
Tampa Westshore......... 15.0 1.8 3.6 10.8 1.3 2.6
The Ritz-Carlton,
Naples................. 66.4 18.1 23.3 53.1 12.7 18.0
Atlanta Marriott
Marquis................ 85.4 21.3 33.3 58.6 15.0 25.6
Atlanta Midtown Suites.. 10.5 1.8 3.5 7.8 1.3 2.6
Atlanta Norcross........ 7.6 1.0 1.7 5.6 0.7 1.2
Atlanta Northwest....... 14.9 2.7 4.3 11.3 1.9 3.3
Atlanta Perimeter....... 16.6 2.5 4.5 12.6 1.7 3.5
JW Marriott Hotel at
Lenox.................. 24.8 3.7 6.8 17.7 2.6 5.0
The Ritz-Carlton,
Atlanta................ 30.2 5.8 8.8 21.7 4.1 6.8
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
The Ritz-Carlton, Buckhead.. $ 49.3 $ 13.1 $ 16.3 $ 35.8 $ 9.2 $ 11.7
Chicago/Deerfield Suites.... 10.2 1.8 3.1 7.4 1.3 2.3
Chicago/Downers Grove
Suites..................... 9.0 1.8 2.9 6.7 1.3 2.2
Chicago/Downtown Courtyard.. 16.3 3.1 4.9 12.2 2.2 3.9
Chicago O'Hare.............. 40.0 5.5 11.5 28.8 3.9 8.2
South Bend.................. 9.9 1.1 2.1 7.0 0.8 1.5
New Orleans ................ 66.4 17.5 21.8 47.6 12.3 15.8
Bethesda.................... 23.2 3.2 5.6 17.3 2.2 4.1
Gaithersburg/Washingtonian
Center..................... 13.2 2.4 3.8 9.7 1.7 2.8
Boston/Newton............... 27.4 4.8 7.8 19.1 3.4 5.5
Detroit Romulus............. 8.8 1.1 1.8 6.6 0.8 1.4
The Ritz-Carlton, Dearborn.. 25.7 3.6 5.5 17.7 2.5 4.0
Minneapolis/Bloomington..... 20.2 3.3 6.5 13.8 2.3 4.7
Minneapolis City Center..... 27.5 3.7 7.5 20.4 2.4 5.2
Minneapolis Southwest....... 14.9 2.7 4.8 10.1 1.9 4.0
Kansas City Airport......... 14.3 1.7 3.7 9.9 1.2 2.5
St. Louis Pavilion.......... 27.5 6.1 6.5 18.5 4.3 4.3
Nashua...................... 7.5 0.8 1.3 5.3 0.5 0.9
Hanover..................... 22.5 4.7 6.6 15.1 3.3 4.3
Newark Airport.............. 39.4 6.5 11.8 29.2 4.6 8.6
Park Ridge.................. 16.0 2.5 4.0 11.9 1.7 4.2
Saddle Brook................ 10.7 1.3 2.1 7.8 0.9 1.7
Albany...................... 18.5 3.5 6.1 12.4 2.5 5.2
New York Marriott Financial
Center..................... 39.6 7.7 13.2 29.1 5.4 10.1
New York Marriott Marquis... 210.3 40.0 60.8 155.4 29.7 47.6
Marriott World Trade
Center..................... 65.4 12.2 19.4 49.1 8.6 14.9
Charlotte Executive Park.... 14.0 2.3 3.7 9.8 1.6 2.6
Raleigh Crabtree Valley..... 14.9 2.4 3.9 10.9 1.7 2.8
Oklahoma City............... 15.6 2.0 3.8 10.4 1.4 2.4
Oklahoma City Waterford..... 9.1 1.5 2.7 6.1 1.0 1.7
Portland.................... 26.4 4.1 7.5 17.6 2.9 4.8
Philadelphia (Convention
Center).................... 80.7 14.2 25.0 58.2 10.0 17.8
Philadelphia Airport........ 25.0 4.1 7.6 18.6 2.9 5.6
Pittsburgh City Center...... 16.4 1.9 3.0 11.1 1.3 2.2
Memphis..................... 10.6 1.5 3.2 5.7 1.0 1.8
Dallas/Fort Worth........... 28.9 5.9 9.3 21.9 4.1 7.0
Dallas Quorum............... 25.7 4.2 8.2 18.3 3.0 5.8
El Paso..................... 11.6 0.9 2.3 7.8 0.6 1.4
Houston Airport ............ 21.6 2.8 6.0 16.9 2.0 4.6
JW Marriott Houston......... 27.2 5.0 8.0 20.1 3.5 5.9
Plaza San Antonio........... 13.8 2.9 4.6 9.7 2.0 3.3
San Antonio Rivercenter..... 68.9 17.5 24.5 49.3 12.3 17.8
San Antonio Riverwalk....... 29.3 6.1 10.3 21.7 4.3 7.6
Salt Lake City.............. 28.5 5.6 9.5 21.1 3.9 7.2
Dulles Airport.............. 14.6 1.8 4.0 10.9 1.2 3.0
Key Bridge.................. 29.4 5.6 10.2 21.2 3.9 7.4
Norfolk Waterside........... 18.1 3.3 5.4 12.8 2.4 3.8
Pentagon City Residence
Inn........................ 11.7 3.5 5.5 8.7 2.5 4.2
The Ritz-Carlton, Tysons
Corner..................... 34.4 5.9 9.8 24.9 4.1 7.3
Washington Dulles Suites.... 10.3 2.5 4.0 7.8 1.8 3.0
Westfields.................. 28.0 4.7 7.4 20.3 3.3 5.4
Williamsburg................ 12.6 1.8 2.8 9.3 1.3 2.1
Washington Metro Center..... 25.2 4.5 7.3 19.2 3.2 5.3
Calgary..................... 13.4 1.7 1.7 9.8 1.2 2.3
Toronto Airport............. 17.1 2.9 5.6 13.0 2.0 4.2
Toronto Eaton Centre........ 21.1 6.1 7.1 16.0 4.3 5.6
Toronto Delta Meadowvale.... 16.1 2.6 4.9 10.6 1.9 3.1
Fairview Park............... 22.5 3.9 7.3 16.3 2.8 5.2
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Dayton....................... $ 18.2 $ 3.2 $ 6.0 $ 13.4 $ 2.3 $ 4.3
Research Triangle Park....... 9.1 1.4 2.9 6.8 1.0 2.3
Detroit Marriott Southfield.. 8.8 1.2 2.1 6.9 0.9 1.7
Detroit Marriott Livonia..... 10.0 1.4 2.6 7.4 1.0 1.9
Fullerton.................... 6.8 1.2 1.8 5.0 0.8 1.3
Marriott O'Hare Suites....... 14.4 2.7 4.9 10.8 1.9 4.0
Albuquerque.................. 16.4 3.6 3.6 11.1 2.5 2.6
Greensboro-High Point........ 13.6 3.3 3.3 10.2 2.3 2.4
Houston Medical Center....... 16.5 4.0 4.0 12.2 2.8 2.9
Miami Biscayne Bay........... 26.8 6.5 6.6 20.5 4.5 5.1
Marriott Mountain Shadows
Resort...................... 24.1 4.4 4.5 16.9 3.1 3.1
Seattle SeaTac Airport....... 23.1 6.7 6.7 17.5 4.7 5.1
Four Seasons, Atlanta(4)..... 15.6 5.8 5.9 14.2 4.1 4.5
Four Seasons,
Philadelphia(4)............. 41.1 7.9 12.4 30.6 5.6 10.1
Grand Hyatt, Atlanta(4)...... 25.3 10.0 10.0 22.6 7.0 8.2
Hyatt Regency,
Burlingame(4)............... 47.9 8.8 17.6 39.5 6.2 15.1
Hyatt Regency, Cambridge(4).. 32.4 6.7 11.9 26.8 4.7 10.4
Hyatt Regency, Reston(4)..... 30.5 6.5 11.3 24.2 4.5 9.2
Swissotel, Atlanta(4)........ 22.2 5.0 6.3 17.2 3.5 5.8
Swissotel, Boston(4)......... 26.8 6.4 8.5 20.5 4.5 6.9
Swissotel, Chicago(4)........ 38.1 10.9 15.1 28.9 7.7 12.0
The Drake (Swissotel), New
York(4)..................... 38.8 11.6 13.6 34.2 8.2 13.4
The Ritz-Carlton, Amelia
Island(4)................... 45.7 10.3 13.4 37.4 7.2 11.1
The Ritz-Carlton, Boston(4).. 40.1 6.9 10.5 31.4 4.8 8.8
-------- ------ -------- -------- ------ ------
Total Full-Service
Properties.................. 3,600.8 715.9 1095.6 2,671.0 504.5 838.3
Total Courtyard by Marriott
Properties.................. 212.0 50.6 59.2 159.2 35.0 36.8
Total Residence Inn
Properties.................. 69.9 17.2 20.3 50.6 12.0 12.3
-------- ------ -------- -------- ------ ------
Total...................... $3,882.7 $783.7 $1175.1 $2,880.8 $551.5 $887.4
======== ====== ======== ======== ====== ======
</TABLE>
32
<PAGE>
Although a number of the transactions comprising the REIT Conversion are
expected to be consummated immediately prior to, or in certain instances
immediately following, the Merger, the Merger will not be consummated unless
Host Stockholders have approved the Merger Agreement and the other conditions
to the Merger have been satisfied or waived. In particular, Host's Board of
Directors will have determined, among other things, that the transactions
constituting the REIT Conversion which impact Host REIT's status as a REIT for
federal income tax purposes have occurred or are reasonably likely to occur,
and based on advice of counsel, that Host REIT can elect to be treated as a
REIT for federal income tax purposes effective no later than the first full
taxable year commencing after the REIT Conversion is completed (which might
not be until the year commencing January 1, 2000 if the REIT Conversion is not
completed prior to January 1, 1999). Consistent with the foregoing, Host
intends to pursue the transactions constituting the REIT Conversion at least
through the date of the Special Meeting. If the Merger Agreement is approved
by Host Stockholders at the Special Meeting, Host intends to continue pursuing
those transactions constituting the REIT Conversion which have not yet been
completed, including the Blackstone Acquisition (which is not expected to be
consummated any earlier than December 29, 1998), and, if Host's Board of
Directors has determined that the conditions to the Merger have been or likely
will be satisfied or waived, declare the Distribution and enter into the
leases and subleases of hotels with subsidiaries of the Company, even though
there is no assurance that the Merger and the other transactions comprising
the REIT Conversion might not be delayed or possibly might never be
consummated. If, however, the Merger Agreement is not approved by the Host
Stockholders at the Special Meeting or the Host Board does not make the
determinations described above, Host's Board does not intend to declare the
Distribution or enter into the leases and subleases of hotels with
subsidiaries of the Company. Assuming the Merger Agreement is approved by Host
Stockholders at the Special Meeting and the Host Board of Directors makes the
determinations described above, it is currently contemplated that (i) the Host
Board of Directors would declare the Distribution on or about December 18,
1998 payable no later than December 31, 1998 to Host Stockholders of record on
December 28, 1998 and (ii) the Merger would be consummated on or about
December 29, 1998, subject to satisfaction or waiver of the remaining
conditions. Even under circumstances where the Distribution is made but the
Merger or other transactions comprising the REIT Conversion are delayed or
possibly never consummated, the Host Board believes that having the leasing
arrangements in place with the Company could facilitate any subsequent efforts
by Host to qualify as a REIT for federal income tax purposes (including
efforts to pursue a merger with another entity or other transaction that would
permit it to commence a new taxable year and elect REIT status prior to
January 1, 2000).
H. Represents the adjustment to reflect the Company's anticipated adoption
of EITF 97-2 in the fourth quarter of 1998 by recording property-level sales
and operating expenses. The adjustment has no impact on operating profit or
net income.
I. The "Pro Forma without Blackstone" column reflects the adjustment to
eliminate the revenues, operating expenses and working capital relating to the
Blackstone hotel properties assuming that the Blackstone Acquisition does not
occur. Amounts related to the Company's 25% interest in Swissotel Management
(USA) L.L.C. have not been included in the pro forma financial statements
because they are immaterial.
- --------
(1) On a pro forma basis as of September 11, 1998, the Company had 75
million shares of common stock, $.01 par value, authorized with 24.8 million
shares issued and outstanding. In addition, on a pro forma basis, 10 million
shares of preferred stock, $.01 par value, are authorized with none issued or
outstanding.
(2) Reflects the pro forma earnings per share based on 24.8 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and the issuance of shares to
the Blackstone Entities.
(3) Reflects the pro forma earnings per share based on 20.4 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and assumes that the Blackstone
acquisition does not occur.
(4) Represent the Blackstone hotel properties.
33
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 11, 1998
NO PARTNERSHIP PARTICIPATION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WITHOUT
HISTORICAL ADJUSTMENTS PRO FORMA BLACKSTONE
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment, net...... $649,528 $ -- $649,528 $649,528
Amounts due from Marriott Inter-
national........................ 4,097 -- 4,097 4,097
Other assets..................... 14,290 67,000(A) 87,772 82,772
6,482(B)
Cash and cash equivalents........ 26,504 15,000(B) 35,022 35,022
(6,482)(B)
-------- ------- -------- --------
Total assets................... $694,419 $82,000 $776,419 $771,419
======== ======= ======== ========
LIABILITIES AND STOCKHOLDER'S EQ-
UITY
Debt............................. $213,034 $ -- $213,034 $213,034
Deferred income taxes............ 61,376 -- 61,376 61,376
Due to Host Marriott Corporation,
net............................. 12,989 67,000(A) 79,989 74,989
Accounts payable and other ac-
crued liabilities............... 13,639 -- 13,639 13,639
Deferred revenue................. 1,310 -- 1,310 1,310
-------- ------- -------- --------
Total liabilities.............. 302,348 67,000 369,348 364,348
-------- ------- -------- --------
Stockholder's equity
Common stock, 100 shares
authorized, issued and
outstanding (on a pro forma
basis 75 million shares of
common stock authorized; 24.8
million issued and
outstanding)(1)................. -- -- -- --
Additional paid-in capital....... 386,627 15,000(B) 401,627 401,627
Retained earnings................ 5,444 -- 5,444 5,444
-------- ------- -------- --------
Total stockholder's equity..... 392,071 15,000 407,071 407,071
-------- ------- -------- --------
Total liabilities and stock-
holder's equity............... $694,419 $82,000 $776,419 $771,419
======== ======= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
34
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
NO PARTNERSHIP PARTICIPATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
D E F G H I
DEBT PRO FORMA
REFINANCING/ COMMUNITY CORPORATE HOTEL LEASES ADOPTION OF WITHOUT
HISTORICAL REPAYMENTS ACQUISITIONS EXPENSES AND SUBLEASES EITF 97-2 PRO FORMA BLACKSTONE
---------- ------------ ------------ --------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Rooms............ $ -- $ -- $ -- $ -- $ -- $1,507,687 $1,507,687 $1,292,185
Food and
beverage........ -- -- -- -- -- 675,831 675,831 579,231
Other............ -- -- -- -- -- 110,423 110,423 94,640
House profit..... -- -- -- -- 896,321 (896,321) -- --
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total hotels..... -- -- -- -- 896,321 1,397,620 2,293,941 1,966,056
-------- ------- ----- ------- -------- ---------- ---------- ----------
Senior living
communities
Routine.......... 54,872 -- 84 -- -- 94,792 149,748 149,748
Ancillary........ 2,928 -- 1 -- -- 13,483 16,412 16,412
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total senior
living
communities..... 57,800 -- 85 -- -- 108,275 166,160 166,160
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total revenues... 57,800 -- 85 -- 896,321 1,505,895 2,460,101 2,132,216
-------- ------- ----- ------- -------- ---------- ---------- ----------
OPERATING COSTS
AND EXPENSES
Hotels
Property-level
costs and
expenses
Rooms............ -- -- -- -- -- 651,662 651,662 569,292
Food and
beverage........ -- -- -- -- -- 632,750 632,750 546,178
Other department
costs and
deductions...... -- -- -- -- -- 113,208 113,208 105,846
Management fees
and other....... -- -- -- -- 177,521 -- 177,521 166,240
Lease expense.... -- -- -- -- 697,500 -- 697,500 554,500
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total hotels.... -- -- -- -- 875,021 1,397,620 2,272,641 1,942,056
-------- ------- ----- ------- -------- ---------- ---------- ----------
Senior living
communities
Property-level
costs and
expenses
Routine.......... -- -- -- -- -- 94,792 94,792 94,792
Ancillary........ -- -- -- -- -- 13,483 13,483 13,483
Other operating
costs and
expenses........ 29,803 -- 49 -- -- -- 29,852 29,852
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total senior
living
communities.... 29,803 -- 49 -- -- 108,275 138,127 138,127
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total operating
costs and
expenses....... 29,803 -- 49 -- 875,021 1,505,895 2,410,768 2,080,183
-------- ------- ----- ------- -------- ---------- ---------- ----------
Operating profit
................. 27,997 -- 36 -- 21,300 49,333 52,033
Corporate ex-
penses........... (2,937) -- -- (7,948) -- -- (10,885) (10,885)
Interest expense.. (17,560) 4,789 -- -- (2,949) -- (15,720) (15,513)
Interest and
dividend income.. 1,120 -- 6 -- 392 -- 1,518 1,518
-------- ------- ----- ------- -------- ---------- ---------- ----------
Income (loss)
before income
taxes............ 8,620 4,789 42 (7,948) 18,743 -- 24,246 27,153
Benefit
(provision) for
income taxes..... (3,534) (1,963) (18) 3,259 (7,685) -- (9,941) (11,133)
-------- ------- ----- ------- -------- ---------- ---------- ----------
Income (loss)
before
extraordinary
item............. $ 5,086 $ 2,826 $ 24 $(4,689) $ 11,058 $ -- $ 14,305 $ 16,020
======== ======= ===== ======= ======== ========== ========== ==========
Pro forma earnings
per share........ $ .21(2) $ .58(2) $ .78(3)
======== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
35
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1998
NO PARTNERSHIP PARTICIPATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
C D E F G H
DEBT
FORUM REFINANCING/ COMMUNITY CORPORATE HOTEL LEASES ADOPTION OF PRO
HISTORICAL ACQUISITION REPAYMENT ACQUISITIONS EXPENSES AND SUBLEASES EITF 97-2 FORMA
---------- ----------- ------------ ------------ --------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Room............. $ -- $ -- $ -- $ -- $ -- $ -- $1,984,659 $1,984,659
Food and bever-
age............. -- -- -- -- -- -- 874,761 874,761
Other............ -- -- -- -- -- -- 167,322 167,322
House profit..... -- -- -- -- -- 1,163,628 (1,163,628) --
-------- ------- ------- ------- ------- --------- ---------- ----------
Total hotels.... -- -- -- -- -- 1,163,628 1,863,114 3,026,742
-------- ------- ------- ------- ------- --------- ---------- ----------
Senior living
communities......
Routine.......... 35,473 30,859 -- 7,031 -- -- 127,135 200,498
Ancillary........ 1,427 1,983 -- 188 -- -- 18,693 22,291
-------- ------- ------- ------- ------- --------- ---------- ----------
Total senior
living
communities.... 36,900 32,842 -- 7,219 -- -- 145,828 222,789
-------- ------- ------- ------- ------- --------- ---------- ----------
Total revenues.. 36,900 32,842 -- 7,219 -- 1,163,628 2,008,942 3,249,531
-------- ------- ------- ------- ------- --------- ---------- ----------
OPERATING COSTS
AND EXPENSES
Hotels
Property-level
costs and expenses
Rooms............ -- -- -- -- -- -- 889,525 889,525
Food and bever-
age............. -- -- -- -- -- -- 852,701 852,701
Other department
costs and
deductions...... -- -- -- -- -- -- 120,888 120,888
Management fees
and other....... -- -- -- -- -- 214,128 -- 214,128
Lease expense.... -- -- -- -- -- 921,800 -- 921,800
-------- ------- ------- ------- ------- --------- ---------- ----------
Total hotels.... -- -- -- -- -- 1,135,928 1,863,114 2,999,042
-------- ------- ------- ------- ------- --------- ---------- ----------
Senior living com-
munities
Property-level
costs and expenses
Routine.......... -- -- -- -- -- -- 127,135 127,135
Ancillary........ -- -- -- -- -- -- 18,693 18,693
Other operating
costs and
expenses......... 20,929 17,977 -- 4,733 -- -- -- 43,639
-------- ------- ------- ------- ------- --------- ---------- ----------
Total senior
living
communities.... 20,929 17,977 -- 4,733 -- -- 145,828 189,467
-------- ------- ------- ------- ------- --------- ---------- ----------
Total operating
costs and
expenses....... 20,929 17,977 -- 4,733 -- 1,135,928 2,008,942 3,188,509
-------- ------- ------- ------- ------- --------- ---------- ----------
Operating
profit .......... 15,971 14,865 -- 2,486 -- 27,700 -- 61,022
Corporate
expenses......... (2,304) (5,115) -- 745 (6,826) -- -- (13,500)
Interest expense.. (13,396) (9,630) 7,312 (2,118) -- (4,261) -- (22,093)
Interest and
dividend income.. 336 598 -- -- -- 567 -- 1,501
-------- ------- ------- ------- ------- --------- ---------- ----------
Income (loss)
before income
taxes Benefit.... 607 718 7,312 1,113 (6,826) 24,006 -- 26,930
(provision) for
income taxes..... (249) (294) (2,998) (456) 2,799 (9,843) -- (11,041)
-------- ------- ------- ------- ------- --------- ---------- ----------
Income (loss)
before
extraordinary
item............. $ 358 $ 424 $ 4,314 $ 657 $(4,027) $ 14,163 $ -- $ 15,889
======== ======= ======= ======= ======= ========= ========== ==========
Pro forma earnings
per share........ $ .01(2) $ .64(2)
======== ==========
<CAPTION>
I
PRO
FORMA
WITHOUT
BLACKSTONE
-------------
<S> <C>
REVENUES
Hotels
Room............. $1,719,425
Food and bever-
age............. 757,856
Other............ 144,961
House profit..... --
-------------
Total hotels.... 2,622,242
-------------
Senior living
communities......
Routine.......... 200,498
Ancillary........ 22,291
-------------
Total senior
living
communities.... 222,789
-------------
Total revenues.. 2,845,031
-------------
OPERATING COSTS
AND EXPENSES
Hotels
Property-level
costs and expenses
Rooms............ 782,914
Food and bever-
age............. 740,238
Other department
costs and
deductions...... 83,462
Management fees
and other....... 200,128
Lease expense.... 785,300
-------------
Total hotels.... 2,592,042
-------------
Senior living com-
munities
Property-level costs and expenses
Routine.......... 127,135
Ancillary........ 18,693
Other operating
costs and
expenses......... 43,639
-------------
Total senior
living
communities.... 189,467
-------------
Total operating
costs and
expenses....... 2,781,509
-------------
Operating
profit........... 63,522
Corporate
expenses......... (13,500)
Interest expense.. (21,793)
Interest and
dividend income.. 1,501
-------------
Income (loss)
before income
taxes............ 29,730
Benefit
(provision) for
income taxes..... (12,189)
-------------
Income (loss)
before
extraordinary
item............. $ 17,541
=============
Pro forma earnings
per share........ $ .86(3)
=============
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
36
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NO PARTNERSHIP PARTICIPATION
A. Represents the adjustment to increase working capital and record a loan
payable to Host of $67 million to record the transfer of hotel working capital
to the Company related to the leasing of Host's hotels.
B. Represents the following transactions in connection with the
Distribution:
. Host's contribution of $15 million in cash to the Company.
. Acquisition from Host of a 5% limited partner interest in a joint
venture with Host that owns an approximate $130 million note
receivable from a consolidated subsidiary of Host.
C. Represents the adjustment to reflect the historical revenues, operating
expenses, corporate expenses, interest expense and interest income for the
Forum Acquisition as if such acquisition occurred at the beginning of 1997
(actual acquisition date was June 21, 1997).
D. Represents the adjustment to eliminate interest expense on $133 million
of debt repaid during 1998 by Host on behalf of the Company and treated as a
capital contribution by Host.
E. Represents the adjustment to record the historical revenues, operating
expenses, corporate expenses and interest income related to the acquisition of
one senior living community in 1998 and the acquisition of one senior living
community in 1997. The adjustment also includes the elimination of $745,000 of
minority interest expense included in corporate expenses related to the
purchase of minority interests in certain consolidated subsidiaries of the
Company in 1997.
F. Represents the adjustment to record additional corporate expenses
anticipated to be incurred when the Company is operated on a stand-alone basis
subsequent to the Distribution, net of the asset management contract of $4.5
million per annum. The adjustment includes the following (in thousands):
<TABLE>
<CAPTION>
FIRST THREE FISCAL YEAR
QUARTERS 1998 1997
------------- -----------
<S> <C> <C>
Payroll costs......................................... $6,748 $6,894
Rent and insurance.................................... 1,218 1,267
Other general and administrative costs................ 3,097 3,165
------ ------
11,063 11,326
Less: asset management fee............................ (3,115) (4,500)
------ ------
Net corporate expense adjustment.................... $7,948 $6,826
====== ======
</TABLE>
G. Represents the adjustment to record the historical hotel revenues and
hotel expenses and pro forma lease expense associated with the leasing and
subleasing of certain hotel properties from Host, interest expense on the $67
million working capital loan at 6%, and income from the 5% investment in the
joint venture with Host that owns a $130 million note receivable from a
consolidated subsidiary of Host.
Rental revenues under the leases are based on the greater of Percentage Rent
or Minimum Rent. Total rent in the pro forma statement of operations is
calculated based on the historical gross sales of the property and the
negotiated rental rates and thresholds by property as if the leases were
entered into on the first day of fiscal year 1997. There are generally three
sales categories utilized in the rent calculation: rooms, food and beverage
and other. For rooms and food and beverage, there are three tiers of rent with
two thresholds, while the other category generally has two tiers of rent and
one threshold. The percentage rent thresholds are increased annually on the
first day of each year after the initial lease year based on a blended
increase of CPI and a wage and benefit index. For purposes of the pro formas,
1997 is the assumed initial lease year and the blended increase applied to the
thresholds at January 3, 1998 is assumed to be 3%. Minimum rent is expressed
as a fixed dollar amount that
37
<PAGE>
increases annually on the first day of each year after the initial lease year
at 50% of the CPI increase. Accordingly, the 1998 rent thresholds and minimum
rent included in the pro formas were adjusted as of January 3, 1998 for the
1997 increases in the indices. Rental revenues are recognized only for leases
to be executed with Host REIT at or prior to completion of the Distribution.
The execution of the leases is dependent upon the consummation of the
Distribution, which is subject to contingencies that are outside the control
of the Company, including approval of the Merger Agreement by Host
Stockholders and consent to certain aspects of the REIT Conversion by lenders,
debt holders, partners and ground lessors of Host. The Company believes that
negotiations by Host with third parties to complete the REIT Conversion will
not result in any material change to the leases. The table below details gross
sales, minimum rent and total rent for all full-service properties to be
leased and summarized amounts for the limited-service properties to be
subleased:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Grand Hotel Resort and Golf
Club....................... $ 23.4 $ 2.8 $ 4.2 $ 18.0 $ 2.0 $ 3.7
Scottsdale Suites........... 11.9 3.0 5.0 8.2 2.1 3.4
The Ritz-Carlton, Phoenix... 23.3 4.6 7.2 17.3 3.2 5.5
Coronado Island Resort...... 22.0 2.1 2.1 16.2 1.5 3.6
Costa Mesa Suites........... 9.7 1.9 3.3 7.2 1.3 2.3
Manhattan Beach............. 16.3 2.4 4.8 12.2 1.7 3.6
Marina Beach ............... 21.1 4.6 7.1 16.9 3.2 6.2
Newport Beach............... 33.5 5.5 8.7 24.0 3.9 6.8
Newport Beach Suites........ 11.0 2.6 4.1 8.0 1.8 3.0
Ontario Airport............. 12.1 1.8 3.4 8.3 1.3 2.2
San Diego Marriott Hotel and
Marina..................... 103.3 38.0 39.6 78.6 26.7 31.1
San Diego Mission Valley.... 16.7 3.4 5.1 12.6 2.4 5.6
San Francisco Airport....... 43.8 8.2 13.2 32.2 5.8 9.5
San Francisco Fisherman's
Wharf...................... 17.8 4.0 6.4 12.1 2.8 4.3
San Francisco Moscone
Center..................... 120.2 20.7 37.9 90.5 14.6 28.5
The Ritz-Carlton, Marina del
Rey........................ 32.4 5.5 10.8 23.4 3.9 7.9
The Ritz-Carlton, San
Francisco.................. 50.1 9.6 14.7 34.2 6.7 10.3
Torrance.................... 20.5 2.3 3.5 15.0 1.6 5.1
Denver Southeast............ 21.5 3.0 6.2 14.9 2.1 4.1
Denver Tech Center.......... 26.8 5.1 8.3 20.1 3.6 6.0
Denver West................. 13.7 1.8 4.0 9.6 1.2 2.7
Marriott's Mountain Resort
at Vail.................... 17.6 3.0 5.1 14.1 2.1 4.5
Hartford/Farmington......... 18.4 3.5 4.7 13.4 2.4 3.5
Hartford/Rocky Hill......... 11.6 1.5 2.7 8.5 1.1 2.0
Fort Lauderdale Marina...... 28.5 4.3 7.9 20.4 3.0 5.7
Jacksonville................ 11.8 1.8 3.6 8.0 1.2 2.4
Miami Airport............... 29.7 3.9 8.4 21.6 2.8 6.1
Palm Beach Gardens.......... 11.8 1.9 3.7 8.5 1.4 3.0
Singer Island (Holiday
Inn)....................... 6.6 1.4 2.5 5.2 1.0 2.1
Tampa Airport............... 17.1 1.6 3.5 13.1 1.1 2.7
Tampa Westshore............. 15.0 1.8 3.6 10.8 1.3 2.6
The Ritz-Carlton, Naples.... 66.4 18.1 23.3 53.1 12.7 18.0
Atlanta Midtown Suites...... 10.5 1.8 3.5 7.8 1.3 2.6
Atlanta Norcross............ 7.6 1.0 1.7 5.6 0.7 1.2
Atlanta Northwest........... 14.9 2.7 4.3 11.3 1.9 3.3
Atlanta Perimeter........... 16.6 2.5 4.5 12.6 1.7 3.5
JW Marriott Hotel at Lenox.. 24.8 3.7 6.8 17.7 2.6 5.0
The Ritz-Carlton, Atlanta... 30.2 5.8 8.8 21.7 4.1 6.8
The Ritz-Carlton, Buckhead.. 49.3 13.1 16.3 35.8 9.2 11.7
Chicago/Deerfield Suites.... 10.2 1.8 3.1 7.4 1.3 2.3
Chicago/Downers Grove
Suites..................... 9.0 1.8 2.9 6.7 1.3 2.2
Chicago/Downtown Courtyard.. 16.3 3.1 4.9 12.2 2.2 3.9
Chicago O'Hare.............. 40.0 5.5 11.5 28.8 3.9 8.2
South Bend.................. 9.9 1.1 2.1 7.0 0.8 1.5
Bethesda.................... 23.2 3.2 5.6 17.3 2.2 4.1
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- ----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- ------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Gaithersburg/Washingtonian
Center...................... $ 13.2 $ 2.4 $ 3.8 $ 9.7 $ 1.7 $ 2.8
Boston/Newton................ 27.4 4.8 7.8 19.1 3.4 5.5
Detroit Romulus.............. 8.8 1.1 1.8 6.6 0.8 1.4
The Ritz-Carlton, Dearborn... 25.7 3.6 5.5 17.7 2.5 4.0
Minneapolis/Bloomington...... 20.2 3.3 6.5 13.8 2.3 4.7
Minneapolis City Center...... 27.5 3.7 7.5 20.4 2.4 5.2
Minneapolis Southwest........ 14.9 2.7 4.8 10.1 1.9 4.0
Kansas City Airport.......... 14.3 1.7 3.7 9.9 1.2 2.5
St. Louis Pavilion........... 27.5 6.1 6.5 18.5 4.3 4.3
Nashua....................... 7.5 0.8 1.3 5.3 0.5 0.9
Newark Airport............... 39.4 6.5 11.8 29.2 4.6 8.6
Park Ridge................... 16.0 2.5 4.0 11.9 1.7 4.2
Saddle Brook................. 10.7 1.3 2.1 7.8 0.9 1.7
Albany....................... 18.5 3.5 6.1 12.4 2.5 5.2
New York Marriott Financial
Center...................... 39.6 7.7 13.2 29.1 5.4 10.1
New York Marriott Marquis.... 210.3 40.0 60.8 155.4 29.7 47.6
Marriott World Trade Center.. 65.4 12.2 19.4 49.1 8.6 14.9
Charlotte Executive Park..... 14.0 2.3 3.7 9.8 1.6 2.6
Raleigh Crabtree Valley...... 14.9 2.4 3.9 10.9 1.7 2.8
Oklahoma City................ 15.6 2.0 3.8 10.4 1.4 2.4
Oklahoma City Waterford...... 9.1 1.5 2.7 6.1 1.0 1.7
Portland..................... 26.4 4.1 7.5 17.6 2.9 4.8
Philadelphia (Convention
Center)..................... 80.7 14.2 25.0 58.2 10.0 17.8
Philadelphia Airport......... 25.0 4.1 7.6 18.6 2.9 5.6
Pittsburgh City Center....... 16.4 1.9 3.0 11.1 1.3 2.2
Memphis...................... 10.6 1.5 3.2 5.7 1.0 1.8
Dallas/Fort Worth............ 28.9 5.9 9.3 21.9 4.1 7.0
Dallas Quorum................ 25.7 4.2 8.2 18.3 3.0 5.8
El Paso...................... 11.6 0.9 2.3 7.8 0.6 1.4
Houston Airport ............. 21.6 2.8 6.0 16.9 2.0 4.6
JW Marriott Houston.......... 27.2 5.0 8.0 20.1 3.5 5.9
Plaza San Antonio............ 13.8 2.9 4.6 9.7 2.0 3.3
San Antonio Riverwalk........ 29.3 6.1 10.3 21.7 4.3 7.6
Salt Lake City............... 28.5 5.6 9.5 21.1 3.9 7.2
Dulles Airport............... 14.6 1.8 4.0 10.9 1.2 3.0
Key Bridge................... 29.4 5.6 10.2 21.2 3.9 7.4
Norfolk Waterside............ 18.1 3.3 5.4 12.8 2.4 3.8
Pentagon City Residence Inn.. 11.7 3.5 5.5 8.7 2.5 4.2
The Ritz-Carlton, Tysons
Corner...................... 34.4 5.9 9.8 24.9 4.1 7.3
Washington Dulles Suites..... 10.3 2.5 4.0 7.8 1.8 3.0
Westfields................... 28.0 4.7 7.4 20.3 3.3 5.4
Williamsburg................. 12.6 1.8 2.8 9.3 1.3 2.1
Washington Metro Center...... 25.2 4.5 7.3 19.2 3.2 5.3
Calgary...................... 13.4 1.7 1.7 9.8 1.2 2.3
Toronto Airport.............. 17.1 2.9 5.6 13.0 2.0 4.2
Toronto Eaton Centre......... 21.1 6.1 7.1 16.0 4.3 5.6
Toronto Delta Meadowvale..... 16.1 2.6 4.9 10.6 1.9 3.1
Four Seasons, Atlanta(4)..... 15.6 5.8 5.9 14.2 4.1 4.5
Four Seasons,
Philadelphia(4)............. 41.1 7.9 12.4 30.6 5.6 10.1
Grand Hyatt, Atlanta(4)...... 25.3 10.0 10.0 22.6 7.0 8.2
Hyatt Regency,
Burlingame(4)............... 47.9 8.8 17.6 39.5 6.2 15.1
Hyatt Regency, Cambridge(4).. 32.4 6.7 11.9 26.8 4.7 10.4
Hyatt Regency, Reston(4)..... 30.5 6.5 11.3 24.2 4.5 9.2
Swissotel, Atlanta(4)........ 22.2 5.0 6.3 17.2 3.5 5.8
Swissotel, Boston(4)......... 26.8 6.4 8.5 20.5 4.5 6.9
Swissotel, Chicago(4)........ 38.1 10.9 15.1 28.9 7.7 12.0
The Drake (Swissotel), New
York(4)..................... 38.8 11.6 13.6 34.2 8.2 13.4
The Ritz-Carlton, Amelia
Island(4)................... 45.7 10.3 13.4 37.4 7.2 11.1
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
----------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- ------ -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
The Ritz-Carlton, Boston(4).... $ 40.1 $ 6.9 $ 10.5 $ 31.4 $ 4.8 $ 8.8
-------- ------ ------ -------- ------ ------
Total Full-Service Properties.. 2,790.7 537.9 842.3 2,071.7 379.4 648.4
Total Courtyard by Marriott
Properties.................... 212.0 50.6 59.2 159.2 35.0 36.8
Total Residence Inn
Properties.................... 69.9 17.2 20.3 50.6 12.0 12.3
-------- ------ ------ -------- ------ ------
Total........................ $3,072.6 $605.7 $921.8 $2,281.6 $426.4 $697.5
======== ====== ====== ======== ====== ======
</TABLE>
Although a number of the transactions comprising the REIT Conversion are
expected to be consummated immediately prior to, or in certain instances
immediately following, the Merger, the Merger will not be consummated unless
Host Stockholders have approved the Merger Agreement and the other conditions
to the Merger have been satisfied or waived. In particular, Host's Board of
Directors will have determined, among other things, that the transactions
constituting the REIT Conversion which impact Host REIT's status as a REIT for
federal income tax purposes have occurred or are reasonably likely to occur,
and based on advice of counsel, that Host REIT can elect to be treated as a
REIT for federal income tax purposes effective no later than the first full
taxable year commencing after the REIT Conversion is completed (which might
not be until the year commencing January 1, 2000 if the REIT Conversion is not
completed prior to January 1, 1999). Consistent with the foregoing, Host
intends to pursue the transactions constituting the REIT Conversion at least
through the date of the Special Meeting. If the Merger Agreement is approved
by Host Stockholders at the Special Meeting, Host intends to continue pursuing
those transactions constituting the REIT Conversion which have not yet been
completed, including the Blackstone Acquisition (which is not expected to be
consummated any earlier than December 29, 1998), and, if Host's Board of
Directors has determined that the conditions to the Merger have been or likely
will be satisfied or waived, declare the Distribution and enter into the
leases and subleases of hotels with subsidiaries of the Company, even though
there is no assurance that the Merger and the other transactions comprising
the REIT Conversion might be delayed or possibly might never be consummated.
If, however, the Merger Agreement is not approved by the Host Stockholders at
the Special Meeting or the Host Board does not make the determinations
described above, Host's Board does not intend to declare the Distribution or
enter into the leases and subleases of hotels with subsidiaries of the
Company. Assuming the Merger Agreement is approved by Host Stockholders at the
Special Meeting and the Host Board of Directors makes the determination
described above, it is currently contemplated that (i) the Host Board of
Directors would declare the Distribution on or about December 18, 1998 payable
no later than December 31, 1998 to Host Stockholders of record on December 28,
1998 and (ii) the Merger would be consummated on or about December 29, 1998,
subject to satisfaction or waiver of the remaining conditions. Even under
circumstances where the Distribution is made but the Merger or other
transactions comprising the REIT Conversion are delayed or possibly never
consummated, the Host Board believes that having the leasing arrangements in
place with the Company could facilitate any subsequent efforts by Host to
qualify as a REIT for federal income tax purposes (including efforts to pursue
a merger with another entity or other transaction that would permit it to
commence a new taxable year and elect REIT status prior to January 1, 2000).
H. Represents the adjustment to reflect the Company's anticipated adoption
of EITF 97-2 in the fourth quarter of 1998 by recording property-level sales
and operating expenses. The adjustment has no impact on operating profit or
net income.
I. The "Pro Forma without Blackstone" column reflects the adjustment to
eliminate the revenues, operating expenses and working capital relating to the
Blackstone hotel properties assuming that the Blackstone Acquisition does not
occur. Amounts related to the Company's 25% interest in Swissotel Management
(USA) L.L.C. have not been included in the pro forma financial statements
because they are immaterial.
- --------
(1) On a pro forma basis as of September 11, 1998, the Company had 75
million shares of common stock, $.01 par value, authorized with 24.8 million
shares issued and outstanding. In addition, on a pro forma basis, 10 million
shares of preferred stock, $.01 par value, are authorized with none issued or
outstanding.
40
<PAGE>
(2) Reflects the pro forma earnings per share based on 24.8 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and the issuance of shares to
the Blackstone Entities.
(3) Reflects the pro forma earnings per share based on 20.4 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted shares shares outstanding,
adjusted for a one-for-ten share distribution, and assumes that the Blackstone
acquisition does not occur.
(4) Represent the Blackstone hotel properties.
41
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical consolidated financial
statement data derived from the Company's consolidated financial statements
for the period from June 21, 1997 through January 2, 1998 and the First Three
Quarters 1998. The historical data reflects only operations of the
Communities. The leases and subleases of hotels from Host will be entered into
concurrently with the Distribution and will be effective January 1, 1999
(assuming the Merger occurs prior to that date; otherwise, as soon as
practicable following the Distribution Date). The financial statement data for
periods prior to June 21, 1997 is the data for the predecessor business of the
Company which was owned by Marriott International for the period from April 1,
1996 through June 20, 1997 and by Forum for periods prior to April 1, 1996.
The following data should be read in conjunction with the Company's
consolidated financial statements and the notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
HOST MARRIOTT INTERNATIONAL FORUM
------------------------------------ ----------------------------- ------------------
PERIOD
FROM JUNE
TWELVE WEEKS 21, 1997 TWENTY-FOUR YEAR ENDED
FIRST THREE ENDED THROUGH WEEK PERIOD FORTY WEEK MARCH 31,
QUARTERS SEPTEMBER 12, JANUARY 2, ENDED PERIOD ENDED ------------------
1998 1997 1998 JUNE 20, 1997 JANUARY 3, 1997 1996 1995
----------- ------------- ---------- ------------- --------------- -------- --------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $ 57,800 $ 16,036 $ 36,900 $ 33,570 $ 55,987 $ 59,525 $ 48,055
Operating costs and
expenses............. 29,803 9,738 20,929 15,595 20,646 20,772 16,693
Operating profit...... 27,997 6,298 15,971 17,975 35,341 38,753 31,362
Corporate expenses.... 2,937 954 2,304 4,519 6,380 915 431
Interest expense...... 17,560 6,035 13,396 9,141 14,283 29,119 23,018
Interest income....... 1,120 240 336 598 1,111 2,321 1,743
Net income (loss)
(1).................. 5,086 (266) 358 2,628 9,334 5,717 6,714
Pro forma earnings
(loss) per
share (2)............ .21 (.01) .01 .11 .38 .23 .27
OTHER DATA:
Depreciation and
amortization......... 14,759 4,866 10,635 6,698 8,494 10,172 8,360
Cash provided by (used
in) operating
activities........... 19,024 21,488 25,376 (479) 26,870 26,327 21,518
Cash used in investing
activities........... (7,529) (18,022) (33,412) (16,407) (159,586) (43,253) (34,269)
Cash provided by (used
in) financing
activities........... (2,635) 21,396 25,680 12,673 132,650 5,896 24,184
BALANCE SHEET DATA:
Total assets.......... $694,419 $607,922 $663,502 $ -- $565,094 $417,436 $379,127
Total debt............ 213,034 317,440 349,934 -- 244,318 325,756 267,228
Total stockholder's
equity............... 392,071 210,766 227,064 -- 284,665 49,496 60,636
</TABLE>
- --------
(1) Net income for the fiscal years ended March 31, 1996 and 1995 includes
$2,078,000 and $253,000, respectively, from an extraordinary loss on the
extinguishment of debt. Net income for the fiscal year ended March 31,
1996 includes a $666,000 gain from the cumulative effect of an accounting
charge.
(2) Pro forma earnings per share reflects historical net income divided by the
pro forma weighted average shares outstanding subsequent to the
Distribution. Pro forma weighted average shares of 24.8 million are based
on Host's weighted average shares outstanding, adjusted for a one-for-ten
share distribution and the issuance of shares to the Blackstone Entities.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LACK OF COMPARABILITY FOLLOWING THE DISTRIBUTION
Because the Company will lease and sublease substantially all of Host's
hotels following the Distribution and because prior to the Distribution the
Company's business consisted only of owning the Communities acquired since the
Company's inception in June 1997, the Company does not believe that the
historical results of operations will be comparable to its results of
operations following the Distribution. For pro forma information giving effect
to the Hotel Leases to be entered into with Host REIT effective January 1,
1999 (assuming the Merger occurs prior to that date; otherwise, as soon as
practicable following the Distribution Date), see "Pro Forma Financial
Statements."
HISTORICAL RESULTS OF OPERATIONS
Revenues primarily represent house profit from the Communities. House profit
reflects the net revenues flowing to the Company as property owner and
represents gross community operating sales less property-level expenses
excluding depreciation and amortization, management fees, property taxes,
insurance and certain other costs which are classified as operating costs and
expenses included in the accompanying financial statements.
FIRST THREE QUARTERS 1998 (HISTORICAL)
Revenues. Revenues represent gross property routine and ancillary sales less
property-level expenses. Routine service revenues are generated from monthly
charges for independent living units and daily charges for assisted living
suites and nursing beds which are recognized monthly based on the terms of the
residents' agreements. Ancillary service revenues are generated on a "fee for
service" basis for supplementary items requested by residents and are
recognized as the services are provided.
Revenues generated from the Communities totaled $57.8 million for the First
Three Quarters 1998. During the First Three Quarters 1998, average occupancy
of the Communities was 92%. The average per diem rate for the First Three
Quarters 1998 was $88. Overall occupancies were lower than the historical
occupancies due to the significant number of expansion units added during the
year, the overall disruption to the Communities as a result of the
construction and the time required to fill the expansion units. Senior living
communities' gross sales totaled $166 million for the First Three Quarters
1998.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation and amortization, management fees, property taxes,
insurance and certain other costs. The Company's operating costs and expenses
were $29.8 million (52% of revenues) for the First Three Quarters 1998.
Operating Profit. The Company's operating profit was $28.0 million (48% of
revenues) for the First Three Quarters 1998.
Corporate Expenses. Corporate expenses were $2.9 million (5.1% of revenues)
for the First Three Quarters 1998.
Interest Expense. Interest expense was $17.6 million for the First Three
Quarters 1998.
Interest Income. Interest income was $1.1 million for the First Three
Quarters 1998, primarily reflecting interest earned on cash and certain escrow
accounts.
Net Income. Net income for the First Three Quarters 1998 was $5.0 million.
PERIOD FROM JUNE 21, 1997 THROUGH JANUARY 2, 1998 (HISTORICAL)
Revenues. Revenues generated from the 1997 third quarter acquisition of 29
senior living communities totaled $36.9 million. During the period from June
21, 1997 through January 2, 1998, average occupancy of the Communities was 92%
and the average per diem rate was $84. Overall occupancies were lower than the
historical occupancies due to the significant number of expansion units added
during the year, the overall disruption to the Communities as a result of the
construction and the time required to fill the expansion units. Senior living
communities' gross sales totaled $111 million.
43
<PAGE>
Operating Costs and Expenses. The Company's operating costs and expenses
were $20.9 million (57% of revenues).
Operating Profit. The Company's operating profit was $16.0 million (43% of
revenues).
Corporate Expenses. Corporate expenses were $2.3 million. As a percentage
of revenues, corporate expenses were 6.2% of revenues.
Interest Expense. Interest expense was $13.4 million.
Net Income. The Company's net income was $0.4 million.
PRO FORMA RESULTS OF OPERATIONS
Because the Company will lease or sublease substantially all the hotels
owned or leased by Host following the Distribution, the Company does not
believe that the historical results of operations will be comparable to the
results of operations of the Company following the Distribution. Accordingly,
a comparison of the Company's pro forma results of operations for the First
Three Quarters 1998 to First Three Quarters 1997 and fiscal year 1997 to
fiscal year 1996 have been included below. The following discussion and
analysis should be read in conjunction with the Company's combined
consolidated financial statements and the Company's unaudited pro forma
financial statements and related notes thereto included elsewhere in this
Prospectus. The following discussion and analysis has been prepared assuming
that Host's acquisition of a 100% ownership interest in 13 hotels, in which
Host currently serves as general partner in the entities that currently own
the hotels, together with the acquisition of 12 hotels from the Blackstone
Entities promptly following the Distribution. The following pro forma
financial information includes the Company's anticipated fourth quarter 1998
adoption of EITF 97-2. EITF 97-2 requires the Company to include property-
level sales and operating expenses of the leased hotels and owned senior
living communities in its statement of operations.
Under the Hotel Leases, the Company will participate directly in the results
of the operations of the leased hotels (and thus trends in the hotel industry
are likely to directly bear on the Company's economic performance). Under the
typical hotel lease (or sublease) that the Company enters into, the Company
will be obligated to pay to the lessor rent based upon the greater of a fixed
dollar amount of rent or fixed percentages of various categories of gross
revenues derived from the operation of the leased hotels. See "Description of
the Hotel Leases for Full-Service Hotels Managed by Marriott International,"
"Description of the Subleases for Limited-Service Hotels Managed by Marriott
International," "Description of the Hotel Leases for the Hotels Managed by
Other Management Companies," and "Description of Blackstone Hotel Leases." The
Company in turn will contract with a third party manager (typically, but not
in all cases, Marriott International) to operate the hotels on behalf of the
Company. Under these management agreements, the Company typically pays the
manager a base management fee equal to a fixed percentage of hotel revenues,
plus in many cases an incentive management fee based upon the operating profit
of the hotel above certain specified levels. Under these management
agreements, the Company receives all revenues from the operations of the
hotels (including the impact on revenues of increases or decreases in revenue
per available room ("REVPAR"), which represents the contribution of the
average daily room rate charged and the average occupancy achieved), subject
to its obligation to pay the managers their management fees, and the Company
is typically responsible for all expenses of operation of the hotels,
including costs incurred by the managers. See "Description of Marriott
International Hotel Management Agreements for Full-Service Hotels,"
"Description of Marriott International Hotel Management Agreements for
Limited-Service Hotels," "Description of Other Hotel Management Agreements,"
and "Description of Hotel Management Agreements for Blackstone Hotels." Thus,
the Company receives the operating profit from its leased hotels after paying
the managers their management fees and the lessors their rent (which is not
based upon operating profit but rather upon fixed percentages of gross
revenues). Accordingly, the Company derives the benefit of (and bears the
risks associated with) the operating profits from the hotels. To the extent
that such profits (after the payment of management fees) exceeds the rent due
under the leases, the Company will profit (and its rate of profitability will
increase to the extent that the rate at which operating profits increase
exceeds the rate at which the rents payable under the leases increase).
Conversely, the Company will incur a loss to the extent that such profit is
less than the rent due under the leases (and the Company's profitability will
decline to the extent that the rate at which operating profit increases is
less than the rate at which the rent payable under the leases increases).
Because room revenues historically have represented a significant portion of
hotel revenues,
44
<PAGE>
increases or decreases in REVPAR are likely to impact the Company's operating
profit. The Company's asset management team will continue to work with the
managers to improve the operating profit of the leased hotels to attempt to
increase operating profit for the Company.
The following table sets forth certain historical and pro forma information
regarding management fees paid or payable to Marriott International and rent
payable under the leases and subleases to be entered into with Host REIT in
connection with the Distribution. The hotel management agreements generally
provide for base management fees equal to 2% to 4% of gross revenues and
incentive management fees generally equal to 20% to 50% of hotel operating
profits (generally hotel sales less hotel expenses; hotel expenses include
property-level costs and expenses, management fees, taxes and insurance) over
a priority return (which is a percentage return on the owner's investment in
the property) to the owner, with total incentive management fees not to exceed
20% of operating profits, or 20% of current year operating profit. In the
event of early termination of a management agreement, Marriott International
will receive additional fees based on the unexpired term and expected future
base and incentive management fees. 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. Similar
services and expenses are incurred and allocated at foreign hotels. In
addition, the hotels also participate in the Marriott Rewards program. The
amounts in the table below do not include any costs of these programs because
they are charged to all hotels in the respective hotel system. The Communities
are subject to operating agreements that provide for the payment of base
management fees generally equal to 5% to 8% of gross revenues and incentive
management fees, generally equal to zero to 20% of operating profit (as
defined) over a priority return to the Company. 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. Marriott International is required to furnish the Communities
with certain services ("Central Administrative Services") which are provided
on a central or regional basis to all properties in the Marriott Retirement
Community System. These services include the development and operation of
computer systems, computer payroll and accounting services, marketing and
public relations services, and such additional services as may from time-to-
time be performed more efficiently on a central or regional level. The
operating agreements require payment of Central Administrative Services fees
equal to 2% of gross revenues beginning in the third quarter of 1998. The
amounts in the table do not include any costs of Central Administrative
Services.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
---------------------- -----------------
PERIOD FROM
FIRST JUNE 21, 1997 FIRST
THREE THROUGH THREE FISCAL
QUARTERS JANUARY 2, QUARTERS YEAR
1998 1998 1998 1997
-------- ------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HOTELS:
Management fees to Marriott
International:
Base management fees............... $ -- $ -- $ 77,206 $104,999
Incentive management fees.......... -- -- 73,697 87,599
Rent to Host REIT:
Base rent(2)....................... -- -- 551,500 783,700
Percentage rent(2)................. -- -- 335,900 391,400
SENIOR LIVING COMMUNITIES:
Management fees to Marriott
International:
Base management fees............... 9,408 6,481 9,416 12,888
Incentive management fees.......... 0 0 0 0
</TABLE>
- --------
(1) Amounts assume all Partnerships participate and that the Blackstone
Acquisition is consummated. See "Pro Forma Financial Statements."
(2) Includes amounts paid to the Initial FF&E Lessors.
The unaudited pro forma financial statements do not purport to represent
what the Company's results of operations or cash flows would actually have
been if the Distribution and Host's conversion to a REIT had in fact occurred
on such date or at the beginning of such period or to project the Company's
results of operations for any future date or period.
45
<PAGE>
FIRST THREE QUARTERS 1998 COMPARED TO FIRST THREE QUARTERS 1997 (PRO FORMA)(1)
The following table presents the results of operations for the First Three
Quarters 1998 and the First Three Quarters 1997 on the pro forma basis
discussed above:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Hotel revenues........................................ $2,874,871 $2,669,857
Senior living community revenues...................... 166,160 152,694
Total revenues........................................ 3,041,031 2,822,551
Hotel operating costs and lease expenses.............. 2,844,340 2,645,657
Senior living community operating costs and expenses.. 138,127 129,600
Operating costs and expenses.......................... 2,982,467 2,775,257
Operating profit before minority interest, corporate
expenses and interest expense........................ 58,564 47,294
Corporate expenses.................................... (10,885) (9,838)
Interest expense...................................... (16,302) (16,509)
Interest and dividend income.......................... 1,518 1,230
---------- ----------
Income before income taxes............................ 32,895 22,177
Provision for income taxes............................ (13,487) (9,093)
---------- ----------
Net income............................................ $ 19,408 $ 13,084
========== ==========
</TABLE>
- --------
(1) Assumes all Partnerships participate and the Blackstone Acquisition is
consummated.
Revenues. Revenues primarily represent gross sales from leased and subleased
hotels and owned senior living communities. Revenues increased by $218
million, or 7.7%, to $3,041 million for the First Three Quarters 1998 from
$2,823 million for the First Three Quarters 1997.
Hotel revenues increased $205 million, or 7.7%, to $2,875 million in the
First Three Quarters 1998. Improved results for the Company's leased full-
service hotels were driven by strong increases in REVPAR of 8.3% to $113.67
for the First Three Quarters 1998. Average room rates increased 9%, while
average occupancy decreased slightly to 77.8% for the full-service properties.
REVPAR for the Company's subleased Courtyard by Marriott hotel properties
increased 7.9% to $74.28 due to an increase in average room rates of nearly
10%, while average occupancy decreased more than one percentage point to
80.5%. REVPAR for the Company's 18 subleased Residence Inn properties
increased 6.4% to $87.82 due to an increase in average room rates of 5%, while
average occupancy increased one percentage point to 84.4%.
Senior living community revenues increased by $13 million, or 8.8%, to $166
million. For the First Three Quarters 1998, average per diem increased 6.2% to
$88.19 while average occupancy decreased 1.5 percentage points to 91.9%.
Operating Costs and Expenses. Hotel operating costs and expenses principally
consist of hotel property-level operating costs and expenses plus hotel
management fees and lease expenses. Senior living community operating costs
and expenses consist of property-level expenses plus depreciation, property
taxes, ground rent, insurance and certain other costs. Operating costs and
expenses increased $207 million, or 7.5%, to $2,982 million in the First Three
Quarters 1998. Overall hotel operating costs and expenses increased $199
million, or 7.5%, to $2,844 million. Hotel property-level operating costs and
expenses increased $100 million, or 6.1%, to $1,752 million. Hotel management
fees increased $16 million to $205 million, while lease expense increased $82
million, or 10.2%, to $887 million. Senior living community property-level
operating costs and expenses increased $9 million, or 9.3%, to $108 million,
while other operating costs and expenses decreased $1 million to $30 million
for the First Three Quarters 1998.
46
<PAGE>
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $11.3
million, or 23.8%, to $58 million for the First Three Quarters 1998. Hotel
operating profit increased $6.3 million, or 26.2%, to $31 million for the
First Three Quarters 1998 from $24 million for the First Three Quarters 1997.
The Company's leased hotels recorded significant improvements in comparable
operating results. Specifically, hotels in New York City, Boston, Toronto and
Atlanta reported significant improvements for the First Three Quarters 1998.
Properties in Florida reported some temporary declines in operating results
due to exceptionally poor weather in 1998.
Senior living community operating profit increased $4.9 million, or 21.4%,
to $28 million. The Communities' increase in operating profit is primarily due
to increases in residency fees and charges in the independent living, assisted
living and healthcare revenue components, the favorable impact of new
expansion units offset by increased healthcare expenses and a reduction in
food service cost. The Company experienced the most improvement in the
Delaware, Texas and Florida properties. As a percentage of total senior living
revenues, operating profit increased to 16.9% in the First Three Quarters 1998
as compared to 15.1% for the First Three Quarters 1997.
Corporate Expenses. Corporate expenses increased $1 million to $10.9 million
for the First Three Quarters 1998. As a percentage of total revenues,
corporate expenses remained unchanged at 0.4% for the First Three Quarters
1998 and the First Three Quarters 1997.
Interest Expense. Interest expense decreased slightly to $16.3 million in
the First Three Quarters 1998.
Interest and Dividend Income. Interest and dividend income increased
slightly to $1.5 million for the First Three Quarters 1998.
Net Income. Net income for the First Three Quarters 1998 was $19 million,
compared to nearly $13 million for the First Three Quarters 1997.
1997 COMPARED TO 1996 (PRO FORMA)(1)
The following table presents the results of operations 1997 and 1996 on a
pro forma basis:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Hotel revenues........................................ $3,865,304 $3,572,033
Senior living community revenues...................... 222,789 220,272
Total revenues........................................ 4,088,093 3,792,305
Hotel operating costs and lease expenses.............. 3,825,604 3,547,033
Senior living community operating costs and expenses.. 189,467 183,205
Operating costs and expenses.......................... 4,015,071 3,730,238
Operating profit before minority interest, corporate
expenses and interest expense........................ 73,022 62,067
Corporate expenses.................................... (13,500) (11,500)
Interest expense...................................... (22,932) (23,341)
Interest and dividend income.......................... 1,501 2,058
---------- ----------
Income before income taxes............................ 38,091 29,284
Provision for income taxes............................ (15,617) (12,006)
---------- ----------
Net income ........................................... $ 22,474 $ 17,278
========== ==========
</TABLE>
- --------
(1) Assumes all Partnerships participate and the Blackstone Acquisition is
consummated.
Revenues. Revenues increased $296 million, or 7.8%, to $4,088 million for
1997 from $3,792 million in 1996. The 1997 results included 52 weeks versus 53
weeks in 1996.
47
<PAGE>
Hotel sales increased $293 million, or 8.2%, to $3,865 million in 1997,
reflecting the increases in REVPAR. Improved results for the Company's leased
full-service hotels were driven by strong increases in REVPAR of 9.8% to
$103.30 in 1997. Average room rates increased 9%, while average occupancy
increased slightly to 77.7% for the leased full-service properties. REVPAR for
the Company's subleased Courtyard by Marriott hotels properties increased 9.6%
to $68.38 due to an increase in average room rate of 8%, while average
occupancy increased one percentage point to 81.1%. REVPAR for the Company's
subleased Residence Inn properties increased 7.7% to $83.27 due to an increase
in average room rates of 10%, while average occupancy decreased nearly two
percentage points to 83.3%.
Senior living community revenues increased $2.5 million, or 1.1%, to $223
million. For 1997, average per diem increased 1% from $82.72 to $83.28, while
average occupancy decreased one and one half percentage points to 93%.
Operating Costs and Expenses. Operating costs and expenses increased $285
million to $4,015 million for 1997. Overall hotel operating costs and expenses
increased $279 million, or 7.9%, to $3,826 million. Hotel property-level
operating costs and expenses increased $127 million, or 5.6%, to $2,390
million. Hotel management fees increased $67 million to $261 million, while
lease expense increased $85 million, or 7.8%, to $1,175 million. Senior living
community property-level operating costs and expenses increased $3 million, or
2.0%, to $146 million, while other operating costs and expenses increased $3
million to $44 million.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, the Company's operating profit increased
$11 million, or 17.7%, to $73 million in 1997. Hotel operating profit
increased $14.7 million, or 58.8%, to $39.7 million for 1997 compared to $25
million for 1996. In nearly all markets, the Company's leased full-service
hotels recorded improvements in comparable operating results. In particular,
the Company's leased full-service 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 in Southern California performed particularly
well. In 1998, the Company expects results to be strong in these markets and
other gateway cities in which the Company owns hotels. In 1997, the Company's
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 the Company's leased full-service 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.
Senior living community operating profit decreased $3.7 million, or 10.1%,
to $33 million.
Corporate Expenses. Corporate expenses increased $2 million to $14 million
in 1997. As a percentage of total revenues, corporate expenses remained
unchanged at 0.3% for 1997.
Interest Expense. Interest expense remained unchanged at approximately $23
million for 1997.
Interest and Dividend Income. Interest and dividend income remained
unchanged at approximately $2 million for 1997.
Net Income. Net income for 1997 was $22 million, compared to net income of
$17 million for 1996.
PRO FORMA RESULTS IF NO PARTNERSHIPS PARTICIPATE IN THE REIT CONVERSION
There is no requirement that any of the Partnerships participate in the REIT
Conversion in order for the REIT Conversion to be consummated. Accordingly,
the following discussion has been included assuming that no Partnerships
participate in the REIT Conversion and compares the "No Partnerships
Participate" scenario to the "All Partnerships Participate" scenario with both
scenarios assuming the Blackstone Acquisition occurs.
48
<PAGE>
Revenues for the First Three Quarters 1998 and fiscal year 1997 would have
been lower by $581 million and $838 million, respectively, due to the revenues
generated by the 24 hotel properties owned by the Partnerships. Operating
profit would have been lower by $9 million and $12 million, respectively, with
income before extraordinary items lower by $5 million and $7 million,
respectively.
PRO FORMA RESULTS WITHOUT BLACKSTONE ACQUISITION
Host intends to use its best efforts to cause the REIT Conversion to be
completed as soon as possible, but there is no assurance that it will be
completed during 1998 in time for Host REIT to elect REIT status effective
January 1, 1999. If the REIT Conversion does not occur in 1998, the
effectiveness of Host REIT's election could be delayed to January 1, 2000,
which could cause the Blackstone Acquisition (which is conditioned, among
other things, on consummation of the REIT Conversion by March 31, 1999 and
Host REIT qualifying as a REIT for 1999) not to be consummated. Accordingly,
the following discussion compares the scenario where all Partnerships
participate and the Blackstone Acquisition occurs to one in which all
Partnerships participate and the Blackstone Acquisition does not occur.
Revenues for the First Three Quarters 1998 and fiscal year 1997 would have
been lower by $328 million and $405 million, respectively, due to the revenues
related to the Blackstone hotel properties. Operating profit for the First
Three Quarters 1998 and fiscal year 1997 would have been lower by $3 million
and higher by $3 million, respectively, and income before extraordinary items
would have been approximately $2 million lower and $2 million higher,
respectively. On a per share basis, income before extraordinary items would
have been higher by $.12 and $.27, respectively, due to the impact of the
approximately 4.37 million shares to be issued to the Blackstone Entities.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, Host acquired all of the outstanding common stock of Forum from
Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott
International. Host purchased Forum, which consisted of a portfolio of 29
senior living communities, for approximately $460 million, including
approximately $270 million in assumed debt. The Communities will continue to
be operated by MSLS. In addition, the Company plans to add approximately 865
units to these Communities for approximately $89 million through an expansion
plan which will be completed in 2000. In 1997, approximately $56 million (549
units) of the expansion plan had been completed (including $33 million of debt
financing provided by Marriott International). Through September 11, 1998, the
Company completed 591 units of the expansion plan for a total of approximately
$60 million to date. The expansion plan has been funded through a combination
of operating cash flow and contributions by Host. During the remainder of
1998, the Company expects to complete additional units at a cost of
approximately $20 million which will be funded using cash flow from operations
and contributions from Host. During 1999 and 2000, the Company expects to
complete the expansion at a cost of approximately $9 million using available
cash and cash flow from operations. The Company also acquired 49% of the
remaining 50% interest in the partnership which owned the 418-unit Leisure
Park senior living community from Marriott International for approximately $23
million, including approximately $15 million in assumed debt.
During the first quarter of 1998, the Company acquired the Gables at
Winchester in suburban Boston, a 124-unit senior living community, for $21
million and entered into conditional purchase agreements to acquire two
Marriott Brighton Gardens assisted living communities from the Summit
Companies of Denver, Colorado. After the anticipated completion of
construction in the first quarter of 1999, the Company may acquire these two
160-unit properties located in Denver and Colorado Springs, Colorado, for $35
million, if they achieve certain operating performance criteria. All three of
these communities will be operated by MSLS under long-term operating
agreements.
Under the terms of its senior living communities' management agreements, the
Company is generally required to spend a specified amount of gross revenues to
cover certain routine repairs and maintenance and replacements and renewals to
the communities' property and improvements. The amount Host is required to
49
<PAGE>
spend will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003
through 2007, and 3.5% thereafter. The Company anticipates spending
approximately $6 million in 1998.
Cash provided by operations was approximately $25 million for the period
from June 21, 1997 through January 2, 1998 and approximately $19 million for
the First Three Quarters 1998. Cash used in investing activities was
approximately $33 million for the period June 21, 1997 through January 2, 1998
and approximately $8 million for the First Three Quarters 1998. The cash used
in investing activities principally consists of capital expenditures for
renewals and replacements and expansions. Cash provided by financing
activities was approximately $26 million for the period from June 21, 1997
through January 2, 1998, while cash used in financing activities was
approximately $3 million for the First Three Quarters 1998. The Company's cash
from financing activities consists primarily of the issuance of debt related
to the expansions and debt principal repayments.
During the first quarter of 1998, Host prepaid $26.4 million in mortgage
debt which was treated as a capital contribution to the Company. In the second
quarter of 1998, Host prepaid $92 million of unsecured debt provided by
Marriott International. The $92 million unsecured note upon repayment by Host
became payable by the Company to Host. During the third quarter of 1998, Host
forgave the $92 million note as well as a $14.8 million note due to Host, both
of which were treated as a capital contribution to the Company. As of
September 11, 1998, the Company has $213 million of debt outstanding at an
average interest rate of 9.5%. All of the Company's debt is fixed rate. Debt
maturities of the Company's debt as of September 11, 1998 are as follows,
excluding unamortized fair value adjustments of approximately $18 million (in
millions):
<TABLE>
<S> <C>
1999.................................................................. $ 4.2
2000.................................................................. 47.1
2001.................................................................. 3.2
2002.................................................................. 2.5
Thereafter............................................................ 137.2
------
$194.2
======
</TABLE>
The Company expects to have sufficient cash flow from operations to meet its
debt obligations and expansion plans. The Company is also currently
negotiating to put in place a credit facility to meet its long term financing
and capital requirements.
At September 11, 1998, property- level debt included the following:
FRP Financing Limited, L.P. FRP Financing Limited, L.P. ("FRP"), a
subsidiary of Forum, owns nine Communities which are subject to a mortgage
pursuant to a loan agreement between FRP and Nomura Asset Capital Corporation
("NACC"). The original principal amount of the loan is approximately $50
million and it matures in January 2001 unless earlier repaid. Any changes to
the management agreement or the replacement of the manager are subject to
NACC's consent. Other extraordinary events, such as a transfer of partnership
interest in FRP and entering into other financing arrangements, are also
subject to NACC's consent. As of September 11, 1998, the remaining balance of
the loan is $46 million. NACC's consent is not required for the Distribution.
FGI Financing I Corporation and Forum Ohio Healthcare, Inc. FGI Financing I
Corporation ("FGI") and Forum Ohio Healthcare, Inc. ("FOH") are subsidiaries
of Forum that own seven Communities and one Community, respectively. Both FGI
and FOH are subject to a single loan agreement, dated September 1, 1995, with
NACC in the original amount of $124.6 million. The loans are supported by two
promissory notes for the amount of $104.4 million and $20.2 million, which
mature in September 2003 and September 2018, respectively. The loan agreement
contains cross-default provisions so that a default by one subsidiary can
result
50
<PAGE>
in acceleration of the entire amount of the indebtedness. Consent of NACC is
necessary for any (i) amendments to the management agreements, (ii)
replacement of the manager, (iii) transfer of a Community which secures the
loan, (iv) other financing, (v) changes to existing leases, including ground
leases or (vi) transfers of FGI and FOH stock. As of September 11, 1998, $122
million remains outstanding. NACC's consent is not required for the
Distribution.
Leisure Park Joint Venture Limited Partnership. Leisure Park Joint Venture
Limited Partnership ("Leisure Park"), a subsidiary of the Company, owns one
Community. Leisure Park has outstanding $14.7 million in tax free bonds held
by outside bondholders (the "Leisure Park Bonds"). Host is the guarantor of
the Leisure Park Bonds.
EBITDA
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") on a historical
basis was $40.9 million in the First Three Quarters 1998 and $24.6 million for
the period from June 21, 1997 through January 2, 1998.
The following is a reconciliation of historical EBITDA to the Company's
income before extraordinary item:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 21, 1997
FIRST THREE QUARTERS THROUGH
1998 JANUARY 2, 1998
-------------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
EBITDA..................................... $ 40,939 $ 24,638
Interest expense........................... (17,560) (13,396)
Depreciation and amortization.............. (14,759) (10,635)
Income taxes............................... (3,534) (249)
-------- --------
Income before extraordinary item......... $ 5,086 $ 358
======== ========
</TABLE>
The Company's interest coverage, defined as EBITDA divided by cash interest
expense, was 2.2 times for the First Three Quarters 1998 compared to 1.7 times
for the period from June 21, 1997 through January 2, 1998. The ratio of
earnings to fixed charges was 1.5 to 1.0 for the First Three Quarters of 1998
and 1.1 to 1.0 for the period from June 21, 1997 through January 2, 1998.
The Company's pro forma EBITDA increased $9.7 million, or 17.0%, to $66.8
million in the First Three Quarters 1998 as compared to First Three Quarters
1997 and increased $9.9 million, or 12.8%, to $87.7 million for fiscal year
1997 as compared to fiscal year 1996.
The following is a reconciliation of pro forma EBITDA to the Company's
income before extraordinary item(1):
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEARS
---------------------- ------------------
1998 1997 1997 1996
---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA.................... $ 66,753 $ 57,050 $ 87,710 $ 77,793
Interest expense.......... (16,302) (16,509) (22,932) (23,341)
Depreciation and
amortization............. (14,787) (15,595) (22,687) (21,168)
Income taxes.............. (13,487) (9,093) (15,617) (12,006)
Other non-cash charges,
net...................... (2,769) (2,769) (4,000) (4,000)
---------- ---------- -------- --------
Income before
extraordinary item..... $ 19,408 $ 13,084 $ 22,474 $ 17,278
========== ========== ======== ========
</TABLE>
- --------
(1) Assumes all Partnerships participate and the Blackstone Acquisition is
consummated.
51
<PAGE>
Cash Flows. Cash flow from operations for the First Three Quarters 1998 and
the period from June 21, 1997 through January 2, 1998 totaled $19 million and
$25 million, respectively. Cash used in investing activities was $8 million
and $33 million for the First Three Quarters 1998 and the period from June 21,
1997 through January 2, 1998, respectively. Cash from investing activities
primarily consists of the acquisition of expansion units and renewals and
replacements.
Cash used in financing activities was $3 million for the First Three
Quarters 1998, while cash from financing activities was $26 million for the
period from June 21, 1997 through January 2, 1998. Cash from financing
activities primarily consists of the proceeds from debt offerings, offset by
prepayments on certain debt and other scheduled principal payments.
INFLATION
The hotel lodging properties expected to be leased or subleased by the
Company from Host REIT and owned Communities are impacted by inflation through
its effect on increasing costs and on the managers' ability to increase rates.
Unlike other real estate, the Company believes that 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. The rates charged for the delivery of
services at the Company's Communities are highly dependent upon local market
conditions and the competitive environment in which the Communities operate.
Although resident agreements are for short terms, and thus may enable the
Company to seek increases in daily fees at the time of renewal in response to
inflation or other factors, any such increases would be subject to market and
competitive conditions.
YEAR 2000 PROBLEM
The "Year 2000 Problem" has 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. Following the
Distribution, the Company, as the lessee of Host REIT's hotels, will deal
directly with Year 2000 matters material to the operation of the hotels, and
the Company has agreed to adopt and implement the Host compliance program
outlined below with respect to third-party systems for all hotels for which it
is the lessee. The following disclosure provides information regarding the
current status of Host's Year 2000 compliance program.
Host has adopted the compliance program because it recognized the importance
of minimizing the number and seriousness of any disruptions that may occur as
a result of the Year 2000 issue. Host's compliance program includes an
assessment of Host's hardware and software computer systems and embedded
systems, as well as an assessment of the Year 2000 issues relating to third
parties with which Host has a material relationship or whose systems are
material to the operations of Host's hotel or senior living properties. Host's
efforts to ensure that its computer systems are Year 2000 compliant have been
segregated into two separate phases: in-house systems and third-party systems.
In-House Systems. Since October 1993, Host has invested in the
implementation and maintenance of accounting and reporting systems and
equipment that are intended to enable Host to provide adequately for its
information and reporting needs and which are also Year 2000 compliant.
Substantially all of Host's in-house systems have already been certified as
Year 2000 compliant through testing and other mechanisms and Host has not
delayed any systems projects due to the Year 2000 issue. Host is in the
process of engaging a third party to review its Year 2000 in-house compliance.
Management of Host believes that future costs associated with Year 2000 issues
for its in-house systems will be insignificant and therefore not impact Host's
or the Company's business, financial condition and results of operations. Host
has not developed, and does not plan to develop, a separate contingency plan
for its in-house systems due to their current Year 2000 compliance.
Third-Party Systems. Host relies upon operational and accounting systems
provided by third parties, primarily the managers and operators of its hotel
and senior living properties, to provide the appropriate property-specific
operating systems (including reservation, phone, elevator, security, HVAC and
other systems) and to
52
<PAGE>
provide it with financial information. Based on discussions with the third
parties that are critical to Host's business, including the managers and
operators of its hotels and senior living properties, Host believes 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, Host
has not received any oral or written assurances that these third parties will
be Year 2000 compliant on time. To the extent these changes impact property-
level systems, Host may be required to fund capital expenditures for upgraded
equipment and software. Host does not expect these charges to be material, but
is committed to making these investments as required. To the extent that these
changes relate to a third party managers' centralized systems (including
reservations, accounting, purchasing, inventory, personnel and other systems),
Host's management agreements generally provide for these costs to be charged
to Host's properties subject to annual limitations which costs will be borne
by the Company following the Distribution. Host expects that the third party
managers will incur Year 2000 costs for its centralized systems in lieu of
costs related to system projects that otherwise would have been pursued and
therefore its overall level of centralized system charges allocated to the
properties will not materially increase as a result of the Year 2000
compliance effort. Host and the Company believe that this deferral of certain
system projects will not have a material impact on their respective future
results of operations, although it may delay certain productivity enhancements
at its properties. The Company 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. Host (and following the Distribution, the
Company) believes that in the event of material Year 2000 non-compliance
caused by a breach of the manager's duties, Host will have the right to seek
recourse against the manager under its 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. If the Distribution occurs, such recovery would accrue to Crestline,
with only a portion accruing to Host through increased lease payments from the
Company.
Host (and following the Distribution, the Company) 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, Host has had extensive
discussions regarding the Year 2000 problem with Marriott International, the
manager of a substantial majority of its leased and subleased hotel properties
and all of its senior living communities. Due to the significance of Marriott
International to Host's business (and, following the Distribution, the
Company's 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: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be
affected; (iii) Assessment: reviewing these components for Year 2000
compliance, and assessing the scope of Year 2000 issues; (iv) Planning:
defining the technical solutions and labor and work plans necessary for each
particular system; (v) Remediation/Replacement: completing the programming to
renovate or replace the problem software or hardware; (vi) Testing and
Compliance Validation: conducting testing, followed by independent validation
by a separate internal verification team; (vii) Implementation: placing the
corrected systems and technology back into the business environment; and
(viii) Quality Assurance: utilizing a dedicated audit team to review and test
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").
53
<PAGE>
Marriott International measures the completion of each phase based on
documented and quantified results, weighted for System Criticality. As of the
end of the 1998 third quarter, the awareness and inventory phases were
complete for IT Applications and nearly complete for BIS and Building Systems.
For IT Applications, the Assessment, Planning and Remediation/Replacement
phases were each over 80% complete, and Testing and Compliance Validation had
been completed for a number of key systems, with most of the remaining work in
its final stage. For BIS and Building Systems, Assessment and Planning were in
the mid- to upper-range of completion, with a substantial amount of work in
process, while the progress level for Remediation/Replacement and Testing and
Compliance Validation had not yet been documented and quantified. Quality
Assurance is also in progress for IT Applications and is scheduled to begin
for BIS and Building Systems in the near future. Marriott International's goal
is to substantially complete the Remediation/Replacement and Testing phases
for its System Critical IT Applications by the end of 1998, with 1999 reserved
for unplanned contingencies and for Compliance Validation and Quality
Assurance. For System Critical BIS and Building Systems, the same level of
completion is targeted for June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications
with its significant third party suppliers, vendors and business partners,
including its franchisees. Marriott International is focusing its efforts on
the business interfaces most critical to its customer service 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
value, 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 is also establishing 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 Host (or the
Company following the Distribution) or third parties will be properly and
timely completed, and failure to do so could have a material adverse effect on
the Company, its business and its financial condition since, following the
Distribution, the Company will be responsible for interfacing with third
parties in addressing Year 2000 issues at the hotels, leased or subleased by
the Company. The Company cannot predict the actual effects to it of the Year
2000 problem, which depends on numerous uncertainties such as: (i) whether
significant third parties properly and timely address the Year 2000 issue; and
(ii) whether broad-based or systemic economic failures may occur. The Company
is 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 the Company's responsibilities to Host and dependence
upon third parties, the Company is unable to determine at this time whether
the consequences of Year 2000 failure will have a material impact on the
Company. Although the Company's efforts to coordinate with Host in implenting
their Year 2000 compliance programs are expected to significantly reduce the
level of uncertainty concerning Year 2000 issues and management believes that
the possibility of significant interruptions of normal operations should be
reduced, there is no assurance that this will be the case.
IMPACT OF FINANCIAL ACCOUNTING STANDARDS
During 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 the appropriate disclosures required by
these statements have been incorporated herein.
54
<PAGE>
In the First Quarter 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in financial statements.
The objective of SFAS No. 130 is to report a measure of all changes in equity
of an enterprise that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive income is the
total of net income and all other nonowner changes in equity. For all periods
presented, the Company had no items of other comprehensive income.
Consequently, comprehensive income equals net income and the Company has no
accumulated other comprehensive income for all periods presented.
On November 20, 1997, the EITF of the Financial Accounting Standards Board
reached a consensus on EITF 97-2. 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 has considered the impact of EITF 97-2 on its financial
statements and has determined that EITF 97-2 requires the Company to include
property-level sales and operating expenses of its leased and subleased hotels
and owned senior living communities in its statements of operations. The
Company will adopt 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 First Three
Quarters 1998, and the twelve weeks ended September 12, 1997 and the period
from June 21, 1997 through January 2, 1998 would have increased both revenues
and operating expenses by approximately $108 million, $30 million and $74
million, respectively, and would have had no impact on operating profit, net
income or earnings per share.
55
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Following the Distribution, the Company and its subsidiaries will be engaged
in the business of leasing and subleasing full-service and limited-service
hotels, asset management of hotels and owning senior living communities. In
June 1997, the Company's predecessor acquired all of the outstanding stock of
Forum from Marriott International. The Company currently owns 31 Communities
located in 13 states. The Company expects to lease from Host REIT
approximately 125 full-service hotels, representing substantially all of the
hotels owned by Host REIT. In addition, the Company expects to sublease from
Host REIT 71 limited-service hotels. Concurrently with entering into the Hotel
Leases, the Company will assume the existing management agreements between
Host and Marriott International and the Non-MI Managers, pursuant to which
Marriott International and the Non-MI Managers will continue to manage the
hotels that are leased or subleased by the Company from Host and subsidiaries
of HPT. Marriott International also will continue to manage the Communities.
The Company's activities are and will be limited for certain specified periods
by certain agreements with Host REIT and Marriott International to which the
Company is or will become a party. See "Business and Properties--Non-
Competition Agreements."
The Company was incorporated in Maryland on November 9, 1998, as a wholly
owned subsidiary of Host, to facilitate the reincorporation of its
predecessor, Crestline Capital Corporation, a Delaware corporation
("Crestline--Delaware"), from Delaware into Maryland. The Company's name was
changed from "CCC Merger Corporation" to "Crestline Capital Corporation," the
name of its predecessor, upon the reincorporation. Crestline--Delaware was
incorporated in Delaware on May 15, 1997 as a wholly owned subsidiary of Host,
for the purpose of acquiring all of the outstanding stock of Forum from
Marriott International. The principal executive offices of the Company are
located at 10400 Fernwood Road, Bethesda, Maryland 20817, and its telephone
number at that location is (301) 380-9000.
BUSINESS OF THE COMPANY
Lodging and Asset Management Services. Upon completion of the Distribution,
the Company will lease approximately 125 full-service hotels and sublease 71
limited-service hotels from Host REIT. The full-service hotel portfolio will
be managed by Marriott International and the Non-MI Managers under the
"Marriott," "Ritz-Carlton," "Four Seasons," "Swissotel," "Hyatt," "Holiday
Inn" and "Delta" brand names, and the limited-service hotels will be managed
by Marriott International under the "Courtyard by Marriott" and "Residence
Inn" brand names. The Company also will enter into a contract with Host REIT
to provide asset management services for substantially all of Host REIT's
hotel portfolio.
The full-service hotels to be leased by the Company from Host REIT are in
the upscale and luxury segments of the lodging industry. Based on data
provided by Smith Travel Research, the upscale and luxury segments achieved an
average occupancy of 71.1% for 1997. The Company's full-service hotel lease
portfolio achieved a 78.4% occupancy and 12.6% REVPAR increase in 1997, which
significantly outperformed the competitive set. The Company believes this is
due to the quality and positioning of the hotel properties, as well as the
strength of the brand names and management companies in the portfolio.
The Company believes that there are significant barriers to entry,
particularly in urban and airport locations, that have limited supply
increases in the upscale and luxury segments of the full-service hotel
industry to an average of approximately 1% from 1992 through 1997. These
barriers to entry have included: the affordability, availability and location
of quality land; the lead time for the development of a comparable hotel which
can now range from three to five years or more from conception to completion
of construction; the limited availability of financing for new hotel
construction; and the availability of existing comparable hotels that have
sold at a discount to their replacement cost.
The Company does not believe, however, that the limited-service hotel sector
has the same barriers to entry for new supply limitations that exist in the
full-service sector. For 1998, room supply within the moderate-price
56
<PAGE>
and extended-stay segments has exceeded room demand. The Company believes that
this trend will have an effect on the feasibility of additional new limited-
service construction starts and certain of the supply/demand imbalances may
create acquisition and leasing opportunities for the Company.
Under the Hotel Leases, the Company will participate directly in the results
of the operations of the leased hotels (and thus trends in the hotel industry
are likely to directly bear on the Company's economic performance). Under the
typical hotel lease (or sublease) that the Company enters into, the Company
will be obligated to pay to the lessor rent based upon the greater of a fixed
dollar amount of rent or fixed percentages of various categories of gross
revenues derived from the operation of the leased hotels. See "Description of
the Hotel Leases for Full-Service Hotels Managed by Marriott International,"
"Description of the Subleases for Limited-Service Hotels Managed by Marriott
International," "Description of the Hotel Leases for Hotels Managed by Other
Management Companies," and "Description of Blackstone Hotel Leases." The
Company in turn will contract with a third party manager (typically, but not
in all cases, Marriott International) to operate the hotels on behalf of the
Company. Under these management agreements, the Company typically pays the
manager a base management fee equal to a fixed percentage of hotel revenues,
plus in many cases an incentive management fee based upon the operating profit
of the hotel above certain specified levels. Under these management
agreements, the Company receives all revenues from the operations of the
hotels, subject to its obligation to pay the managers their management fees,
and the Company is typically responsible for all expenses of operation of the
hotels, including costs incurred by the managers. See "Description of Marriott
International Hotel Management Agreements for Full-Service Hotels,"
"Description of Marriott International Hotel Management Agreements for
Limited-Service Hotels," "Description of Other Hotel Management Agreements,"
and "Description of Hotel Management Agreements for Blackstone Hotels." Thus,
the Company receives the operating profit from its leased and subleased hotels
after it pays the managers their management fees and the lessors their rent
(which is not based upon operating profit but rather upon fixed percentages of
gross revenues). Accordingly, the Company derives the benefit of (and bears
the risks associated with) the operating profits from the hotels. To the
extent that such profits (after the payment of management fees) exceeds the
rent due under the leases, the Company will profit (and its rate of
profitability will increase to the extent that the rate at which operating
profits increases exceeds the rate at which the rents payable under the leases
increase). Conversely, the Company will incur a loss to the extent that such
profit is less than the rent due under the leases (and the Company's
profitability will decline to the extent that the rate at which operating
profit increases is less than the rate at which the rent payable under the
leases increases). The Company's asset management team will continue to work
with the managers to improve the operating profit of the leased hotels to
attempt to increase operating profit for the Company.
Pursuant to the terms of the Hotel Non-Competition Agreement entered into by
Host with Marriott International in 1993 and a non-competition agreement to be
entered into by the Company with Host in connection with the Distribution, the
Company generally will be precluded (i) until October 8, 2000, from operating
or managing (but not leasing) full-service or limited-service hotels and (ii)
until the earlier of December 31, 2008 or the date when the Company no longer
leases at least 25% of the hotels leased from Host REIT at the time of the
Distribution, from owning or acquiring any full-service hotels not leased from
Host REIT. The Company is also subject to certain restrictions relating to
leasing, operating and managing full-service hotels under its agreement with
Host. See "--Non-Competition Agreements--Non-Competition Agreement with
Marriott International Regarding Hotels" and "--Non-Competition Agreement with
Host or Host REIT Regarding Hotels."
Senior Living. At the time of the Distribution, the Company will own a
portfolio of 31 Communities that contains over 7,200 units located in 13
states. These assets were acquired by the Company in 1997 and 1998 and are
managed by MSLS, a subsidiary of Marriott International, under long-term
operating agreements. This portfolio is positioned in the quality tier segment
of the senior living industry. (The quality tier segment of the market focuses
on the private pay customer who is targeted demographically as a senior who is
75 years or older with annual income of $25,000 or greater). The Communities
generally offer the residents the full continuum of care: independent living;
assisted living; and healthcare units. The Company believes that few
competitors offer this continuum which allows residents to age in place over
time.
57
<PAGE>
The senior living industry encompasses the independent living, assisted
living and healthcare segments. In general, residents in independent living
units participate in a community's dining plan and other social functions and
may utilize other services such as housekeeping, laundry or transportation. In
general, these residents do not need assistance with activities of daily
living ("ADLs") such as eating, bathing, grooming, dressing or medicine
reminders. Assisted living residents typically require some assistance with
some or all of these ADLs. Certain assisted living communities may also
provide personal assistance with Alzheimer's disease or other forms of
dementia. Residents who develop further physical or cognitive frailties that
require more intensive medical attention often reside in healthcare units. In
general, there are few barriers to entry in the independent and assisted
living segments of the senior living industry.
Pursuant to the terms of the Community Non-Competition Agreement entered
into by Host with Marriott International in 1997, as amended, until June 21,
2010, the Company generally is precluded from operating or managing (but not
owning or leasing) senior living communities. See "--Non-Competition
Agreements--Non-Competition Agreement with Marriott International Regarding
the Senior Living Communities."
BUSINESS STRATEGY
The Company's primary business strategy is to take advantage of
opportunities to enhance the profitability of its three strategic business
units: lodging; asset management; and senior living.
Lodging. Based on the number of hotels to be leased or subleased from Host
REIT, the Company will be one of the largest leasing companies in the lodging
industry. The Company intends to expand its full-service hotel lease portfolio
through additional lease transactions with Host REIT that may arise from Host
REIT's own growth through acquisition. Since 1994, Host has acquired 79 full-
service hotels for an aggregate purchase price of approximately $3.9 billion
and Host believes its acquisition opportunities remain significant with both
Marriott and non-Marriott brand name opportunities. However, there are no
rights of first refusal or other contractual arrangements enabling the Company
to lease any additional hotels acquired by Host REIT in the future. The
Company may also pursue the acquisition and/or leasing of limited-service
hotels from Host and its affiliates, which currently hold interests in
partnerships owning 120 Courtyard by Marriott and 50 Residence Inn hotels. The
Company also expects to pursue the acquisition and/or leasing of other
limited-service hotels as the effects of overbuilding in this sector may
create opportunities in markets with strong long-term fundamentals.
The Company also plans to seek to establish strategic relationships with
hotel REITs other than Host REIT. Current federal income tax law does not
allow REIT's to derive revenues directly from the operations of hotels. As a
result, hotel REITs generally enter into leases with lessees who agree to pay
a base rent plus a percentage rent based on increases in gross revenues of a
hotel. The Company, therefore, believes that there will be leasing
opportunities with some hotel REITs other than Host REIT that have been unable
to pursue acquisition opportunities because certain hotel management companies
have been unwilling to enter into such leases. The Company intends to pursue
these leasing opportunities for both full-service and limited-service hotels,
subject to the terms of the non-competition agreements with Marriott
International and Host REIT.
In addition, many hotel REITs have established related-party hotel leasing
companies that are generally small and privately held. The Company believes
that some of these REITs, in an effort to reduce conflicts of interest, may
seek to establish independent leasing relationships which could create an
opportunity for the Company to act as a consolidator of these leasing
companies.
The Company also intends to explore the feasibility of other lodging-related
business opportunities, such as timeshare investments and, after October 8,
2000, when the restrictions under the Hotel Non-Competition Agreement expire,
third-party hotel management.
Asset Management. The Company's asset management team (which will be
transferred from Host to the Company in connection with the Distribution) is
experienced in managing one of the largest and highest quality hotel and
senior living community portfolios in the hotel and senior living industries.
This team, consisting of
58
<PAGE>
approximately 30 employees, has developed significant expertise in enhancing
the value of lodging and senior living real estate. The asset management
function encompasses overseeing the life cycle of a lodging property or senior
living community. A key element to the function is the development of a
strategic plan and identifying specific objectives designed to achieve that
plan. Asset management is responsible for developing the strategic objectives
for a property consistent with the owner's goals and then performing
activities which focus on the achievement of those objectives. A strategic
plan may differ from property to property; however, the general objectives
associated with the asset management function include:
. Maximizing the cash return on investment through cost reduction and
revenue enhancement opportunities;
. Enhancing, preserving and maximizing the long-term value and life of the
assets; and
. Ensuring optimal positioning of each property.
The asset management group functions as the intermediary between Host, as
owner, and the Company, as lessee, and the managers of the lodging properties
and senior living communities. The managers are typically responsible for the
day-to-day operations of the properties. The asset management group oversees
the managers' activities to ensure that the objectives of the owner and the
lessee receive the appropriate level of priority and attention. There is a
broad spectrum of activities encompassed by the asset management function
including, among others:
. Reviewing periodic operating results, budgets and forecasts and
providing managers with feedback and direction;
. Reviewing, approving and overseeing capital expenditures;
. Dealing with regulatory, property tax, lender and ground lessor issues,
as applicable;
. Assessing performance against competition in a particular market;
. Ensuring that the property is maintained;
. Understanding market conditions, competitor initiatives, and changes
impacting on supply and demand;
. Performing due diligence in connection with an acquisition or
disposition;
. Exploring and initiating opportunities to increase revenues and
profitability, including, for example, expansions, renovations and
additional guest amenities and services; and
. Performing property inspections.
In connection with the Distribution, the Company will enter into contracts
with Host REIT and a non-controlled subsidiary of Host REIT for a term of two
years (with one automatic renewal) to continue to provide asset management
services to Host REIT and such subsidiary for the Host REIT hotel portfolio
and certain hotel investments owned by the non-controlled subsidiary. These
services will include: (i) monitoring property/brand performance; (ii)
pursuing expansion and repositioning opportunities; (iii) overseeing capital
expenditure budgets and forecasts; (iv) assessing return on investment
expenditure opportunities; and (v) analyzing competitive supply conditions in
each market. The Company will be paid an aggregate annual fee of $4.5 million
for services rendered under these contracts.
The Company intends to utilize the asset management team's industry
expertise to expand its customer base to include new third-party asset
management contracts with entities such as hotel REITs, pension funds, life
insurance companies, opportunity funds and offshore owners. In addition, the
Company's asset management team may expand the range of services it provides
to include feasibility analyses, valuations, acquisition/disposition due
diligence and similar services. The method of charging for these services will
be determined on a case-by-case basis. Potential alternatives include a fixed
fee, a fixed fee coupled with a performance or incentive fee, a fee based on
hourly rates, or a fee determined based on a percentage of revenues generated
by a property. The Company does not have employment agreements with any of the
employees in its asset management group.
59
<PAGE>
Senior Living. The Company owns a premier portfolio of senior living
communities and was ranked as the fourth largest owner of senior living
communities by The American Senior Housing Association in 1997. The portfolio
encompasses the full continuum of care by offering a combination of
independent living (55% of units), assisted living (20% of units) and
healthcare accommodations (25% of units). During 1997, the portfolio achieved
an average occupancy of approximately 92% and an average daily rate of $84 for
the period in which Host owned the properties.
In 1999, the Company expects to complete the final phase of an $88 million
expansion program that will result in the addition of 864 units at its
Communities. Upon completion, this expansion program will bring the total
number of units in the Company's portfolio to 7,540. The Company's objective
in completing the expansion program has been to further solidify the
competitive position of its Communities through the provision of a continuum
of housing accommodations on one campus. These expansions have typically
involved the addition of assisted living units to a community which offered
only independent living units or to a community which offered only independent
living and healthcare units. The Company believes that its portfolio will
continue to enjoy a competitive advantage as the result of its emphasis on the
provision of multiple levels of care.
The Company expects to continue selectively pursuing the acquisition of
upscale senior living communities and to engage premier operators to manage
these communities. The Company expects to continue to target primarily assets
which offer at least two levels of care and which are located in established
neighborhoods where land for development is scarce and where community groups
and local authorities are less likely to encourage the development of
additional senior living communities.
The Company has entered into a conditional purchase agreement in connection
with the acquisition of two Brighton Gardens senior living communities in
Denver and Colorado Springs, Colorado. Both of these communities are under
construction and are expected to be completed in the second quarter of 1999.
Under the terms of the agreement, the Company can elect to acquire these
communities for approximately $35 million on the first anniversary of their
opening. The communities will be managed by MSLS under long-term operating
agreements.
In addition to pursuing single asset and portfolio acquisitions, the Company
may also pursue the acquisition of senior living companies to the extent that
the real estate assets of these companies complement its own. The senior
living industry is currently highly fragmented and many markets are dominated
by two or three regional companies. The Company believes that as this industry
consolidates, some of these regional companies will seek to align themselves
with larger companies in an effort to solidify their growth. The Company may
be a logical partner for one or more of these companies.
HOTEL LODGING INDUSTRY
The upscale and luxury full-service segments of the lodging industry
continue to benefit from a favorable cyclical imbalance in the supply/demand
relationship in which room demand growth has exceeded supply growth, which has
remained fairly limited. The lodging industry posted strong gains in revenues
and profits in 1997, as demand growth continued to outpace additions to
supply. The Company believes that upscale and luxury full-service hotel room
supply growth will remain limited through at least year 2000. Accordingly, the
Company believes this supply/demand imbalance will result in improving
occupancy and room rates which should result in improved REVPAR and operating
profit.
Following a period of significant overbuilding in the mid-to-late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction, excluding casino-related construction, has been modest and
largely offset by the number of rooms taken out of service each year. Due to
an increase in travel and an improving economy, hotel occupancy has grown over
the past several years and room rates have improved. The Company believes that
room demand for upscale and luxury full-service properties will continue to
grow at approximately the rate of the Gross Domestic Product ("GDP"), which
recently has been growing at a rate of approximately 2% to 3%. Increased room
demand should result in increased hotel occupancy and room rates. According to
Smith
60
<PAGE>
Travel Research, upscale and luxury full-service occupancy for the Company and
its competitive set grew in 1997 to 72.5% from 72.2% in 1996, while room rate
growth continued to exceed inflation. While room demand has been rising, new
hotel supply growth has been minimal. Smith Travel Research data shows that
upscale and luxury full-service room supply increased an average of only 1%
annually from 1991 through 1997. The increase in room demand and minimal
growth in new hotel supply has also led to increased room rates. The Company
believes that these recent trends will continue, with overall occupancy
changing slightly and room rates increasing at more than one and one-half
times the rate of inflation in 1998.
While the supply/demand relationship has generally remained favorable in the
upper upscale and luxury markets in which the Company's properties operate, a
number of new construction projects have been announced or commenced in 1998,
particularly in suburban and smaller metropolitan markets where the Company
does not have a significant presence. This growth in new supply, together with
slowing demand growth, have served to reduce the rate of REVPAR growth at the
Company's properties from year earlier growth rates. In part, as a reaction to
a concern regarding the potential for lodging industry overbuilding as well as
general economic concerns which have been heightened by the Asian crisis and
other factors, the availability of capital to the lodging industry has
diminished greatly in the second half of 1998. While this condition is having
a favorable effect by curtailing construction of a number of potentially
competing hotel projects, it is also limiting the Company's ability to grow
through acquisitions.
The lodging industry is cyclical with operating results correlated highly to
the GDP. During recent months, a number of investment banks and economists
have substantially reduced their estimates of growth in GDP through 1999.
Should such estimates of diminished GDP growth prove accurate, the Company
believes that REVPAR growth would be substantially reduced at its properties.
LEASED AND SUBLEASED HOTEL PROPERTIES
The full-service hotel lodging properties expected to be leased from Host
represent quality assets in the upscale and luxury full-service lodging
segments and substantially all of the full-service hotel properties are
currently operated under the Marriott or Ritz-Carlton brand names. In
addition, the Company will sublease limited-service hotels from Host REIT,
including Courtyard by Marriott (moderate-price) and Residence Inn (extended-
stay) hotel properties, all of which are managed by Marriott International.
61
<PAGE>
The following tables set forth certain information with respect to the
operations of the hotels to be leased or subleased by the Company following
the Distribution on a historical and pro forma basis for fiscal year 1997 and
for the First Three Quarters 1998.
<TABLE>
<CAPTION>
FISCAL YEAR 1997
-------------------------------------------
NUMBER NUMBER AVERAGE
OF HOTELS OF ROOMS HOTEL REVENUES OCCUPANCY DAILY RATE REVPAR(1)
--------- -------- -------------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Full-service (histori-
cal)................... 92 45,029 $ 930,648 78.8% $134.00 $105.56
Full-service (pro
forma)(2) ............. 126 59,026 1,329,997 77.7 132.73 103.09
Moderate-price (histori-
cal)................... 53 7,606 116,236 81.1 84.30 68.38
Extended-stay (histori-
cal)................... 18 2,178 39,670 83.3 99.96 83.27
<CAPTION>
FIRST THREE QUARTERS 1998
-------------------------------------------
NUMBER NUMBER AVERAGE
OF HOTELS OF ROOMS HOTEL REVENUES OCCUPANCY DAILY RATE REVPAR(1)
--------- -------- -------------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Full-service (histori-
cal)................... 101 49,068 $ 797,971 79.2% $139.79 $110.76
Full-service (pro
forma)(2) ............. 126 59,026 1,013,199 78.4 141.61 111.05
Moderate-price (histori-
cal)................... 53 7,606 82,856 81.6 91.67 74.82
Extended-stay (histori-
cal)................... 18 2,178 27,387 85.1 102.97 87.61
</TABLE>
- --------
(1) REVPAR measures daily room revenues generated on a per room basis. REVPAR
does not include food and beverage or other ancillary revenues generated
by the property. REVPAR represents the combination of the average daily
room rate charged and the average daily occupancy achieved.
(2) Includes the hotels owned by all Hotel Partnerships which Host proposes to
acquire in connection with the REIT Conversion and the Blackstone Hotels,
assuming all such Hotel Partnerships participate in the REIT Conversion.
Full-Service. The Company's leased full-service hotels average nearly 500
rooms. Twelve of the hotels to be leased by the Company have more than 750
rooms. Hotel properties typically include meeting and banquet facilities, a
variety of restaurants and lounges, swimming pools, gift shops and parking
facilities. The full-service hotels to be leased by the Company 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 at
resort/convention locations where there are limited or no development sites.
Marriott International serves as the manager for 86 of the 100 full-service
hotels currently owned by Host and to be leased by the Company from Host REIT
and all but three are part of Marriott International's full-service hotel
system. The average age of the properties is 15 years.
The chart below sets forth performance information for the full-service
hotels expected to be leased by the Company from Host REIT on a comparable
basis:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- ----------------
1998 1997 1997 1996
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
Comparable Full-Service
Hotels(1)
-----------------------
Number of properties.... 75 75 53 53
Number of rooms......... 37,675 37,675 26,959 26,959
Average daily rate...... $ 142.11 $ 131.74 $134.49 $121.58
Occupancy percentage.... 80.1% 80.4% 79.4% 78.0%
REVPAR.................. $ 113.87 $ 105.86 $106.76 $ 94.84
REVPAR % change......... 7.6% -- 12.6% --
</TABLE>
- --------
(1) Consists of the 75 full-service properties owned by Host for the entire
First Three Quarters 1998 and First Three Quarters 1997, respectively, and
the 53 properties owned by Host for the entire 1997 and 1996 fiscal years,
respectively, except for four hotel properties which will not be leased
from Host. 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.
62
<PAGE>
The chart below sets forth certain performance information for the full-
service hotels expected to be leased by the Company from Host REIT in
connection with the Distribution and were owned by Host prior to September 11,
1998:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- ----------------
1998 1997 1997 1996
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
Number of properties.................. 101 83 92 75
Number of rooms....................... 49,068 40,257 45,029 35,725
Average daily rate.................... $139.79 $132.37 $134.00 $120.66
Occupancy percentage.................. 79.2% 80.4% 78.8% 77.8%
REVPAR................................ $110.76 $106.40 $105.56 $ 93.83
</TABLE>
Revenues in 1997 for nearly all of the full-service hotels to be leased by
the Company from Host REIT were improved or comparable to 1996. This
improvement was achieved through steady increases in customer demand, as well
as yield management techniques applied by the manager to maximize REVPAR on a
property-by-property basis. REVPAR for comparable properties increased 12.6%
for fiscal year 1997 as average room rates increased almost 11% and average
occupancy increased over one percentage point. Overall, this resulted in
strong sales growth. Sales expanded at a 9% rate for comparable hotels and
house profit margins increased by over two percentage points. REVPAR in 1997
for all such leased full-service properties (including both comparable and
non-comparable properties) increased 12.8% as average room rates increased
over 11% and average occupancy increased over one percentage point. For the
First Three Quarters 1998, REVPAR for comparable properties increased 7.6% as
average room rates increased nearly 8% and average occupancy decreased
slightly. Sales for the First Three Quarters 1998 expanded at an 8% rate for
comparable hotels and the house profit margin increased by one percentage
point. REVPAR for the First Three Quarters 1998 for full-service properties
expected to be leased by the Company from Host REIT increased 4.1% as average
room rates increased nearly 6% and average occupancy decreased over one
percentage point. The Company believes that the full-service hotels expected
to be leased by the Company from Host REIT have outperformed the industry's
average REVPAR growth rates. The relatively high occupancy rates of the
hotels, along with increased demand for upscale and luxury full-service hotel
rooms, allowed the managers of the hotels to increase average room rates by
selectively raising room rates and replacing certain discounted group business
with higher-rate group and transient business. The Company believes that these
favorable REVPAR growth trends should continue due to the limited new
construction of full-service properties and the expected improvements from the
conversion of eight properties to the "Marriott" brand names in 1996, 1997 and
1998.
Following the REIT Conversion, the Company and the managers will continue to
focus on cost control in an attempt to ensure that hotel sales increases serve
to maximize house and operating profit. While control of fixed costs serves to
improve profit margins as hotel sales increase, it also results in more hotel
properties reaching financial performance levels that allow the managers to
share in the growth of profits in the form of incentive management fees. The
Company believes this is a positive development as it strengthens the
alignment of the Company's interests, as lessee, and the managers' interests.
63
<PAGE>
The following table presents certain information for the full-service hotels
expected to be leased by the Company from Host REIT by geographic region for
fiscal year 1997:
<TABLE>
<CAPTION>
AVERAGE
NUMBER AVERAGE
NUMBER OF GUEST AVERAGE DAILY
GEOGRAPHIC REGION OF HOTELS ROOMS OCCUPANCY RATE REVPAR
----------------- --------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Atlanta......................... 7 441 76.5% $131.69 $100.74
Florida......................... 11 511 80.9 131.78 106.64
Mid-Atlantic.................... 12 364 76.1 111.71 85.00
Midwest......................... 10 418 74.3 107.65 79.99
New York........................ 10 708 84.7 173.85 147.22
Northeast....................... 7 367 75.2 96.75 72.72
South Central................... 15 525 76.5 120.81 92.39
Western......................... 21 519 79.5 140.07 111.39
Average-all regions........... -- 485 78.8 134.00 105.56
</TABLE>
Limited-Service -- Courtyard by Marriott Hotels. The Courtyard by Marriott
hotels to be subleased by the Company are moderate-priced, limited-service
hotels aimed at individual business and pleasure travelers, as well as
families. Courtyard by Marriott hotels typically have approximately 150 rooms
at locations in suburban areas or near airports throughout the United States.
The Courtyard by Marriott hotels include well-landscaped grounds, a courtyard
with a pool and socializing areas. Each Courtyard by Marriott hotel to be
subleased by the Company features meeting rooms and a restaurant and lounge
with approximately 80 seats. The Courtyard by Marriott hotels to be leased by
the Company average eight years of age, have substantially matured and are
operating at high occupancy rates. The Company believes this competitive
position will enable the manager to continue to improve profitability by
adjusting the mix of business to increase room rates. The table below sets
forth comparable performance information for the Courtyard by Marriott hotels
to be subleased by the Company:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- --------------
1998 1997 1997 1996
---------- ---------- ------ ------
<S> <C> <C> <C> <C>
Number of properties................. 53 53 53 53
Number of rooms...................... 7,606 7,606 7,606 7,606
Average daily rate................... $91.67 $84.27 $84.30 $77.80
Occupancy percentage................. 81.6% 82.9% 81.1% 80.2%
REVPAR............................... $74.82 $69.86 $68.38 $62.40
REVPAR % change...................... 7.1% -- 9.6% 7.0%
</TABLE>
The Courtyard by Marriott hotels to be subleased by the Company benefited in
1997 from higher demand. REVPAR increased 9.6% due to increases in room rates
of nearly 8.4% and an increase in occupancy of one percentage point. House
profit margins also increased by almost one percentage point, reflecting the
operating leverage inherent in properties already running at close to
capacity. For the First Three Quarters 1998, REVPAR increased 7.1% due to
increases in room rates of nearly 9%, while average occupancy decreased over
one percentage point. The Courtyard by Marriott hotels to be subleased by the
Company were generally fully occupied during the business week and enjoyed
high occupancies during the weekends. The Company believes this competitive
position will enable the manager to continue to improve profitability through
yield management and selective room rate increases. However, there can be no
assurance that profitability will continue to improve.
64
<PAGE>
The following table presents limited-service properties information by
geographic region for fiscal year 1997:
<TABLE>
<CAPTION>
AVERAGE
NUMBER AVERAGE
NUMBER OF GUEST AVERAGE DAILY
GEOGRAPHIC REGION OF HOTELS ROOMS OCCUPANCY RATE REVPAR
----------------- --------- -------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
Southeast........................ 9 140 78.9% $78.61 $62.02
Mid-Atlantic..................... 11 144 82.8% 85.32 70.60
Midwest.......................... 6 142 75.9% 78.28 59.39
Northeast........................ 15 142 82.3% 86.77 71.38
South Central.................... 3 153 76.3% 77.66 59.22
Western.......................... 9 141 84.6% 90.06 76.21
Average-all-regions............ -- 144 81.1% 84.30 68.38
</TABLE>
Limited-Service -- Residence Inns. The Residence Inns to be subleased by the
Company are extended-stay, limited-service hotels which cater primarily to
business and family travelers who stay more than five consecutive nights.
Residence Inns typically have 80 to 130 studio and two-story penthouse suites.
Residence Inns generally are located in suburban settings throughout the
United States and feature a series of residential style buildings with
landscaped walkways, courtyards and recreational areas. Residence Inns do not
have restaurants, but offer complimentary continental breakfast. In addition,
most Residence Inns provide a complimentary evening hospitality hour. Each
suite contains a fully equipped kitchen, and many suites have woodburning
fireplaces. The 18 Residence Inns to be subleased by the Company average eight
years of age.
The table below sets forth comparable performance information for the
Residence Inns expected to be subleased by the Company from Host REIT.
<TABLE>
<CAPTION>
FIRST THREE
QUARTERS FISCAL YEAR
--------------- --------------
1998 1997 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
Number of properties........................ 18 18 18 18
Number of rooms............................. 2,178 2,178 2,178 2,178
Average daily rate.......................... $102.97 $99.50 $99.96 $90.82
Occupancy %................................. 85.1% 84.7% 83.3% 85.1%
REVPAR...................................... $ 87.61 $84.28 $83.27 $77.29
REVPAR % change............................. 3.9% -- 7.7% 4.9%
</TABLE>
For 1997, the Residence Inns expected to be subleased by the Company from
Host REIT performed well, with REVPAR increasing 7.7% due to an increase in
room rates of 10% although occupancy decreased by over one percentage point.
Continued popularity of this product with customers combined with increasing
business travel resulted in strong performance for 1997. At an average
occupancy rate of 83.3% for 1997, these properties were near full occupancy
during the business week and enjoyed high occupancies during the weekends.
Given this strong demand, the manager of the Residence Inns was able to
improve room rates through managing the mix of business. For the First Three
Quarters 1998, REVPAR increased 3.9% due to an increase in average room rates
of over 3% and a slight increase in occupancy.
65
<PAGE>
The following table presents certain information for Residence Inn extended-
stay properties expected to be subleased by the Company from Host REIT by
geographic region for fiscal year 1997:
<TABLE>
<CAPTION>
AVERAGE
NUMBER AVERAGE
NUMBER OF GUEST AVERAGE DAILY
GEOGRAPHIC REGION OF HOTELS ROOMS OCCUPANCY RATE REVPAR
----------------- --------- -------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
Southeast........................ 2 107 80.8% $ 94.70 $76.47
Mid-Atlantic..................... 2 112 84.0% 96.35 80.91
Midwest.......................... 3 153 81.0% 114.85 92.97
Northeast........................ 3 110 86.3% 97.60 84.21
South Central.................... 3 119 82.1% 89.34 73.33
Western.......................... 5 119 84.8% 99.62 84.51
Average-all-regions............ -- 120 83.0% 99.96 83.27
</TABLE>
BLACKSTONE ACQUISITION
In April 1998, Host entered into a definitive agreement with the Blackstone
Entities to acquire ownership of, or controlling interests in, twelve hotels
and two mortgage loans, one secured by one of the acquired hotels and one
secured by an additional hotel. In addition, Host will acquire a 25% interest
in Swissotel Management (USA) L.L.C., which operates five Swissotel hotels in
the United States, from the Blackstone Entities, which Host REIT will transfer
to the Company. If the Blackstone Acquisition is consummated, Host REIT, among
other things, will transfer to the Blackstone Entities approximately 4,370,000
shares of Common Stock of the Company then owned by Host REIT. The Blackstone
Acquisition is expected to occur promptly following the Merger. Consequently,
the Blackstone Entities will own approximately 18% of the Common Stock of the
Company to be issued and outstanding following the Distribution, assuming the
Blackstone Acquisition is consummated. In connection with the Blackstone
Acquisition, the Company has granted to the Blackstone Entities certain
registration rights with respect to such shares of Common Stock of the
Company. See "Description of Capital Stock--Registration Rights Agreement." At
the closing of the Blackstone Acquisition, the Blackstone portfolio will be
contributed to Host REIT and its hotels will be leased to subsidiaries of the
Company and will continue to be managed on behalf of such subsidiaries of the
Company under the Blackstone Entities' existing management agreements. The
Blackstone Acquisition is subject to certain conditions, including the Merger
being consummated by March 31, 1999. In the event the Distribution is declared
by the Board of Directors of Host but the Blackstone Acquisition does not
occur, the shares of Common Stock of the Company distributed to Host
Stockholders in the Distribution will represent 100% of the outstanding Common
Stock of the Company as of the Distribution and the remaining approximately
18% of the Common Stock will be repurchased by the Company from Host at a
purchase price of $0.01 per share, subject to the right of Host to cause the
Company to sell such 18% of the Common Stock to the Blackstone Entities at
fair market value if the Distribution is made prior to January 1, 1999 and the
Blackstone Acquisition is consummated at a later date.
The Blackstone portfolio is one of the premier collections of hotel
properties. It includes: The Ritz-Carlton, Amelia Island; The Ritz-Carlton,
Boston; Hyatt Regency Burlingame at San Francisco Airport; Hyatt Regency
Cambridge, Boston; Hyatt Regency Reston, Virginia; Grand Hyatt Atlanta; Four
Seasons Philadelphia; Four Seasons Atlanta; The Drake (Swissotel) New York;
Swissotel Chicago; Swissotel Boston; and Swissotel Atlanta.
66
<PAGE>
HOTEL PROPERTIES TO BE LEASED OR SUBLEASED BY THE COMPANY UNDER THE HOTEL
LEASES
The following table sets forth, as of the date hereof, the location and
number of rooms relating to each of the hotels to be leased or subleased to
the Company by Host REIT. All of the full-service hotel properties are
operated under either "Marriott" or "Ritz-Carlton" brand names by Marriott
International, unless otherwise indicated. All of the limited-service hotel
properties are operated under either the "Courtyard by Marriott" or "Residence
Inn" brand names by Marriott International.
Full-Service:
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Alabama
Grand Hotel Resort and Golf Club......................................... 306
Arizona
Scottsdale Suites........................................................ 251
The Ritz-Carlton, Phoenix (1)............................................ 281
California
Coronado Island Resort................................................... 300
Costa Mesa Suites........................................................ 253
Desert Springs Resort and Spa............................................ 884
Manhattan Beach (2)...................................................... 380
Marina Beach ............................................................ 368
Newport Beach............................................................ 570
Newport Beach Suites..................................................... 250
Ontario Airport (2)...................................................... 299
San Diego Marriott Hotel and Marina...................................... 1,355
San Diego Mission Valley (2)............................................. 350
San Francisco Airport.................................................... 684
San Francisco Fisherman's Wharf (2)...................................... 285
San Francisco Moscone Center............................................. 1,498
San Ramon................................................................ 368
Santa Clara.............................................................. 754
The Ritz-Carlton, Marina del Rey (1)..................................... 306
The Ritz-Carlton, San Francisco (1)...................................... 336
Torrance................................................................. 487
Colorado
Denver Southeast......................................................... 595
Denver Tech Center....................................................... 625
Denver West.............................................................. 307
Marriott's Mountain Resort at Vail....................................... 349
Connecticut
Hartford/Farmington...................................................... 380
Hartford/Rocky Hill...................................................... 251
Florida
Fort Lauderdale Marina................................................... 580
Harbor Beach Resort...................................................... 624
Jacksonville (2)......................................................... 256
Miami Airport............................................................ 782
Orlando World Center..................................................... 1,503
Palm Beach Gardens (2)................................................... 279
Singer Island (Holiday Inn) (3).......................................... 222
Tampa Airport............................................................ 295
Tampa Westshore.......................................................... 309
The Ritz-Carlton, Naples (1)............................................. 463
Georgia
Atlanta Marriott Marquis................................................. 1,671
Atlanta Midtown Suites................................................... 254
Atlanta Norcross......................................................... 222
Atlanta Northwest........................................................ 400
Atlanta Perimeter........................................................ 400
JW Marriott Hotel at Lenox............................................... 371
The Ritz-Carlton, Atlanta (1)............................................ 447
The Ritz-Carlton, Buckhead (1)........................................... 553
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Illinois
Chicago/Deerfield Suites................................................. 248
Chicago/Downers Grove Suites............................................. 254
Chicago/Downtown Courtyard............................................... 334
Chicago O'Hare........................................................... 681
Indiana
South Bend............................................................... 300
Louisiana
New Orleans ............................................................. 1,290
Maryland
Bethesda................................................................. 407
Gaithersburg/Washingtonian Center........................................ 284
Massachusetts
Boston/Newton............................................................ 430
Michigan
Detroit Romulus.......................................................... 245
The Ritz-Carlton, Dearborn (1)........................................... 308
Minnesota
Minneapolis/Bloomington.................................................. 479
Minneapolis City Center.................................................. 583
Minneapolis Southwest (2)................................................ 320
Missouri
Kansas City Airport...................................................... 382
St. Louis Pavilion....................................................... 672
New Hampshire
Nashua................................................................... 251
New Jersey
Hanover.................................................................. 353
Newark Airport........................................................... 590
Park Ridge............................................................... 289
Saddle Brook............................................................. 221
New York
Albany (2)............................................................... 359
New York Marriott Financial Center....................................... 504
New York Marriott Marquis................................................ 1,911
Marriott World Trade Center.............................................. 820
North Carolina
Charlotte Executive Park (2)............................................. 298
Raleigh Crabtree Valley.................................................. 375
Oklahoma
Oklahoma City............................................................ 354
Oklahoma City Waterford (2).............................................. 197
Oregon
Portland................................................................. 503
Pennsylvania
Philadelphia (Convention Center)......................................... 1,200
Philadelphia Airport..................................................... 419
Pittsburgh City Center (2)............................................... 400
Tennesee
Memphis.................................................................. 404
Texas
Dallas/Fort Worth........................................................ 492
Dallas Quorum............................................................ 547
El Paso.................................................................. 296
Houston Airport ......................................................... 566
</TABLE>
67
<PAGE>
HOTEL PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- ------
<S> <C>
JW Marriott Houston.................................................... 503
Plaza San Antonio (2).................................................. 252
San Antonio Rivercenter................................................ 999
San Antonio Riverwalk.................................................. 500
Utah
Salt Lake City......................................................... 510
Virginia
Dulles Airport......................................................... 370
Key Bridge............................................................. 588
Norfolk Waterside (2).................................................. 404
Pentagon City Residence Inn............................................ 300
The Ritz-Carlton, Tysons Corner (1).................................... 397
Washington Dulles Suites............................................... 254
Westfields............................................................. 335
Williamsburg........................................................... 295
Washington, D.C.
Washington Metro Center................................................ 456
Canada
Calgary................................................................ 380
Toronto Airport........................................................ 423
Toronto Eaton Centre................................................... 459
Toronto Delta Meadowvale (3)........................................... 374
------
Total.................................................................. 49,068
======
</TABLE>
Full-service hotel properties that are currently not consolidated by Host
but in which Host REIT intends to acquire a 100% ownership interest promptly
following the Distribution are as follows:
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Marriott Diversified American
Hotels, L.P.
Fairview Park............................................. Virginia 395
Dayton.................................................... Ohio 399
Research Triangle Park.................................... North Carolina 224
Detroit Marriott Southfield............................... Michigan 226
Detroit Marriott Livonia.................................. Michigan 224
Fullerton................................................. California 224
-----
1,692
-----
</TABLE>
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Marriott O'Hare Suites.................................... Illinois 256
-----
Potomac Hotel Limited Partnership
Albuquerque............................................... New Mexico 411
Greensboro-High Point..................................... North Carolina 299
Houston Medical Center.................................... Texas 386
Miami Biscayne Bay........................................ Florida 605
Marriott Mountain Shadows Resort.......................... Arizona 337
Seattle SeaTac Airport.................................... Washington 459
-----
2,497
-----
Total.................................................................... 4,445
=====
</TABLE>
Full-service hotel properties that are included in the Blackstone portfolio
to be acquired by Host REIT are as follows:
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Four Seasons, Atlanta (3).................................. Georgia 246
Four Seasons, Philadelphia (3)............................. Pennsylvania 365
Grand Hyatt, Atlanta (3)................................... Georgia 439
Hyatt Regency, Burlingame (3).............................. California 793
Hyatt Regency, Cambridge (3)............................... Massachusetts 469
Hyatt Regency, Reston (3).................................. Virginia 514
Swissotel, Atlanta (3)..................................... Georgia 348
Swissotel, Boston (3)...................................... Massachusetts 498
Swissotel, Chicago (3)..................................... Illinois 630
The Drake (Swissotel), New York (3)........................ New York 494
The Ritz-Carlton, Amelia Island (1)........................ Florida 449
The Ritz-Carlton, Boston (1)............................... Massachusetts 275
-----
Total................................................................... 5,520
=====
</TABLE>
Limited-Service -- Courtyard by Marriott Hotels:
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Arizona
Phoenix Camelback........................................................ 155
Scottsdale Mayo.......................................................... 100
California
Camarillo................................................................ 130
Fountain Valley.......................................................... 150
Los Angeles Airport...................................................... 146
Laguna Hills............................................................. 137
San Jose Airport......................................................... 151
Torrance................................................................. 151
Delaware
Wilmington............................................................... 152
Florida
Boca Raton............................................................... 152
Jacksonville............................................................. 146
Miami Lakes.............................................................. 151
Georgia
Atlanta Airport.......................................................... 152
Atlanta Cumberland....................................................... 182
Atlanta Jimmy Carte Blvd................................................. 121
Atlanta Midtown.......................................................... 168
Macon.................................................................... 108
Illinois
Arlington Heights........................................................ 152
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Indiana
Indianapolis Carmel...................................................... 149
Iowa
Quad Cities.............................................................. 113
Kansas
Kansas City South........................................................ 149
Maryland
Columbia................................................................. 152
Greenbelt................................................................ 152
Massachusetts
Boston Danvers........................................................... 121
Boston Foxborough........................................................ 149
Boston Lowell............................................................ 121
Boston Milford........................................................... 151
Boston Stoughton......................................................... 152
Norwood.................................................................. 148
Woburn................................................................... 125
Michigan
Detroit Auburn Hills..................................................... 148
Minnesota
Minneapolis/Eden Prarie.................................................. 149
Missouri
Kansas City Airport...................................................... 149
</TABLE>
68
<PAGE>
Limited-Service -- Courtyard by Marriott Hotels (Continued):
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
New Jersey
Hanover................................................................ 149
Mahwah................................................................. 146
Tinton Falls........................................................... 121
New York
Fishkill............................................................... 152
Syracuse............................................................... 149
North Carolina
Charlotte.............................................................. 152
Fayetteville........................................................... 108
Raleigh Durham......................................................... 151
Pennsylvania
Philadelphia Airport................................................... 152
Pittsburgh Airport..................................................... 148
Willow Grove........................................................... 149
Rhode Island
Middletown............................................................. 148
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
South Carolina
Spartanburg............................................................ 113
Tennessee
Chattanooga............................................................ 114
Texas
Dallas Central......................................................... 160
Virginia
Arlington/Rosslyn...................................................... 162
Dulles Fairfax......................................................... 149
Williamsburg........................................................... 151
Washington
Seattle Bellevue....................................................... 152
Wisconsin
Brookfield (Milwaukee)................................................. 148
-----
Total.................................................................. 7,606
=====
</TABLE>
Limited-Service -- Residence Inns:
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Arizona
Flagstaff.............................................................. 102
Scottsdale............................................................. 122
Tempe.................................................................. 126
California
Fountain Valley........................................................ 122
Rancho Bernardo........................................................ 123
Georgia
Atlanta Alpharetta..................................................... 103
Illinois
Chicago................................................................ 221
Maryland
Annapolis.............................................................. 102
Massachusetts
Westborough............................................................ 109
Michigan
Warren................................................................. 133
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
New Mexico
Albuquerque............................................................ 112
New York
Syracuse............................................................... 102
North Carolina
Durham................................................................. 122
Ohio
Columbus............................................................... 106
Pennsylvania
Willow Grove........................................................... 118
Tennessee
Nashville.............................................................. 110
Texas
Dallas Northpark....................................................... 103
Dallas Market Center................................................... 142
-----
Total.................................................................. 2,178
=====
</TABLE>
- --------
(1) Property is operated as a Ritz-Carlton. The Ritz-Carlton Hotel Company,
L.L.C. manages the property and is wholly owned by Marriott International.
(2) Property is operated as a Marriott franchised property and is not managed
by Marriott International.
(3) Property is not operated under a Marriott brand name and is not managed by
Marriott International.
SENIOR LIVING INDUSTRY
The Company believes that the senior living industry is supported by strong
long-term fundamentals. The aging of the American population should increase
demand for senior living housing and services across the full continuum of
care. The U.S. Bureau of Census estimates that the number of seniors 85 years
and older will increase by approximately 100% from 3.0 million in 1990 to 6.0
million in 2010. The traditional alternative of family-based care also is
disappearing as the prevalence of dual income families and increased
geographic mobility has reduced the potential role of family caregivers. In
addition, the affordability of senior housing has improved as seniors are
becoming increasingly affluent with the number of wealthy senior households
(households over age 65 with net worth above $500,000) increasing at a rate of
14% per annum from 1983 to 1992. Finally, a supply/demand imbalance is being
created as the supply of skilled nursing beds per thousand persons age 85 and
older has declined from 690 per thousand in 1976 to an estimated 350 per
thousand in the year 2000.
69
<PAGE>
The Company believes, however, that many assisted living markets have become
or are on the verge of becoming overbuilt. The rapid development of assisted
living may cause some supply/demand imbalances which the Company believes
could create acquisition and/or leasing opportunities in markets that possess
strong long-term fundamentals. However, overbuilding in markets in which the
Company's assisted living units are located could cause the Company's assisted
living units to experience decrease occupancy, depressed operating margins and
lower operating results. See "Risk Factors--Overbuilding in the Assisted
Living Industry."
SENIOR LIVING COMMUNITIES
As of the date hereof, the Company's senior living communities portfolio
consists of 31 upscale properties with over 7,200 units. The Communities
represent high quality assets in the senior living lodging segment. The
Communities offer a combination of independent living, assisted living and
healthcare components that differ mostly by the level of senior care services
provided.
Independent living components, which represent 55% of the Company's senior
living units, contain a variety of accommodations, together with amenities
such as dining facilities, lounges, and game and craft rooms. All residents of
the independent living components are provided security, meals, housekeeping
and scheduled transportation from on-site staff is available upon demand 24
hours a day, and each independent living unit is equipped with an emergency
call system to assist with emergency situations. The independent living
components of the properties generally consist of apartments or villas. Each
resident enters into a residency agreement that may be terminated by the
resident on short notice. Although there can be no assurance that available
independent living units will be reoccupied as residency agreements expire or
are terminated, since 1988 at least 80% of the residents of the apartments and
villas managed by Marriott International have renewed their residency
agreements from year to year.
Assisted living components, which represent 20% of the Company's senior
living units, provide a supportive environment that encourages independent
living. Residents have private or semi-private units, eat meals in a separate
dining room, and are provided the added services of scheduled activities,
housekeeping and linen service, preventive health surveillance, periodic
health monitoring, assistance with activities of daily living and emergency
care. Certain of the Company's Communities also provide personal assistance
with Alzheimer's disease and other forms of dementia.
Healthcare components, which represent 25% of the Company's senior living
units, provide residents a full range of healthcare. Residents have private or
semi-private rooms and share communal dining and social facilities. In most
instances, each resident of the independent living component of a property is
entitled to priority admission in the assisted living (if any) or healthcare
component.
Some Communities also provide ancillary healthcare services, including
physical occupational and speech and learning therapy, respite care and adult
daycare centers on the premises of some Communities. All Communities are
managed by Marriott International under long-term management agreements. The
average age of the Communities is 14 years.
The chart below sets forth performance information for the Company's senior
living communities for the First Three Quarters and the period from June 21,
1997 through January 2, 1998:
<TABLE>
<CAPTION>
PERIOD FROM
TWELVE WEEKS JUNE 21, 1997
FIRST THREE ENDED THROUGH
QUARTERS 1998 SEPTEMBER 12, 1997 JANUARY 2, 1998
------------- ------------------ ---------------
<S> <C> <C> <C>
Number of properties..... 31 29 30
Number of units (1)...... 7,259 6,546 7,094
Average daily rate....... $88.19 $83.60 $83.88
Occupancy percentage..... 91.9% 91.2% 91.7%
</TABLE>
--------
(1) Number of units is based on the number of rooms.
70
<PAGE>
During 1997, the average occupancy at the Communities was approximately 92%
and the average daily rate was $84. Overall occupancies for 1997 were lower
than the historical occupancies due to the significant number of expansion
units added during the year and the time required to fill the expansion units.
For the First Three Quarters of 1998 and the 12 weeks ended September 12,
1997, average occupancy was approximately 92% and 91%, respectively, and the
average daily rate was $88 and $84, respectively. Occupancy and average daily
rates increased for the First Three Quarters in 1998 as compared to the 12
weeks ended September 12, 1997 as a result of the stabilization of expansion
units which were opened in 1997, increases in monthly rates in certain markets
and implementation of marketing campaigns.
The Company is an active owner of its senior living communities portfolio.
The Company focuses on maximizing profitability throughout the portfolio. The
Company's asset management department works closely with Marriott
International to identify and evaluate opportunities to increase profitability
by making selective investments where favorable incremental returns are
expected, including the expansion of certain properties, or implementing new
cost control programs. Aggregate completed renovation expenditures for the
Communities totalled approximately $3 million for the period from June 21,
1997 through January 2, 1998.
The following table sets forth certain information as of the date hereof,
relating to each of the Communities. The Company holds the fee interest in
each of the Communities, except as otherwise indicated. All of the properties
are operated by Marriott International.
<TABLE>
<CAPTION>
LOCATION UNITS
- -------- -----
<S> <C>
Arizona
The Forum at Desert Harbor(1).. 240
The Forum--Pueblo Norte........ 296
The Forum at Tucson(1)......... 327
California
The Remington Club I........... 205
The Remington Club II.......... 200
Delaware
Forwood Manor.................. 212
Foulk Manor North(1)........... 115
Foulk Manor South(1)........... 106
Millcroft(1)................... 198
Shipley Manor(1)............... 159
Florida
Coral Oaks..................... 254
The Forum at Deer Creek(1)..... 292
Fountainview................... 343
Park Summit(1)................. 281
Springwood Court............... 100
Tiffany House.................. 123
Indiana
The Forum at the Crossing...... 221
Kansas
The Forum at Overland Park(1).. 205
</TABLE>
<TABLE>
<CAPTION>
LOCATION UNITS
- -------- -----
<S> <C>
Kentucky
The Forum at Brookside(1)......... 324
The Lafayette at Country
Place(2)......................... 149
The Lexington at Country
Place(2)......................... 133
Massachusetts
Gables at Winchester.............. 124
New Jersey
Leisure Park(3)................... 418
New Mexico
The Montebello on Academy(1)...... 209
Ohio
The Forum at Knightsbridge(1)(2).. 316
South Carolina
Myrtle Beach Manor(1)............. 164
Texas
The Forum at Lincoln Heights(1)... 241
The Forum at Memorial Woods(1).... 431
The Montevista at Coronado(1)..... 251
The Forum at Park Lane(1)......... 318
The Forum at The Woodlands........ 304
-----
Total.......................... 7,259
=====
</TABLE>
- --------
(1) Property is encumbered by secured debt.
(2) The land on which the community is built is leased by the Company under a
long-term ground lease agreement.
(3) A subsidiary of Marriott International holds a 1% limited partnership
interest in this property.
In the first quarter of 1998, LTJ Senior Living Communities Corporation, a
wholly owned subsidiary of the Company, entered into conditional purchase
agreements for two communities located in Colorado with Summit Companies of
Denver, Colorado. After the anticipated completion of construction in the
first quarter of 1999, the Company may acquire these two communities located
in Denver and Colorado Springs, Colorado, for approximately $35 million, if
the communities achieve certain operating performance criteria. Both
communities will be managed by Marriott International under long-term
operating agreements.
71
<PAGE>
MARKETING
As of the date hereof, 114 of the 126 full-service hotels expected to be
leased by the Company are managed or franchised by Marriott International as
Marriott or Ritz-Carlton brand name hotels. All 71 of the subleased Courtyard
by Marriott and Residence Inn hotels and all 31 of the Communities are managed
by Marriott International. The Company believes that these Marriott
International-managed and franchised hotels 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 hotels. 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 brand name hotels.
In addition, software at Marriott's centralized reservations centers enables
agents to immediately identify the nearest Marriott or Ritz-Carlton brand
hotel with available rooms when a caller's first choice is fully occupied.
COMPETITION
Lodging. The United States lodging industry generally is comprised of two
broad segments: full-service hotels and limited-service hotels. Full-service
hotels generally offer restaurant and lounge facilities and meeting spaces, as
well as a wide range of services, typically including bell service and room
service. Limited-service hotels generally offer accommodations with limited or
no services and amenities. The lodging industry, in general, is highly
competitive, but the degree of competition varies from location to location
and over time. The hotels' success will be dependent, in large part, upon the
ability to compete in such areas as access, location, quality of
accommodations, room rates, structure, the quality and scope of food and
beverage facilities and other service amenities. The Company's leased 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.
Further, competing properties may be built or existing projects enhanced. The
lodging industry, including the hotels, also may be adversely affected in the
future by (i) national and regional economic conditions, (ii) changes in
travel patterns, (iii) taxes and government regulations which influence or
determine wages, prices, interest rates, construction procedures and costs,
(iv) the availability of credit and (v) other factors beyond the control of
the Company. Although the competitive position of each of the hotel properties
differs from market to market, the Company believes that its leased properties
will 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 the Company
competes:
<TABLE>
<CAPTION>
SEGMENT REPRESENTATIVE PARTICIPANTS
- ------- ---------------------------
<S> <C>
Luxury Full-Service..... Ritz-Carlton; Four Seasons
Upscale Full-Service.... Marriott Hotels, Resorts and Suites; Crowne Plaza; Doubletree; Hyatt;
Hilton; Radisson; Red Lion; Sheraton; Swissotel; Westin; Wyndham
Moderate-priced......... Courtyard by Marriott; Hampton Inn and Suites; Hilton Inn; Holiday Inn;
Ramada Inn; Sheraton Four Points; Wyndham Garden
Extended-stay........... Residence Inn; AmeriSuites; Hawthorne Suites; Homewood Suites;
Summerfield Suites
</TABLE>
Senior Living. The Company's senior living communities compete with
facilities of varying similarity in the respective geographical market areas
in which the Communities are located. Competing facilities are generally
operated on a regional and local basis by religious groups and other nonprofit
organizations, as well as
72
<PAGE>
by public and private operators. There are a limited number of operators on a
national basis. The independent living components of the Communities face
competition from various types of residential opportunities available to the
elderly. However, the number of communities that offer on-premises healthcare
services is limited. The assisted living and healthcare components of the
Communities compete with other assisted living and healthcare communities.
Significant competitive factors for attracting residents to the independent
living components of the Communities include price, physical appearance and
amenities and services offered. Additional competitive factors for attracting
residents to the assisted living and healthcare components of the Communities
include quality of care, reputation, physician and nursing services available
and family preferences. The Company believes that its senior living
communities rate high in each of these categories, except that its senior
living communities are generally more expensive than competing communities.
Some of the Company's present and potential competitors are significantly
larger and have, or may obtain, greater financial resources than the Company.
Consequently, there can be no assurance that the Company will not encounter
increased competition that could limit its ability to attract residents or
expand its senior living care business in the future. The Company believes
that many assisted living markets have become or are on the verge of becoming
over built. Approximately 20% of the Company's senior living units are
assisted living units. Overbuilding in the assisted living market could cause
the Company's assisted living units to experience decreased occupancy,
depressed margins and lower operating results.
RELATIONSHIP WITH HOST AFTER THE DISTRIBUTION
For the purposes of governing certain of the ongoing relationships between
the Company and Host after the Distribution and to provide mechanisms for an
orderly transition, the Company and Host will enter into various agreements,
in addition to the Hotel Leases as described below. The descriptions of such
agreements are qualified in their entirety by reference to the agreements, the
forms of which (other than the Distribution Agreement and the Corporate
Transitional Services Agreement) are included as exhibits to the Registration
Statement of which this Prospectus is a part.
Distribution Agreement. Prior to the Distribution Date, the Company and Host
will enter into a distribution agreement (the "Distribution Agreement"), which
will provide for, among other things, (i) the Distribution; (ii) the division
between the Company and Host of certain assets and liabilities; (iii) the
contribution to the Company of Host's 3% general partnership interest in
Boynton Beach Limited Partnership, which owns a Community located in Boynton
Beach, Florida; (iv) the transfer to the Company of the 25% interest in
Swissotel Management (USA) L.L.C., the management company to be acquired in
the Blackstone Acquisition; (v) the return to the Company of those shares of
the Common Stock held for delivery to the Blackstone Entities in the
Blackstone Acquisition if that transaction does not occur, subject, however,
to the right of Host to cause the Company to sell such 18% of the Common Stock
of the Company to the Blackstone Entities at fair market value if the
Distribution is made prior to January 1, 1999 and the Blackstone Acquisition
is consummated at a later date; and (vi) certain other agreements governing
the relationship between the Company and Host following the Distribution. The
Company also will grant Host REIT a contingent right for a period of ten years
to purchase the Company's interest in Swissotel Management (USA) L.L.C. at
fair market value in the event the tax laws are changed so that Host REIT
could own such interest without jeopardizing its status as a REIT.
Subject to certain exceptions, the Distribution Agreement will also provide
for, among other things, the assumption of liabilities and cross-indemnities
designed to allocate to the Company, effective as of the Distribution Date,
financial responsibilities for liabilities arising out of, or in connection
with, the business of the Communities.
Tax Sharing Agreement. The Company and Host will enter into a tax sharing
agreement which will define each party's rights and obligations with respect
to deficiencies and refunds of federal, state and other income or
73
<PAGE>
franchise taxes relating to the Company's business for taxable years prior to
the Distribution and with respect to certain tax attributes of the Company
after the Distribution. Generally, Host will be responsible for filing
consolidated returns and paying taxes for periods through the date of the
Distribution, and the Company will be responsible for filing returns and
paying taxes for subsequent periods.
Asset Management Agreements. The Company will enter into two asset
management agreements (the "Asset Management Agreements"), one with Host REIT
and one with a non-controlled subsidiary, pursuant to which the Company will
agree to provide review and advice on the management and operation of the
hotels. Generally, the Company will provide the following consulting services:
(i) review of operating and financial results (including site visits) and meet
with Host or the non-controlled subsidiary, as applicable, at least quarterly,
to review such results of the hotels; (ii) review of financial statements and
budgets, including periodic accounting statements, annual operating budgets,
FF&E budgets and management analysis reports; (iii) review of revenue and
capital spending projections; (iv) administration of approvals relating to the
operation of the Hotel required under any related loan documents; (v) advice
relating to any changes to the hotel management agreements; (vi) review of
market conditions and competition for each of the hotels; (vii) monitoring and
negotiating with governmental agencies in connection with any condemnation
proceedings against the hotels; and (viii) monitoring and negotiating with
insurance companies and contractors following a casualty at a hotel. The
Company 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 will
be allocated between Host REIT and the non-controlled subsidiary. The Asset
Management Agreements will have a term of two years with an automatic one year
renewal, unless earlier terminated by either party in accordance with the
terms thereof.
Corporate Transitional Services Agreement. The Company and Host will, prior
to the Distribution Date, enter into a transitional services agreement,
pursuant to which the Company and Host will provide certain limited services
to each other for a fee. Among other things, Host will provide centralized
administrative and computer systems services to the Company. Such services
will be provided, as needed, at cost (including a reasonable overhead
allocation) on a time and materials basis. The charges associated with such
services are not expected to be material.
Host REIT Non-Competition Agreement. The Company and Host REIT will enter
into a non-competition agreement that limits the respective parties' future
business opportunities. See "Business and Properties--Non-Competition
Agreements."
Employee Benefits and Other Employment Matters Allocation Agreement. As part
of the REIT Conversion, the Company, Host and Host Marriott, L.P. expect to
enter into an employee benefits agreement which will govern the allocation of
responsibilities relating to various compensation, benefits and labor matters.
See "Management--Employee Benefit Plans."
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
Marriott International will serve as the manager for substantially all of
the full-service and limited-service hotels to be leased and subleased by the
Company. In addition, Marriott International is the manager for all 31
Communities. The Company will be bound by certain non-competition agreements
with Marriott International whereby the Company's business opportunities will
be restricted. See "Business and Properties--Non-Competition Agreements" and
"--Description of Other Agreements for the Communities."
DESCRIPTION OF THE HOTEL LEASES FOR FULL-SERVICE HOTELS MANAGED BY MARRIOTT
INTERNATIONAL
In order for Host REIT to qualify as a REIT, Host REIT may not operate the
hotels or related properties. Accordingly, subsidiaries of Host REIT (the
"Host REIT Lessor") will lease substantially all of the full-service hotels
owned by Host REIT to subsidiaries of the Company. The following summary of
the principal terms of the full-service Hotel Leases between subsidiaries of
the Company and subsidiaries of Host REIT and the related guaranty and pooling
agreements are qualified in their entirety by reference to the full-service
Hotel Leases and such other agreements, the forms of which are included as
exhibits to the Registration Statement of which this
74
<PAGE>
Prospectus is a part. All references herein to Host REIT or its subsidiaries,
as Lessor, shall be deemed to refer to Host in the event the Merger of Host
with and into Host REIT for any reason is not consummated.
Lessees. There generally will be a separate lessee, which will be an
indirect subsidiary of the Company (the "Lessee"), for each hotel or group of
hotels that is owned by a separate subsidiary of Host REIT. Each Lessee will
be a Delaware limited liability company, whose purpose will be limited to
acting as lessee under the applicable Hotel Lease(s). For those hotels where
it is the manager, Marriott International or a subsidiary will have a
noneconomic membership interest in the Lessee entitling it to certain voting
rights but no economic rights. The operating agreements for such Lessees will
provide that the Company member of the Lessee will have full control over the
management of the business of the Lessee, except with respect to certain
decisions which will require the consent of both members. These decisions are:
(i) dissolving, liquidating, consolidating, merging, selling or leasing all or
substantially all of the assets of the Lessee; (ii) engaging in any other
business or acquiring any assets or incurring any liabilities not reasonably
related to the conduct of the Lessee's business; (iii) instituting voluntary
bankruptcy or similar proceedings or consenting to involuntary bankruptcy or
similar proceedings; (iv) 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;
(v) challenging the status or rights of the manager or the enforceability of
the membership rights; or (vi) 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.
Full-Service Hotel Lease Terms. Each full-service Hotel Lease will have a
fixed term generally ranging from seven to ten years (depending upon the Hotel
Lease), subject to earlier termination upon the occurrence of certain
contingencies described in the Hotel Leases (including, particularly, the
provisions described herein under "--Damage or Destruction," "--Termination of
the Hotel Leases upon Disposition of Full-Service Hotels" and "--Termination
of the Hotel Leases upon Changes in Tax Laws").
Minimum Rent; Percentage Rent; Additional Charges. Each Hotel Lease will
require the Lessee to pay (i) Minimum Rent (as defined below) in a fixed
dollar amount per annum plus (ii) 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"
will be a fixed dollar amount specified in each Hotel 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 Host REIT
lessor under the Hotel Leases are deemed to be "Additional Charges." The
amount of Minimum Rent and the Percentage Rent thresholds will be adjusted
each year (the "Annual Adjustment") based upon any increases in the CPI and
the Employment Cost Index during the previous 12 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" shall
mean the fiscal year used by the hotel manager. Payments of Rent (defined
herein) will be made within two business days after the required payment date
under the management agreement for each Accounting Period. "Accounting Period"
shall mean for those hotels where Marriott International is the manager, any
of the thirteen four-week accounting periods which are used in the hotel
manager's accounting system. Rent payable for each Accounting Period will be
the sum of (i) the excess (if any) of (x) the greater of cumulative Minimum
Rent year-to-date due and payable or cumulative Percentage Rent due and
payable year-to-date over (y) the total amount of Minimum Rent and Percentage
Rent actually paid year-to-date plus (ii) any Additional Charges due ("Rent").
If the total amount of Minimum Rent and Percentage Rent actually paid year-to-
date, as of any rent payment date, is greater than both cumulative Minimum
Rent due and payable year-to-date and cumulative Percentage Rent due and
payable year-to-date, then the Host REIT Lessor will remit the difference to
the Lessee.
The full-service Hotel Leases will generally provide for a Rent adjustment
in the event of damage, destruction, partial taking, certain capital
expenditures or an FF&E Adjustment.
75
<PAGE>
Lessee Expenses. Each Lessee will be 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 hotels. The Lessee
also will be 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
Hotel Lease. The Lessee will not be obligated to bear the cost of any capital
improvements or capital repairs to the hotels or the other expenses borne by
the Host REIT Lessor, as described below.
Host REIT Lessor Expenses. The Host REIT Lessor will be responsible for the
following expenses: real estate taxes, personal property taxes (to the extent
the Host REIT 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 Host REIT Lessor will be required for any capital
expenditures funded by the Lessee (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.
Security. The obligations of the Lessee will be 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 Host REIT Lessor will sell the existing working
capital (including Inventory and fixed asset supplies (which principally
consist of linen and similar items) and net receivables due from the manager,
net of accounts payable and accrued expenses) to the applicable Lessee upon
the commencement of the Hotel Lease at a price equal to the fair market value
of such assets (which shall be deemed to be book value after taking into
account depreciation). The purchase price will be 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 Hotel
Lease. Interest accrued on the working capital loan will be 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 Hotel Lease. At
the termination or expiration of the Hotel Lease, the Lessee will sell to the
Host REIT Lessor the then existing working capital at a price equal to the
value of such assets at that time (which shall be deemed to be book value
after taking into account depreciation). The Host REIT Lessor will pay the
purchase price of the working capital by offsetting against the outstanding
principal balance of the working capital loan. To the extent that the value of
the working capital delivered to the Host REIT Lessor exceeds or is less than
the value of the working capital delivered by the Host REIT Lessor to the
Lessee at the commencement of the Hotel Lease, the Host REIT Lessor or the
Lessee, as appropriate, shall pay to the other party an amount equal to the
difference in cash.
Termination of the Hotel Leases upon Disposition of Full-Service Hotels. In
the event the applicable Host REIT Lessor enters into an agreement to sell or
otherwise transfer any full-service hotel free and clear of the applicable
Hotel Lease, the Host REIT 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 Hotel Lease using a discount rate of 12%. Alternatively, the Host
REIT Lessor will be entitled to (i) substitute a comparable hotel or hotels
(in terms of economics and quality for the Host REIT Lessor and the Lessee as
agreed to by the Lessee) for any hotel that is sold or (ii) sell the hotel
subject to the Hotel 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 Host REIT Lessor's obligations under the Hotel Lease, or is or
controls or is controlled by a person convicted of a felony involving moral
turpitude), without being required to pay a termination fee. Pursuant to the
Hotel Lease, the Host REIT Lessor and the Lessee will each have the right to
terminate the Lease without being required to pay any fee or other
compensation as a result of such termination, provided that the termination
rights of both the Host REIT Lessor and the Lessee may only be exercised if
the Host REIT Lessor and the Lessees under 12 of the other Hotel Leases have
not already exercised their respective
76
<PAGE>
rights to terminate, and the Host REIT Lessor will only be permitted to
exercise such right in connection with a sale of a hotel to an unrelated third
party or the transfer of a hotel to a joint venture in which Host Marriott,
L.P. does not have a two-thirds or greater interest.
Termination of the Hotel Leases upon Changes in Tax Laws. In the event that
changes in the federal income tax laws allow the Host REIT Lessors, or
subsidiaries or affiliates of the Host REIT Lessors, to directly operate the
hotels without jeopardizing Host REIT's status as a REIT, the Host REIT
Lessors will have the right to terminate all, but not less than all, of the
full-service Hotel Leases (excluding Hotel Leases for hotels that must
continue to be leased following the tax law change) 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 provided above under "-- Termination of
the Hotel Leases upon Disposition of Full-Service Hotels." The payment will be
payable in cash or, subject to certain conditions, shares of Host REIT common
stock, at the election of Host REIT and the Host REIT Lessor. Host has been
pursuing the enactment of such legislation for more than one year, but there
is no such bill pending in Congress, and there can be no prediction as to
whether such legislation would be enacted in the future.
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 Host
REIT Lessor), the Hotel Lease of such hotel shall automatically terminate and
the insurance proceeds shall be retained by the Host REIT Lessor, except to
the extent of any personal property owned by the Lessee and proceeds from
business interruption insurance. In this event, no termination fee shall 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 Host REIT Lessor), the
Lessee, subject to the Host REIT Lessor agreeing to release the insurance
proceeds and to fund any shortfall in the insurance proceeds, shall apply the
insurance proceeds to restore the hotel to its preexisting condition. The Host
REIT Lessor shall fund any shortfall in insurance proceeds less than or equal
to 5% of the estimated cost of repair. The Host REIT Lessor may fund, in its
sole discretion, any shortfall in insurance proceeds greater than 5% of the
estimated cost of the repair, provided that if the Host REIT Lessor elects not
to fund such shortfall, the Lessee may terminate the Hotel Lease and the Host
REIT Lessor shall pay to the Lessee a termination fee equal to the Lessee's
operating profit for the immediately preceding Fiscal Year.
Events of Default. Except as otherwise provided below, and subject to the
notice and, in some cases, cure periods in the Hotel Lease, the Hotel Lease
may be terminated without penalty by the applicable Host REIT Lessor and
various other remedies may be exercised 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 Hotel Lease
(other than the failure to pay Rent) for 30 days after notice from the
Host REIT Lessor, including failure to properly maintain the hotel
(other than by reason of the failure of the Host REIT Lessor to perform
its obligations under the Hotel 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 the Company for three consecutive Accounting Periods to
maintain (i) a minimum net worth at least equal to the maximum liability
under the guaranty agreements from time to time (less amounts held in
cash collateral accounts), and (ii) debt service coverage ratio of at
least 1.4 to 1.0;
. Filing of any petition for relief, bankruptcy or liquidation by or
against the Lessee or any parent company of 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;
77
<PAGE>
. A change in control of the Company, the Lessee or any subsidiary of the
Company that is a direct or indirect parent of the Lessee (provided,
however, that if 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 a person) or a party who would jeopardize Host
REIT's qualification as a REIT, the Host REIT Lessor must pay a
termination fee equal to the Lessee's operating profit from the hotel
for the immediately preceding Fiscal Year if the lease is terminated
following such a change in control);
. Default in payment or performance of certain covenants (after applicable
cure periods) under any other Hotel Lease in the same "pool" of hotels
as described below; or
. The Lessee, the Company or the Lessee's Pool Parent (as defined herein)
defaults under the assignment of the management agreement, the
guarantees described below, the non-competition agreement described
below or certain other related agreements between the parties or their
affiliates.
Assignment of the Hotel Lease. A Lessee will be permitted to assign its
interest under its Hotel Lease, without the consent of the Host REIT Lessor,
to any wholly owned and controlled single-purpose subsidiary of the Company,
provided that the Company continues to meet the minimum net worth test and all
other requirements of the Hotel Lease. Transfers to other parties will be
permitted if approved by the Host REIT Lessor.
Subordination to Qualifying Mortgage Debt. The rights of each Lessee will be
expressly subordinate to qualifying mortgage debt (which totaled approximately
$2.9 billion on a pro forma basis at September 11, 1998 assuming all
Partnerships participate and the Blackstone Acquisition is consummated) and
any refinancing thereof. A default under the loan documents may result in the
termination of the Hotel Lease by the lender. The lender will not be required
to provide a non-disturbance agreement to the Lessee.
The Host REIT Lessor will be obligated to compensate the Lessee, on a basis
equal to the lease termination provision described in "Termination of the
Hotel Leases upon Disposition of Full-Service Hotels" above, if the full-
service Hotel 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 Host REIT
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
Hotel Lease after a twelve-month cure period and the Host REIT Lessor will owe
a termination fee as provided above. During any period of time that a cash
flow sweep structure (or other similar cash management procedure) is in
effect, the Host REIT Lessor will compensate the Lessee for any lost revenue
resulting from such cash flow sweep. Host Marriott, L.P. will guarantee these
obligations.
Personal Property Limitation. If a Host REIT Lessor reasonably anticipates
that the average tax basis of the items of the Host REIT 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 Hotel Lease, the following procedures will apply,
subject to obtaining lender consent where required:
. The Host REIT Lessor will acquire any replacement FF&E that would cause
the applicable limits to be exceeded (the "Excess FF&E"), and
immediately thereafter the Lessee would be obligated either to acquire
such Excess FF&E from the Host REIT 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 Host REIT 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
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 Lessee.
. The annual Rent under the applicable Hotel Lease would be reduced in
accordance with a formula based on market recovery rates.
78
<PAGE>
Certain Actions under the Hotel Leases. The full-service Hotel Leases
prohibit the Lessee from taking the following actions with respect to the
management agreement without notice to the Host REIT Lessor and, if the action
would have a material adverse effect on the Host REIT Lessor, the consent of
the Host REIT Lessor: (i) terminate the management agreement prior to the
expiration of the term thereof; (ii) amend, modify or assign the management
agreement; (iii) waive (or fail to enforce) any right of the "owner" under the
management agreement; (iv) waive any breach or default by the manager under
the management agreement (or fail to enforce any right of the "owner" in
connection therewith); (v) agree to any change in the manager or consent to
any assignment by the manager; or (vi) take any other action which reasonably
could be expected to materially adversely affect the Host REIT Lessor's rights
or obligations under the management agreement for periods following the
termination of the Hotel Lease (whether upon the expiration of its term or
upon earlier termination as provided for therein).
Change in Manager. A Lessee will be permitted to change the manager or the
brand affiliation of a hotel only with the approval of the applicable Host
REIT Lessor, which approval may not be unreasonably withheld. The 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 Hotel Lease without the consent of the Host REIT Lessor, which
consent may be withheld in the Host REIT Lessor's sole discretion.
Company Guaranty and Related Pooling Agreements. The Company and certain of
its subsidiaries will enter into guarantees of the Hotel Lease obligations of
each Lessee. For each of four identified "pools" of hotels (determined on the
basis of the term of the particular Hotel Lease, with all leases having
generally the same lease term placed in the same "pool"), the cumulative limit
of the Company's guaranty obligation will be the greater of 10% of the
aggregate Rent payable for the immediately preceding Fiscal Year under all
Hotel Leases in the pool or 10% of the aggregate Rent payable under all Hotel
Leases in the pool for 1999 (with an agreed estimate of the 1999 Rent serving
as the limit during 1999). For each pool, the subsidiary of the Company that
is the parent of the Lessees in the pool (a "Pool Parent") also will be a
party to the guaranty of the Hotel Lease obligations for that pool. The
obligations of the Pool Parent will not be limited in this manner.
The obligations of the Pool Parent under each guaranty will be secured by
all funds received by the applicable Pool Parent from the Lessees in the pool,
and the Lessees in the pool will be required to distribute their excess cash
flow to the Pool Parent for each Accounting Period, in certain events. These
events include a decline in Crestline's tangible net worth or consolidated
debt coverage ratio below specified levels, a payment default and certain
other defaults under any Hotel Lease in the same pool or any other full-
service Hotel Lease with respect to which a guaranty by the Company is in
effect, a default under the lien or debt covenants under any Hotel Leases in
the same pool, or a reduction in the Company's obligation under a pool
guaranty to zero. Funds received from the Lessees will be deposited in a cash
collateral account and applied, to the extent of available funds, to pay any
shortfalls in payment of Rent under any Hotel Lease in the pool. If certain
conditions are satisfied, any remaining funds will then be released to the
Pool Parent. Otherwise, the remaining funds will be applied to make a payment
to the Pool Parent in a specified amount for overhead expenses and to maintain
a reserve equal to the amount of the Company's liability under the applicable
guaranty (subject to a specified minimum amount), and, if certain conditions
are satisfied, any remaining funds will be released to the Pool Parent.
In the event that the Company'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 Host Marriott, L.P. In
that event, subject to certain conditions, the Pool Parent's guaranty and the
pooling agreement for that pool will terminate six months after the effective
date of such notice, subject to reinstatement in certain limited
circumstances. At any time after such notice, Host REIT will be entitled to
terminate the Hotel Leases in such pool without penalty. Following termination
of the Pool Parent's guaranty, the Host REIT Lessors in the applicable pool
will have the right to terminate the Hotel Leases in the pool without payment
of a termination fee, so long as the Hotel Leases are terminated within a year
and all Hotel Leases in the pool are terminated.
79
<PAGE>
DESCRIPTION OF THE SUBLEASES FOR LIMITED-SERVICE HOTELS MANAGED BY MARRIOTT
INTERNATIONAL
Subsidiaries of HPT (the "HPT Lessors") own 71 limited-service hotels under
the "Residence Inn" and "Courtyard by Marriott" brands (the "HPT Hotels") that
they lease to subsidiaries of Host (the "HPT Lessees"). The HPT Hotels are
subject to substantially similar leases (the "HPT Leases"). In connection with
the REIT Conversion, the applicable Host subsidiary will sublease its leased
HPT Hotel (the "Subleases") to a subsidiary of the Company subject to the
terms of the applicable HPT Lease. The descriptions of the Subleases and the
HPT Leases set forth below are qualified in their entirety by reference to the
agreements, copies of the form of which are included as exhibits to the
Registration Statement of which this Prospectus is a part.
The Sublessees. There generally will be a separate sublessee, which will be
an indirect subsidiary of the Company (the "Sublessee"), for each hotel or
group of hotels that is owned by a separate subsidiary of HPT. Each Sublessee
will be a Delaware limited liability company, whose purpose will be limited to
acting as sublessee under the applicable sublease(s). Marriott International
or a subsidiary will have a noneconomic membership interest in the Sublessee
entitling it to certain voting rights but no economic rights. The operating
agreements for such Sublessees will provide that the Company member of the
Sublessee will have full control over the management of the business of the
Sublessee, except with respect to certain decisions for which the consent of
both members will be required. These decisions are: (i) dissolving,
liquidating, consolidating, merging, selling, or leasing all or substantially
all of the assets of the Sublessee; (ii) engaging in any other business or
acquiring any assets or incurring any liabilities not reasonably related to
the conduct of the Sublessee's business or (iii) instituting voluntary
bankruptcy or similar proceedings or consenting to involuntary bankruptcy or
similar proceedings. Upon any termination of the applicable management
agreement, these special voting rights of Marriott International (or its
subsidiary) will cease.
Sublease Terms. The term of each Sublease will expire simultaneously with
the expiration of the initial term of the HPT Lease to which it relates. Each
Sublease provides that generally all of the terms of the HPT Lease will apply
to the HPT Lessees and the Sublessees as if they were, respectively, lessor
and lessee under the HPT Lease. Sublessees will not, however, be required to
provide a security deposit, will not have the right to assign or sublet except
to certain affiliates of the Sublessees and concessionaires and will be liable
for only one-third of the cost of any environmental remediation.
The term of each Sublease will automatically be renewed 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 shall
consist of the Minimum Rent payable under the HPT Lease and percentage rent
payable to the Sublessor, which percentage rent shall be sufficient to cover
the Additional Rent due under the HPT Lease, with any excess being retained by
the Sublessor. The rent payable under the Subleases shall be guaranteed by the
Company, up to a maximum amount of $5,000,000, which amount will be allocated
between the two pools of HPT Hotels. In the event that changes in the federal
income tax laws allow the Sublessors, or subsidiaries or affiliates of the
Sublessors, to directly operate the hotels without jeopardizing Host REIT's
status as a REIT, the Sublessors will have the right to terminate all, but not
less than all, of the Subleases in a particular hotel pool (excluding
Subleases for any hotels not covered by any such tax law change) upon payment
of a termination fee to the Sublessees equal to the fair market value of the
Sublessees' leasehold interests in the remaining term of the Subleases using a
discount rate of 5%. Each Sublessor shall also have the right to terminate the
HPT Sublease upon a default by the Sublessee and the expiration of all
applicable grace or cure periods, in which event no termination fee shall be
payable; provided, however, that, in such event, if the Sublessor fails to
terminate the Sublease within twelve months and so long as the Company has
fully performed under its guarantees with respect to such Subleases, the
Sublessor shall pay to the Sublessee a termination fee equal to fair market
value of the Sublessee's leasehold interest in the remaining term of the
Sublease using a discount rate of 5%.
80
<PAGE>
HPT Lease Terms. The initial terms of the HPT Leases expire within seven to
12 years. The HPT Leases will be automatically extended subject to certain
conditions. The HPT Lessee may not elect to renew less than all of the HPT
Leases for the Residence Inn properties or the Courtyard by Marriott
properties.
Minimum Rent; Additional Rent; Additional Charges. Each HPT Lease requires
the HPT Lessee to pay (i) Minimum Rent (as defined below) in a fixed dollar
amount per annum plus (ii) Additional Rent based upon a specified percentage
of collective gross revenues from the HPT Hotels to the extent they exceed the
gross revenues for a specified fiscal year. "Minimum Rent" will be a fixed
dollar amount specified in each HPT Lease less the cost of any repairs,
maintenance, renovations or replacements of the hotel or the personal
property. Minimum Rent payments are due in advance on the first business day
of each Accounting Period. "Accounting Period" means each of the 13 four-week
accounting periods which are used in the hotel manager's accounting system.
Additional Rent payments are calculated quarterly for each fiscal year or
portion thereof and are paid quarterly in arrears on the same date as the
Minimum Rent for the next Accounting Period. A final adjustment of the
Additional Rent for each fiscal year will be made after financial statements
are available. The amount of Additional Rent due on any payment date will not
be less than zero.
In addition to the Minimum Rent and Additional Rent, the HPT Lessee is
required to pay Impositions, utility charges, insurance premiums and all
amounts payable under the HPT management agreements, equipment leases and
agreements to indemnify the HPT Lessor. "Impositions" means, collectively, all
taxes, assessments, water, sewer or other rents and charges, excises, tax
levies, fees and all other governmental charges levied in respect of the HPT
Hotels and the business conducted by the HPT Lessee in connection therewith.
HPT Lessee Expenses. The HPT Lessee is responsible for all repairs and
replacements to the HPT Hotels and the personal property, except in limited
circumstances where damage to the property exceeds insurance proceeds
received.
HPT Lessor Expenses. In the event that the HPT management agreement or the
HPT Leases require that funds be disbursed for repairs, maintenance,
renovations or replacements at or to the HPT Hotels, and the FF&E Reserve is
insufficient to handle such disbursements, the HPT Lessor is required to
disburse such required funds to the HPT Lessee or the manager, as the case may
be. The consent of the HPT Lessor is required for all capital expenditures
(except in an emergency) and for amendment, termination or assignment of the
HPT management agreement.
Security. The obligations of the HPT Lessee are secured by a pledge of all
personal property (except motor vehicles) and all records of the HPT Lessee
related to the operation of the HPT Hotels and all proceeds therefrom.
Damage or Destruction. If an HPT Hotel is partially or totally destroyed,
and is no longer suitable for use as a hotel (as determined in good faith by
the HPT Lessee or the manager), either the HPT Lessee or the HPT Lessor may
terminate the HPT Lease and the HPT Lessor shall be entitled to retain the
insurance proceeds, except to the extent of any personal property owned by the
HPT Lessee. If an HPT Hotel is partially destroyed but is still suitable for
use as a hotel (as determined in good faith by the HPT Lessee or the manager),
the HPT Lessee shall promptly restore the HPT Hotel using the insurance
proceeds. If there is a shortfall in the amount of insurance proceeds, the HPT
Lessee shall decide in its sole discretion whether it will assume the amount
of the deficiency. If the HPT Lessee elects not to assume the deficiency, the
HPT Lessor in its sole discretion may elect to cover the shortfall. If neither
the HPT Lessee nor the HPT Lessor elects to assume the deficiency required for
restoration of the HPT Hotel, either party may terminate the HPT Lease.
Events of Default. Subject to notice and some cure periods in the HPT Lease,
the HPT Lease may be terminated without penalty by the HPT Lessor if, among
other things, any of the following Events of Default occur:
. Failure to pay rent or any other amount payable under the HPT Lease when
due and such failure shall continue for ten days after notice thereof;
81
<PAGE>
. Failure to observe or perform any term, covenant or agreement contained
in the HPT Lease and such failure shall continue for 30 days after
notice thereof;
. Any obligation in respect of Indebtedness for money borrowed or retained
funds of any material property or services shall be declared due and
payable prior to the stated maturity date thereof, or an event of
default shall occur and be continuing under any instrument evidencing or
securing the same;
. An event of default shall occur and be continuing under any other HPT
Lease;
. Filing of any petition for relief, bankruptcy or liquidation by the HPT
Lessee;
. Commencement by the HPT Lessee of any proceeding for its dissolution or
termination;
. Occurrence and continuation of an event of default under any mortgage
which is secured by the HPT Lessee's leasehold interest under the HPT
Lease; or
. An event of default by the HPT Lessee shall occur under the HPT
management agreement and continue beyond the expiration of any
applicable cure period.
Assignment of the HPT Lease. The HPT Lessee may not assign, mortgage,
pledge, hypothecate, encumber or otherwise transfer the HPT Lease or sublease
all or any part of the HPT Hotel without the HPT Lessor's prior written
consent.
Subordination to Mortgage Debt. The rights of the HPT Lessee are subject and
subordinate to mortgage debt.
Certain Actions Under the HPT Leases. Except as otherwise provided in the
HPT management agreement, the HPT Lease prohibits the HPT Lessee from agreeing
to the following without the prior written consent of the HPT Lessor: (i) any
change in the manager; (ii) any change in the HPT management agreement; (iii)
termination of the HPT management agreement; or (iv) assignment of the HPT
management agreement. Further, the HPT Lessee may not take any action, grant
any consent or, except as provided in the HPT management agreement, permit any
action under the HPT management agreement which might have a material adverse
affect on the HPT Lessor, without the HPT Lessor's prior written consent.
DESCRIPTION OF FF&E LEASES
With respect to certain of the full-service hotels which are leased by
Lessees, each Lessee will lease the Excess FF&E from an affiliate of Host REIT
(the "Initial FF&E Leases"). The Company currently anticipates that
approximately $180 million of Excess FF&E will be leased pursuant to the
Initial FF&E Leases as of January 1, 1999. The Excess FF&E to be leased under
the Initial FF&E Leases will be acquired by an affiliate of Host REIT (the
"FF&E Lessor"), which in turn will lease the Excess FF&E to the applicable
Lessee. The specific types of FF&E which will be leased will vary from hotel
to hotel. The following summary of the principal terms of the FF&E Leases
between subsidiaries of the Company and the FF&E Lessors is qualified in its
entirety by reference to the FF&E Lease, the form of which is included as an
exhibit to the Registration Statement of which this Prospectus is a part.
Term. The term of each Initial FF&E Lease will generally range from two to
four years depending on the estimated remaining useful life of the Excess FF&E
under such Initial FF&E Lease.
Rent. Rent will be paid in arrears in equal monthly payments at the end of
each Accounting Period and will be determined on the basis of the cost to the
FF&E Lessor of the Excess FF&E and the Market Leasing Factor.
End of Term Options. Provided no default under the applicable Initial FF&E
Lease exists, each Lessee will have the option at the end of the applicable
term to purchase the Excess FF&E for a price equal to its fair market value.
Provided no default under the applicable Initial FF&E Lease exists, each
Lessee will also have the option to renew the Initial FF&E Lease for
consecutive one year renewal terms at a fair market rental rate.
82
<PAGE>
Return Requirements. If Lessee does not exercise the purchase option or the
renewal option at the end of the term (or any renewal term), Lessee will pay
FF&E Lessor a return fee equal to one Accounting Period payment of rent, and
the Excess FF&E will be returned to a location within 2,000 miles of the hotel
at Lessee's cost and risk. All Excess FF&E will be returned in as good
condition as when delivered at the commencement of the Initial FF&E Lease,
ordinary wear and tear excepted.
Early Termination Right. Provided no default under the applicable Initial
FF&E Lease exists, each Lessee will have the option to terminate the Initial
FF&E Lease at any time and purchase the Excess FF&E by paying an amount equal
to the greater of the fair market value of the Excess FF&E or the stipulated
loss value (as set forth in such Initial FF&E Lease). Upon the exercise of
such early termination option, the FF&E Lessor will transfer the Excess FF&E
to Lessee on an "as is, where is" basis.
Damage or Destruction. In the event that any item of Excess FF&E shall
become lost, stolen, damaged or destroyed for any reason whatsoever, Lessee is
obligated to either (i) replace such equipment with like property having the
same value and operating capabilities and a useful life at least equal to the
replaced equipment or (ii) pay FF&E Lessor the stipulated loss value of such
equipment. Any insurance proceeds paid to FF&E Lessor on account of such loss,
theft, damage or destruction will be applied to reimburse Lessee for its
expenses related to such loss, theft, damage or destruction. Lessee is
responsible for maintaining casualty insurance on the Excess FF&E during the
lease term.
Events of Default. Subject to applicable notice and cure periods in the
Initial FF&E Lease, the Initial FF&E Lease provides the FF&E Lessor with the
right, among other things, to terminate the Initial FF&E Lease, repossess the
Excess FF&E and seek liquidated damages equal to the stipulated loss value of
the Excess FF&E if, among other things, any of the following Events of Default
occur:
. Failure to pay rent or any other amount payable under the Initial FF&E
Lease within ten days after the due date;
. Failure to maintain required insurance coverages;
. Failure to perform the other covenants of the Initial FF&E Lease;
. Filing of any petition for relief, bankruptcy or liquidation by or
against Lessee;
. Lessee causes or institutes any proceeding for its dissolution or
termination;
. An event of default shall occur under the Hotel Lease where the Excess
FF&E is located;
. An event of default shall occur under any lease to which Lessee is a
party or a guarantor which results in the exercise of possessory
remedies or legal proceedings by such lessor, provided that the
aggregate future payments under such lease exceed certain thresholds; or
. Acceleration of maturity of any indebtedness of Lessee with a principal
amount in excess of certain thresholds.
Assignment. Lessee will not have the right to assign the Initial FF&E Lease
or to sublease the Excess FF&E without the prior written consent of Lessor,
except that Lessee will have the right to assign its rights in the Initial
FF&E Lease without the consent of Lessor to (i) an assignee of Lessee's rights
in the Hotel Lease, (ii) in the event of the termination of the Hotel Lease a
new lessee or purchaser of the hotel, (iii) to Host REIT Lessor or (iv) to a
holder of qualifying mortgage debt upon a default under such debt, provided
that in the case of (i) or (ii), the assignee, lessee or purchaser meets the
financial suitability standards for assignment of the applicable management
agreement.
Subordination to Mortgage Debt. The rights of each Lessee under the Initial
FF&E Lease will be expressly subordinate to qualifying mortgage debt on the
applicable hotel and any refinancing thereof. A default under the mortgage
debt may result in a termination of the Initial FF&E Lease and a loss of
Lessee's right to possession of the Excess FF&E.
83
<PAGE>
DESCRIPTION OF THE HOTEL LEASES FOR HOTELS MANAGED BY OTHER MANAGEMENT
COMPANIES
Of 104 hotel properties currently owned by Host (excluding the Blackstone
hotels), 15 hotels (the "Non-MI Hotels") that are expected to be leased by the
Company are, and will continue to be, managed by the Non-MI Managers. See "--
Description of Other Hotel Management Agreements." Host REIT will lease these
hotels to the lessees, most of which will be indirect majority owned
subsidiaries of the Company. Generally, there will be a separate lessee for
each hotel or group of hotels that has a separate manager. The terms of these
leases will be substantially similar to the leases of hotels that are managed
by Marriott International. See "--Description of the Hotel Leases for Full-
Service Hotels Managed by Marriott International."
DESCRIPTION OF BLACKSTONE HOTEL LEASES
Subsidiaries of the Company, which will be wholly owned Delaware limited
liability companies formed to lease the hotels, will lease from Host REIT the
12 hotels to be contributed by the Blackstone Entities to Host REIT pursuant
to Host REIT's acquisition of these hotels from the Blackstone Entities (the
"Blackstone Hotels"). The Blackstone Hotels will continue to be managed by the
existing hotel management companies. See "--Description of Hotel Management
Agreements for Blackstone Hotels." Generally, there will be a separate lessee
and a separate lease (the "Blackstone Leases") for each hotel. The terms of
the Blackstone Leases will be substantially similar to leases of hotels
managed by Marriott International. See "--Description of the Hotel Leases for
Full-Service Hotels Managed by Marriott International." In addition, the
Company will acquire a 25% interest in Swissotel Management (USA) L.L.C.,
which operates five Swissotel hotels in the United States, subject to the
right of Host REIT to repurchase such interest under certain circumstances.
See "--Relationship with Host after the Distribution."
DESCRIPTION OF FRANCHISE AGREEMENTS WITH MARRIOTT INTERNATIONAL
As of September 11, 1998, 13 of the 15 Non-MI Hotels (excluding the
Blackstone hotels) expected to be leased by the Company are operated or
managed under franchise agreements between either the owner or the Non-MI
Manager and Marriott International. See "Business and Properties--Description
of Other Hotel Management Agreements." The franchise agreements permit Host
REIT and the Non-MI Managers to use the "Marriott" brand name, associated
trademarks, reservation systems and other related items (collectively, the
"Marriott Franchise") in connection with the operation of the hotels. The
remaining two hotels are managed by Non-MI Managers under "Holiday Inn" or
"Delta" brand names. The Company will assume the franchise agreements with
respect to the hotels it leases from Host REIT and will be the franchisee
during the term of the Hotel Leases.
Franchise and Other Fees. As consideration for the use of the Marriott
Franchise, Marriott International is paid franchise fees. Generally, Marriott
International receives a fixed non-refundable initial fee. In addition,
Marriott International has a right to receive franchise fees equal to (i) the
applicable percentage of gross room sales plus (ii) the applicable percentage
of gross food and beverage sales. The percentages used to calculate the
franchise fees vary, although they are generally 3% to 6% of the gross room
sales, and gross food and beverage sales, as the case may be. In addition to
franchise fees, Marriott International is entitled to receive monthly fees in
connection with advertising, promotional, sales and marketing, generally equal
to 1% of gross room sales for the previous month.
Marketing. The franchisee is responsible, at its own cost and expense, for
all local advertising, marketing, promotional and public relations programs
and activities for the hotel. All such advertising and promotional activities
are required to be in accordance with the Marriott standard and shall conform
to specifications as Marriott International may from time to time prescribe.
In addition, such advertising and marketing materials must be submitted to
Marriott International for prior approval.
As part of the Marriott Franchise, Marriott International makes available
specifications and/or all required application software for the Marriott
property system. The franchisee, at its own expense, purchases, installs, and
uses the Marriott property system hardware and software. As long as the
franchisee is in compliance with the franchise agreement, Marriott
International also makes available for use the Marriott Hotel Reservation
System.
84
<PAGE>
Financing of the Hotels. Under the franchise agreements, the franchisee is
not permitted to incur or replace any indebtedness which is secured by a lien
on the applicable hotel without the prior written consent of Marriott
International, which consent may not be unreasonably withheld. In some
instances, the franchisee may replace any indebtedness which is secured by a
lien on the applicable hotel without the prior written consent of Marriott
International, if (i) the franchisee provides written notice of such
indebtedness and the terms thereof to Marriott International, (ii) the terms
of such indebtedness are commercially reasonable, (iii) the maximum loan
amount will not exceed 75% of the appraised value of the hotel and (iv) the
debt coverage ratio is equal to or greater than 1.3.
Alteration, Renovation and Refurbishment of the Hotels. If the applicable
hotel requires significant renovations or refurbishment affecting the design,
character or appearance of the hotel, any such renovation or refurbishment
shall be subject to the prior written approval of Marriott International. Any
such renovation or refurbishment must be completed in accordance with the
Marriott International criteria.
FF&E Reserves. The franchisee is required to establish an escrow account
("FF&E Reserve") and fund it monthly in an amount generally equal to 3% to 5%
of gross revenue. The FF&E Reserve is be used to fund significant renovations
and other necessary replacement and renewals of FF&E. Under the Hotel Leases,
Host REIT will remain responsible for the FF&E Reserve.
Non-Competition. During the term of the franchise agreements, the franchisee
and its affiliates generally may not, without the prior written consent of
Marriott International, directly or indirectly own any interest in or in any
manner be connected or associated with any full-service hotel located within
five miles of the applicable hotel other than a hotel operated by Marriott
International or its affiliates. In addition, in the event of termination of
the franchise agreement due to a default by the franchisee, the franchisee and
its affiliates may not operate the applicable hotel as part of any first-class
hotel brand, including, but not limited to Hilton, Sheraton, Hyatt, Radisson
and Westin, for a period of 24 months after the date the franchise agreement
is terminated.
Events of Default. The franchisee is deemed to be in default under the
franchise agreement upon occurrence of one or more of the following events:
(i) the franchisee becomes insolvent or makes a general assignment for the
benefit of creditors; (ii) the franchisee files a voluntary petition in
bankruptcy or insolvency or a petition for reorganization under any bankruptcy
law; (iii) the franchisee consents to an involuntary petition in bankruptcy
filed against it or an order approving an involuntary petition in a bankruptcy
filed against the franchisee shall remain unvacated 90 days after the date of
entry thereof; (iv) a court enters an order or judgment adjudicating the
franchisee as bankrupt; (v) proceedings for a compromise with creditors is
instituted and not vacated within 90 days after being instituted; (vi)
execution is levied against the hotel or any real or personal property
comprising the hotel; or (vii) a suit to foreclose any lien or mortgage
against the hotel or any real or personal property which is a part of the
hotel is initiated and not vacated within 60 days.
In addition, the franchisee is deemed in default of the franchise agreement
if: (i) immediate closing of the hotel is deemed necessary by Marriott
International to avoid substantial liability arising out of dangerous or
unsafe condition of the property; (ii) the franchisee or any owner or officers
of the franchisee is convicted of a felony or other crime or offense; (iii)
the franchisee divulges any confidential information in violation of the
franchise agreement; (iv) the hotel is no longer operated by the franchisee as
a "Marriott" brand hotel; (v) the franchisee purports to transfer any rights
or obligations arising out of the franchise agreement without complying with
the terms therein; (vi) the franchisee fails to repair and maintain the
premises, or fails to replace FF&E, as required; or (vii) the franchisee fails
to perform in accordance with any of the provisions of the franchise
agreement.
Restrictions on Sales and Other Transfers of Interests in Hotels. Each
franchise agreement generally prohibits any sale, assignment, encumbrance or
other transfer of interest of such franchise agreement or in the applicable
hotel (including a change in control of the franchisee) without Marriott
International's consent, except in accordance with the terms of such franchise
agreement. Each franchise agreement then provides that, in the
85
<PAGE>
event that the franchisee has received an offer to purchase or lease the
applicable hotel or to purchase a controlling interest in the franchisee from
an entity that is not a competitor of Marriott International, then Marriott
International may elect to (i) consent to such proposed transaction or (ii)
refuse to consent to such proposed transaction (which refusal may be made by
Marriott International only if the proposed transferee is not financially
capable or otherwise fails to fulfill certain criteria set forth in the
franchise agreement). However, in the event that the franchisee has received
an offer to purchase or lease the applicable hotel or to purchase or merge
with the franchisee or an affiliate of the franchisee from an entity that is a
competitor of Marriott International, then Marriott International may elect to
(i) purchase or lease the applicable hotel on the terms of the proposed
transaction, if such proposed transaction is a sale or lease of the hotel, or
purchase the hotel at its fair market value, if such proposed transaction is a
merger or purchase of all or a portion of the stock or assets of the
franchisee or an affiliate of the franchisee or (ii) terminate the franchise
agreement, in which event the franchisee would be obligated to pay certain
liquidated damages to Marriott International.
DESCRIPTION OF MARRIOTT INTERNATIONAL HOTEL MANAGEMENT AGREEMENTS FOR FULL-
SERVICE HOTELS
Marriott International or its subsidiaries serve as the managers for 88 of
Host's 104 hotels (excluding the Blackstone hotels) which are expected to be
leased to the Lessees. In addition, for 13 of 15 hotels which are managed by
managers other than Marriott International, Host has the right to use the
"Marriott" brand name through franchise agreements with Marriott International
or its subsidiaries. Marriott International and its subsidiaries also provide
various other services to the Company and Host and its affiliates. The hotel
management agreements applicable to each hotel will be assigned to the
applicable Lessee for the term of the Hotel Lease of such hotel. The
description of the management agreements set forth below is qualified in its
entirety by reference to such agreements, a copy of the form of which is
included as an exhibit to the Registration Statement of which the Prospectus
is a part.
Assignment of Management Agreements. The Lessee will be obligated to perform
all of the obligations of the Host REIT Lessor under the hotel management
agreement during the term of its Hotel Lease including payment of fees due
under the management agreement, other than certain retained obligations
including, without limitation, payment of property taxes, property casualty
insurance and ground lease rent, maintaining a reserve fund for FF&E
replacements, and capital expenditures, for which the Host REIT Lessor will
retain responsibility. Although the Lessee will assume certain obligations of
the Host REIT Lessor under the hotel management agreement, the Host REIT
Lessor will not be released from its obligations and, if the Lessee fails to
perform any such obligations, the manager will be entitled to seek performance
by or damages from the Host REIT Lessor. If the Hotel 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 (i) has
sufficient financial resources and liquidity to fill the obligations under the
Management Agreement, (ii) is not in control of or controlled by persons who
have been convicted of felonies, (iii) 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 (iv) must be a single purpose entity in which Marriott International has a
noneconomic membership interest with the same rights as it has in Lessee.
Other provisions of the management agreements for the full-service hotels to
be leased by the Company from Host REIT include the following:
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 will receive 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.
86
<PAGE>
Executive Supervision and Management Services. The managers generally
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 will
provide a national reservations system.
Chain Services. The hotel management agreements require the manager to
furnish certain services that are furnished generally on a central or regional
basis to hotels in the Marriott hotel system. Such services include the
following: (i) the development and operation of computer systems and
reservation services, (ii) regional management and administrative services,
regional marketing and sales services, regional training services, manpower
development and relocation costs of regional personnel and (iii) 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 will be required to reimburse the manager for its allocable
share of such costs and expenses.
Working Capital and Fixed Asset Supplies. The Lessee will be 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 will also be 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.
Use of Affiliates. The manager employs the services of its affiliates to
provide certain services under the hotel 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 hotel 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 ("FF&E Replacements") and an estimate of the funds necessary
therefor. Under the terms of the Hotel Leases, the Host REIT Lessor is
required to provide to the Lessee, all necessary FF&E for the operation of the
hotels (including funding any required FF&E Replacements). Under each full-
service Hotel Lease, Host REIT will be responsible for the costs of FF&E
Replacements and for decisions with respect thereto (subject to its
obligations to the Lessee under the Hotel Lease).
Building Alterations, Improvements and Renewals. The hotel 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 will be submitted to Host REIT 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 generally shall be paid from the FF&E Reserve Account; to the extent
that there are insufficient funds in such account, Host REIT is required to
pay any shortfall.
Service Marks. During the term of the hotel 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.
87
<PAGE>
Termination Fee. Certain of the hotel 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 will receive a termination
fee as specified in the specific management agreement.
Termination for Failure to Perform. Substantially all of the hotel
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 hotel management agreements
include, among others, the following: (i) 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, (ii) 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 thereafter the failure to diligently
pursue such efforts to completion, (iii) 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, (iv) 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 (v) 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 hotel management agreements
(excluding the termination fee, if any) will become obligations of the
Lessees, to be paid by the Lessees, for so long as the Hotel Leases remain in
effect. The Lessees' obligations to pay these fees, however, could adversely
affect the ability of one or more Lessees to pay Minimum Rent or Percentage
Rent payable under the full-service Hotel Leases, even though such amounts
otherwise are due and owing to Host or Host REIT.
Restrictions on Sales and Other Transfers of Interests in Hotels. The hotel
management agreements prohibit the hotel owner from selling, leasing or
otherwise transferring the hotels unless the transferees assume the management
agreements and satisfy certain criteria, including having sufficient financial
resources and liquidity to satisfy the owner's obligations under the hotel
management agreements, not being in control or controlled by persons who have
been convicted of felonies and not being engaged in operating a branded hotel
chain having 5,000 or more guest rooms in competition with Marriott
International. The management agreements also prohibit the Lessees from
subleasing all or any portion of the Hotel Leases and from assigning the Hotel
Leases except to entities which are wholly owned by the Company and have
organizational documents which are the same as those of the Lessees, in each
case without the prior written consent of Marriott International.
Restrictions on Lease Amendments. The management agreements prohibit the
Lessees and the Host REIT hotel Lessors from entering in certain amendments of
the Hotel Leases, including shortening the term of the full-service Hotel
Leases and modifying the parties' respective rights and obligations with
respect to FF&E, capital expenditures and approval of hotel budgets, in each
case without the prior written consent of Marriott International.
Marriott International's Right to Cause Termination of Hotel Leases. The
management agreements provide that if the Host REIT Lessors do not elect to
terminate the Hotel Lease upon a "Change in Control," Marriott International
may require the Host REIT Lessors to exercise their termination rights if, as
a result of such Change in Control, the Lessees are is in control of or
controlled by persons who are convicted felons or who are engaged (or
affiliated with persons who are engaged) in operating a branded hotel chain
having 5,000 or more guest rooms in competition with Marriott International.
88
<PAGE>
DESCRIPTION OF MARRIOTT INTERNATIONAL HOTEL MANAGEMENT AGREEMENTS FOR LIMITED-
SERVICE HOTELS
Subsidiaries of Marriott International serve as the managers for the HPT
Hotels which will be subleased by Host REIT to the Sublessees. The management
agreements will be assigned to the Sublessees for the term of the HPT Lease of
each HPT Hotel. The Sublessees will be obligated to perform all of the
obligations of the HPT Lessor under the management agreement during the term
of the HPT Lease (including the payment of fees due under the management
agreement), other than certain obligations including, without limitation,
payment of property taxes, property casualty insurance and ground lease rent,
maintaining a reserve fund for FF&E replacements, and capital expenditures,
for which the HPT Lessor will retain responsibility. Although the Sublessees
will assume certain obligations of the HPT Lessor under the management
agreement, the HPT Lessor will not be released from its obligations and, if a
Sublessee fails to perform any such obligations, the manager will be entitled
to seek performance by or damages from the HPT Lessor. The Sublessees'
obligation to pay the fees due under the management agreements, however, could
adversely affect the ability of a Sublessee to pay rent under the HPT Leases,
even though such amounts are otherwise due and owed to the HPT Lessor.
Other provisions of the management agreements for the HPT Hotels to be
subleased by the Company from Host REIT are substantially the same as for the
full-service hotels. See "--Description of Marriott International Hotel
Management Agreements for Full-Service Hotels."
DESCRIPTION OF OTHER HOTEL MANAGEMENT AGREEMENTS
Of the approximately 104 hotels expected to be leased from Host or Host REIT
to the Company (excluding the Blackstone Hotels), 15 hotels are, and will
continue to be, managed by the following four Non-MI Managers: (i) The Durbin
Companies, Inc.; (ii) Interstate Hotels Corporation; (iii) Outrigger Lodging
Services; and (iv) Stormont Trice Corporation. Thirteen of these 15 Non-MI
Managed Hotels operate under the "Marriott" brand name pursuant to existing
franchise agreements between either the hotel owner or the Non-MI Managers and
Marriott International, whereby Marriott International receives a franchise
fee for allowing the use of the "Marriott" brand name. See "Description of
Franchise Agreements with Marriott International." The remaining two Non-MI
Managed Hotels are operated as "Holiday Inn" and "Delta" hotels.
Each management agreement has a fixed term ranging from three to 16 years
with some extension options. Under the management agreements, the Non-MI
Managers shall provide similar management and operating services which are
provided by Marriott International under its management agreements. In return
for these services, the Non-MI Managers generally receive a fixed base
management fee calculated as a percentage of gross revenue. In some instances,
the Non-MI Managers are also entitled to receive an incentive management fee
based on a percentage of the amount by which the operating profit for the
applicable hotel exceeds the owner's required minimum return.
The Lessees will assume the management agreements and will be obligated to
perform certain of the obligations of the Host REIT Lessor for the term of the
Hotel Lease of such hotel.
DESCRIPTION OF HOTEL MANAGEMENT AGREEMENTS FOR BLACKSTONE HOTELS
The Blackstone Hotels are, and will continue to be, managed by the existing
management companies. Except for the Ritz-Carlton Hotel Company, which manages
two Blackstone Hotels and is a majority owned subsidiary of Marriott
International, the managers for the Blackstone Hotels are not affiliated with
either the Company, Host or Marriott International. In addition, none of the
Blackstone Hotels are operated under the "Marriott" brand name. The managers
for the Blackstone Hotels provide substantially similar services as Marriott
International under its management agreements for the full-service hotels. In
addition, the management agreements for the Blackstone Hotels will impose
substantially similar liabilities and obligations on the Company as the
Marriott International management agreements as lessees of the hotels. For
management services provided, the managers of the Blackstone Hotels receive
basic management fees, generally calculated as a percentage of gross revenue,
and in most cases, incentive management fees, which are generally calculated
as a percentage of operating profits. In connection with the Blackstone
Acquisition, the Blackstone Entities' 25% ownership interest in Swissotel
Management (USA) L.L.C. will be contributed to the Company.
89
<PAGE>
DESCRIPTION OF THE OPERATING AGREEMENTS FOR THE COMMUNITIES
The Communities are managed by MSLS pursuant to operating agreements entered
into with the subsidiaries of the Company that own the applicable Community.
Management Services Provided by MSLS under the Operating Agreements. Under
each of the operating agreements, MSLS provides complete management services
to the Company in connection with its management of such Communities.
Generally, each of the operating agreements have initial terms of 30 years
with one five-year renewal option. The services provided by MSLS include the
following:
Operational Services. MSLS has the sole responsibility and exclusive
authority for all activities for the day-to-day operation and management of
the Communities, including obtaining all licenses necessary for the operation,
establishing resident care and healthcare policies and procedures, carrying
out and supervising all necessary repairs and maintenance, procuring food
stuff, supplies, equipment, furniture and fixtures, and establishing prices,
rates and charges for services provided. MSLS recruits, employs, supervises,
directs and discharges all of the employees, and provides all managerial and
other employees for the Communities. In addition, MSLS has exclusive
supervision and control in all matters relating to the management and
operation of the Communities, including the following: fees and charges for
providing accommodations, food, health care and related services to residents
and their guests; supervision of resident care; health care policies; credit
policies; food and beverage services; employment policies; executing,
modifying and terminating leases, licenses and concessions and agreements for
commercial space within the Communities; receipt, holding and reimbursement of
funds; maintenance of bank accounts; procurement of inventories, supplies and
services; and promotion and publicity. In return for these services, MSLS will
receive compensation from the Company in the form of (i) a non-cumulative base
fee calculated as a percentage of revenue and (ii) an incentive fee calculated
as 20% of operating profit in excess of the owner's priority.
Central Administrative Services. The operating agreements require MSLS to
furnish certain Central Administrative Services which are generally furnished
on a central or regional basis to other senior living communities in the
Marriott retirement community system. Such services will include the
following: (i) marketing and public relations services; (ii) human resources
program development; (iii) information systems support and development; and
(iv) centralized computer payroll and accounting services. In lieu of
reimbursement for such services, MSLS is paid an amount equal to 2% of gross
revenues. Generally, through the earlier of (i) the end of the seventh year of
the operating agreement or (ii) the date upon which certain performance
criteria have been met, 50% of the Central Administrative Services fee is
payable only to the extent that operating profit exceeds the owner's priority.
However, the payment of fees for the Central Administrative Services is waived
for the first year of the operating agreement with the exception of one
Community in which it is waived for the first two years of the operating
agreement.
Working Capital. The Company is required to maintain certain working capital
for each Community, and from time to time advance, at the request of MSLS, any
additional funds necessary to maintain working capital at levels generally
consistent with the Marriott senior living community system standard.
FF&E Replacements and Reserves. MSLS establishes a reserve account (the
"FF&E Reserve") to cover the cost of replacements and renewals to the
furniture, furnishing, fixtures, soft goods, case goods, vehicles and
equipment, and for routine building repairs and maintenance which are normally
capitalized. Generally, throughout the term, MSLS is required to transfer into
the FF&E Reserve an amount equal to (i) 2.65% of gross revenue until the end
of fiscal year 2002, (ii) 2.85% of gross revenue during the period from fiscal
year 2003 until the end of fiscal year 2007 and (iii) 3.5% of gross revenue
during the period from fiscal year 2008 until the end of the term. Each year,
MSLS will provide an estimate of the expenditures necessary for such
replacement of FF&E and repairs to the Communities. In replacing the FF&E and
making routine repairs, MSLS may not expend more than the balance in the FF&E
Reserve, except in certain circumstances.
Major Building Alteration, Improvements and Renewals. The operating
agreements require MSLS to prepare an annual estimate of the expenditures
necessary for major repairs, alterations, improvements, renewals
90
<PAGE>
and replacements to the structural, mechanical, electrical, heating,
ventilating, air conditioning, plumbing and vertical transportation elements
of each Community (the "Capital Expenditures"). Such estimate of the Capital
Expenditures will be submitted to the Company for its approval. Except in
certain circumstances, MSLS may not make any Capital Expenditures without the
prior written consent of the Company not to be unreasonably withheld. The
costs of these Capital Expenditures are paid by the Company.
Events of Default. Events of default under the operating agreements ("Events
of Default") include, among others, the following: (i) the failure of either
party to make prompt payments pursuant to the operating agreement, (ii) the
failure of either party to perform, keep or fulfill any of the covenants,
undertakings, obligations or conditions set forth in the operating agreement,
(iii) if either party commences any proceeding under any bankruptcy,
reorganization, readjustment of debt, dissolution or liquidation law or
statute or an assignment for the benefit of creditors or application for the
appointment of at a trustee or receiver for a substantial part of the assets,
(iv) 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 (v) 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.
Termination. Upon the occurrence of an Event of Default, the non-defaulting
party shall have the right to terminate the operating agreement with 30 days'
notice, if such default is a material breach by the defaulting party of its
obligations under the operating agreement. MSLS also is entitled to terminate
the operating agreement if the Community owner fails to approve certain
repairs which arise out of legal requirements.
DESCRIPTION OF OTHER AGREEMENTS FOR THE COMMUNITIES
The Communities also are subject to the following agreements:
The Indemnity Agreement. In connection with the Forum Acquisition, Host, the
Company, Marriott International and MSLS entered into an indemnity agreement
which defines the parties' rights and obligations for indemnification with
respect to liabilities arising prior to and after June 21, 1997 (the "Forum
Acquisition Date"). Together with Host, the Company will indemnify and hold
harmless Marriott International, MSLS and their affiliates against certain
liabilities that arise after the date of the agreement, including any costs
and expenses incurred as a result of defending such claims. In addition,
together with Host, the Company will agree to pay or reimburse Marriott
International and MSLS for all environmental liabilities arising subsequent to
the Forum Acquisition Date which, under the applicable environmental laws,
would be the responsibility of the Company and Host had the Company acquired
title to the Communities on the Forum Acquisition Date, rather than acquiring
the common stock of Forum.
Tax Matters Agreement. Host, the Company, Forum, Marriott International and
MSLS entered into a tax matters agreement which defines the parties' rights
and obligations with respect to certain tax matters, including deficiencies,
assessments and refunds of federal, state, local or foreign income or other
taxes relating to the Community business for tax years prior to and after the
Forum Acquisition Date (the "Tax Matters Agreement"). Together with Host, the
Company will indemnify and hold harmless Marriott International, MSLS and
their affiliates from and against tax liabilities relating to the business of
the Communities which accrue or are attributable or allocable to any taxable
year beginning after the Forum Acquisition Date. In addition, the parties have
agreed to cooperate and consult with each other in preparing tax returns or
dealing in any tax matters.
The Tax Matters Agreement will be in effect until all the obligations of the
respective parties have been carried out and until the expiration of any
applicable statute of limitations relating to tax matters covered by the Tax
Matters Agreement. In connection with the Distribution, the Company will
assume all of Host's obligation under the Tax Matters Agreement relating to
periods subsequent to the Distribution Date and indemnify Host with respect to
any claims made with respect thereto.
91
<PAGE>
The Expansion Agreements. The Company entered into expansion agreements with
MSLS the ("Expansion Agreements"), pursuant to which the parties agreed that
MSLS would construct additional independent living, assisted living and
healthcare units to some of the existing Communities. The Expansion Agreements
require MSLS to provide all services related to such construction of
additional units, including all labor, materials, equipment, tools,
construction equipment and machinery, water, heat, utilities, transportation
and other facilities and services necessary for proper execution and
completion of the work necessary to expand the Community to include additional
units. In providing these services, it is contemplated that MSLS would retain
the services of its affiliate, Marriott International Design & Construction
Services, Inc.
As of September 11, 1998, the Company and MSLS have entered into eight
separate expansions for projects. The construction for six of these projects
is in progress and is expected to be completed by 1999. The number of units
for the remaining two projects have been partially completed with the
construction of the remaining units for these two projects to be determined
after a feasibility analysis. The determination to proceed with the
construction of these remaining units is at the sole option of MSLS.
The Company will pay MSLS a predetermined fixed price for each expansion
project upon completion of the project. The fixed price for each expansion
project has been agreed upon in each project's respective Expansion Agreement.
The expansion payment may be payable either in all cash or (i) up to 35% of
such amount by cash and (ii) 65% of such amount by expansion notes. These
notes are obligations of the Company and are guaranteed by Host.
The Pooling Agreements. As of September 11, 1998, 29 of the Communities are
subject to pooling agreements between the Company and MSLS (the "Pooling
Agreements"). The Pooling Agreements aggregate the Communities into five
distinct "pools." At the date of the Forum Acquisition, Host and MSLS, as the
manager of the Communities, agreed that for the limited purposes of
calculating certain fees and exercising certain termination and manager
replacement rights under the operating and related agreements, such fees and
rights should be considered and determined in the aggregate rather than on a
Community-by-Community basis. Generally, the method of selecting which
Communities would go into which of the five "pools" (Pools I, II, III, IV and
V) was based on whether the Communities were encumbered by mortgage
indebtedness at the time of the Forum Acquisition. The Communities which were
subject to one of the two loan agreements with NACC (the Communities owned by
FRP, FGI and FOH) were placed under Pools I, II, and IV. All other Communities
which were not subject to mortgage indebtedness or were, at the time of the
Forum Acquisition, subject to indebtedness with third party lenders other than
NACC were placed in Pools III and V.
The Ground Leases. The Company owns all of the Communities in fee simple,
except for the following Communities, which are subject to ground leases: (i)
the Knightbridge Community; (ii) the Lexington at Country Place Community; and
(iii) the Lafayette at Country Place Community. All three ground leases
generally provide for initial terms of 25 years with certain renewal options.
In the case of the Knightbridge Community, the Company has the option to
purchase the ground leased property after the death of the landlord for the
consideration provided in the lease. Under the Lexington and Lafayette ground
leases, the Company has the right of first refusal to purchase the land if the
landlord receives a bona fide offer from a third party to purchase the
underlying real property.
NON-COMPETITION AGREEMENTS
The Company's activities are and will be limited by certain non-competition
agreements with Marriott International and Host REIT to which it is or will
become a party. In general, these non-competition agreements restrict the
Company for prescribed periods described below from (i) competing with the
hotel management business of Marriott International (but not from leasing
hotel properties or contracting with third parties to manage leased hotel
properties), subject to certain limitations on hotel properties operated under
a common name, (ii) operating or managing assisted living communities (but not
owning or leasing such communities) and (iii) owning or acquiring full-service
hotels that are not leased from Host REIT. The description of the non-
competition agreements set forth below is qualified in its entirety by
reference to such agreements, a copy of the form of which is included as an
exhibit to the Registration Statement of which this Prospectus is a part.
92
<PAGE>
Non-Competition Agreement with Marriott International Regarding the
Hotels. Host and Marriott International entered into the Hotel Non-Competition
Agreement in 1993 when Host and Marriott International became separate public
companies; the Hotel Non-Competition Agreement was subsequently, amended and
restated in March 1998. The Company is currently bound by the Hotel Non-
Competition Agreement as a subsidiary of Host. In connection with the
Distribution, the Company will enter into an amendment to the Hotel Non-
Competition Agreement agreeing to be bound by the agreement once it is no
longer a subsidiary of Host. Marriott International requested that the Company
enter into such amendment to ensure that the Company would continue to be
bound by the agreement once it ceased to be a subsidiary of Host. No separate
consideration was paid to the Company for this amendment. Under the Hotel Non-
Competition Agreement, as supplemented by an agreement to be entered into
between Host REIT and the Company allocating between them the exceptions to
the non-competition provisions, the Company and its subsidiaries generally
will be prohibited prior to October 8, 2000, subject to certain limited
exceptions, from entering into or acquiring any business that competes with
the hotel management business (i.e., managing, operating or franchising full-
service and limited-service hotels) of Marriott International. Certain
activities are permitted, however, including: (i) the operation by the Company
of an unlimited number of limited-service hotel properties as long as the
Company does not operate more than ten such properties under a common name;
(ii) contracting by the Company with a third party manager for operation of an
unlimited number of limited-service hotel properties, so long as the number of
properties under such third party management is not more than the greater of
(a) ten such properties operated under a common name or (b) 25% of the system
operated by such third party manager under a common name; (iii) contracting by
the Company with a third party manager for operation for an unlimited number
of full-service hotels having the same brand name as one of Host REIT's
currently owned hotels (including the hotels to be acquired in the Blackstone
Acquisition), so long as the number of properties under such third party
management is not more than the greater of (a) five such properties operated
under a common name or (b) 12.5% of the system operated by such third party
under a common name; and (iv) franchising by the Company of an unlimited
number of limited-service hotel properties so long as the Company is not
franchisor for more than ten such properties under a common name.
Non-Competition Agreement with Host or Host REIT Regarding the Hotels. The
Company, Host REIT and the Initial FF&E Lessor will enter into a non-
competition agreement in connection with the Distribution. Pursuant to this
non-competition agreement, the Company will agree, among other things, that
until the earlier of December 31, 2008 or the date upon which the Company is
not the lessee of more than 25% of the number of hotels owned by Host on the
Distribution Date, the Company may not: (i) own, acquire, develop or construct
for ownership any full-service hotel (except for (a) investments which
represent an immaterial portion of a merger or similar transaction, (b) a
minimal portfolio investment or (c) the provision of limited financing); (ii)
without the consent of Host or Host REIT in its sole discretion, manage or
operate (other than through a third party manager) any limited-service or
full-service hotel properties owned by Host or Host REIT; or (iii) conduct,
participate in, engage in or have a financial interest in any person that
engages in the ownership or operation of any single or multiple full-service
hotel franchise system operating under one or more common name brands. The
restrictions described in (i) and (iii) above do not apply to any activities
of the Company related to limited-service hotels. The Company generally is
permitted to act as a manager with respect to full-service hotels, subject to
certain restrictions intended to preclude the Company from using the
management agreement relationship to take a disguised equity ownership
position in full-service hotels. The Company also generally is permitted to
act as a lessee with respect to full-service hotels owned (i) by any party
under an arrangement where the Company also manages the hotel or (ii) by a
REIT, whether or not the Company also manages the hotel, subject in each case
to certain restrictions intended to preclude the Company from using those
leasing arrangements to take significant disguised equity ownership positions
in full-service hotels.
Until the earlier of December 31, 2008 or the date upon which the Company is
not the lessee of more than 25% of the number of hotels owned by Host on the
Distribution Date, Host or Host REIT and the FF&E Lessors have agreed that
they will not conduct, participate in, engage in or have a financial interest
in any person that engages in the business of leasing, operating or
franchising limited-service or full-service hotel properties, provided,
however, that this restriction does not prevent Host or Host REIT or the FF&E
Lessors from
93
<PAGE>
(i) managing, operating or franchising limited-service or full-service hotels
with respect to matters incident to the operation of such properties (e.g.,
management services with respect to food and beverages, plant and equipment
operation and maintenance, reservations, sales and marketing) on behalf of
third parties or (ii) leasing full-service or limited-service hotels to and
from each other or (iii) in the case of Host or Host REIT, leasing full-
service or limited-service hotels from certain other related parties. Until
December 31, 2003, Host or Host REIT and the FF&E Lessor have also agreed that
they will not conduct, participate in, engage in or have a financial interest
in any person that engages in the ownership, acquisition or operation of
senior living communities (except for (a) investments which represent an
immaterial portion of a merger or similar transaction, (b) a minimal portfolio
investment or (c) the provision of limited financing). In addition, both the
Company and Host REIT will agree not to hire or attempt to hire any of the
other company's other senior employees at any time prior to December 31, 2000.
See "Business and Properties--Relationship with Host after the Distribution--
Non-Competition Agreement."
Non-Competition Agreement with Marriott International Regarding Senior
Living Communities. In connection with the Company's acquisition of Forum from
Marriott International in 1997, Host and Marriott International entered into
the Community Non-Competition Agreement for a term of ten years. This
agreement, in general, provided that Marriott International, through its
subsidiary MSLS, would continue in its capacity as operator of the senior
living business previously conducted by Forum and, except as otherwise
provided in the agreement, Host and its subsidiaries would limit their
activities in the senior living area to owning, having equity interests in or
lending money or otherwise financing the Communities acquired from Marriott
International in the Forum Acquisition or subsequently acquired communities.
Under the agreement, Host and its subsidiaries were prohibited, subject to
certain limited exceptions, from competing with Marriott International in the
continental United States by (i) financing, conducting, participating or
engaging in the business of operating, managing or franchising senior living
communities or (ii) providing operational or managerial services relating
thereto with respect to health care, therapy, home health care, assisted
living, nursing and related medical, residential, supportive and personal care
services. In addition, Host and its subsidiaries were prohibited from entering
into a transaction or a series of transactions whereby ten or more Communities
or a controlling interest therein would be transferred to another party unless
such party agreed to be bound by the Community Non-Competition Agreement. The
Company, as the owner of all of Host's senior living communities, is currently
bound by the Community Non-Competition Agreement. In connection with the
Distribution, the Company will enter into an amended and restated Community
Non-Competition Agreement with Marriott International and Host REIT pursuant
to which the Company will agree to be bound by the Community Non-Competition
Agreement until June 17, 2010.
STAFFING AND LABOR COSTS
Marriott International competes with various other lodging companies in
attracting and retaining qualified and skilled personnel to operate the hotels
managed by it. Marriott International also competes with various health care
services providers, including other care providers for the elderly, in
attracting and retaining qualified personnel for the Communities. A shortage
of such personnel or general inflationary pressure may require Marriott
International to enhance its wage and benefits package to compete effectively
for personnel necessary to operate the hotels and the Communities, which could
adversely affect the Company's net income attributable to the hotels and the
Communities.
REGULATION OF THE HEALTHCARE INDUSTRY
The long-term care segment of the healthcare industry is highly regulated.
Operators of skilled nursing facilities, including some of the healthcare
facilities operated as a part of the Company's Communities, are subject to
federal, state and local laws relating to the delivery and adequacy of medical
care, fraud and abuse, distribution of pharmaceuticals, equipment, personnel,
operating policies, fire prevention, rate-setting and reimbursement, and
compliance with safety codes and environmental laws. Such facilities also are
subject to periodic inspection by governmental and other authorities to assure
continued compliance with various standards, the continued licensing of the
facility under state law, certification under the Medicare, Medicaid or other
federal
94
<PAGE>
healthcare programs and the ability to participate in other third party
payment programs. Many states have adopted Certificate of Need or similar laws
which generally require that the appropriate state agency approve certain
acquisitions of such facilities and reimbursement, and determine that need
exists for certain bed additions, new services and capital expenditures or
other changes prior to beds and/or new services being added or capital
expenditures being undertaken. The failure of an operator of a Company
Community to obtain or maintain any required regulatory approvals or licenses
could prevent an operator from offering services or adversely affect its
ability to receive reimbursement for services and could result in the denial
of reimbursement, temporary suspension of admission of new patients,
suspension or decertification from Medicaid, Medicare or other Federal Health
Care Programs, fines, restrictions on the ability to acquire new facilities or
expand existing facilities and, in extreme cases, revocation of the facility's
license or closure of a facility. On a historical basis, Medicare/Medicaid
reimbursements have accounted for approximately 7% of the Company's total
senior living community revenues.
Although not currently regulated at the federal level (except under laws of
general applicability to businesses, such as work place safety and income tax
requirements), assisted living communities are increasingly becoming subject
to more stringent regulation and licensing by state and local health and
social service agencies and other regulatory authorities. In general, these
requirements address, among other things: personnel education, training and
records; community services, including administration of medication,
assistance with self-administration of medication and limited nursing
services; monitoring of wellness; physical plant inspections; furnishing of
resident units; food and housekeeping services; emergency evacuation plans;
and resident rights and responsibilities, including in certain states the
right to receive certain healthcare services from providers of a resident's
choice. In several states, assisted living facilities also require a
Certificate of Need before the facility can be opened, expand or reduce its
resident capacity or make other significant capital expenditures. Like skilled
nursing facilities, assisted living communities are subject to periodic
inspection by government authorities. In most states, assisted living
communities, as well as skilled nursing facilities, also are subject to state
or local building code, fire code and food service licensure or certification
requirements. Any failure by the managers of the Company's Communities to meet
applicable regulatory requirements may result in the imposition of fines,
imposition of a provisional or conditional license or suspension or revocation
of a license or other sanctions or adverse consequences, including delays in
expanding a community. Any failure by the managers of the Company's
Communities to comply with such requirements could have a material adverse
effect on the Company's financial condition and results of operations.
Operators of the Company's Communities also are subject to federal and state
anti-remuneration laws and regulations, such as the Federal Health Care
Programs anti-kickback law, which govern certain financial arrangements among
healthcare providers (including physicians, hospitals and the Company's
nursing facilities) and others (including the Company's assisted living
communities) who may be in a position to refer or recommend patients to such
providers. These laws prohibit, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Federal Health Care Program patients or the purchasing, leasing, ordering
or arranging for any goods, facilities, services or items for which payment
can be made under a Federal Health Care Program (such as Medicare or
Medicaid). A violation of the federal anti-kickback law could result in the
loss of eligibility to participate in a Federal Health Care Program or in
civil or criminal penalties. The federal government, private insurers and
various state enforcement agencies have increased their scrutiny of providers,
other entities, business practices and claims in an effort to identify and
prosecute fraudulent and abusive practices. In addition, the federal
government has issued fraud alerts concerning nursing services, double
billing, home health services and the provision of medical supplies to nursing
facilities. Since some of these services may be furnished in or by some of the
Company's Communities, and since many of the Communities' residents will be
eligible for healthcare coverage under a Federal Health Care Program, these
areas may come under closer scrutiny by the government. Furthermore, some
states restrict certain business corporations from providing, or holding
themselves out as a provider of medical care. Possible sanctions for violation
of any of these restrictions or prohibitions include loss of licensure or
eligibility to participate in reimbursement programs and civil and criminal
penalties. State laws vary from state to state, are often vague and have
seldom been interpreted by the courts or regulatory agencies. There can be no
assurance that these federal and state laws will ultimately be interpreted in
a manner consistent with the Company's practices.
95
<PAGE>
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations,
owners or operators of real estate may be required to investigate and clean up
certain hazardous substances released at a property, and may be held liable to
a governmental entity or to third parties for property damage or personal
injuries and for investigation and clean-up costs incurred by the parties in
connection with any contamination. In addition, some environmental laws create
a lien on a contaminated site in favor of the government for damages and costs
it incurs in connection with the contamination. The presence of contamination
or the failure to remediate contamination may adversely affect the owner's
ability to sell or lease real estate or to borrow using the real estate as
collateral. No assurances can be given that (i) a prior owner, operator or
occupant, such as a tenant, did not create a material environmental condition
not known to the Company, (ii) a material environmental condition with respect
to any hotel or community does not exist or (iii) future uses or conditions
(including, without limitation, changes in applicable environmental laws and
regulations) will not result in the imposition of environmental liability.
No assurances can be given, that all potential environmental liabilities
have been identified or properly quantified or that no prior owner, operator
or past or current guest or occupant has created an environmental condition
not known to the Company. Moreover, no assurances can be given that (i) future
laws, ordinances, or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the hotels or the
Communities will not be affected by the condition of land or operations in the
vicinity of the hotels or the Communities (such as the presence of underground
storage tanks) or by third parties unrelated to the Company.
EMPLOYEES
Upon completion of the Distribution, the Company expects to have
approximately 80 employees.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of management of the Company, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on the Company's business, financial
condition and results of operations.
96
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to those
persons who have agreed to serve as the directors and executive officers of
the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Bruce D. Wardinski(1)... 38 Chairman of the Board, President and Chief Executive Officer
James L. Francis........ 36 Executive Vice President, Chief Financial Officer and Treasurer
Bruce F. Stemerman...... 43 Executive Vice President--Asset Management
Steven J. Fairbanks..... 34 Executive Vice President--Lodging Investments
Larry K. Harvey......... 34 Senior Vice President and Corporate Controller
Tracy M. J. Colden...... 37 Senior Vice President, General Counsel and Secretary
Christopher J.
Nassetta(1)............ 36 Director
Adam M. Aron(2)(3)...... 44 Director Nominee
Louise M. Crom-
well(2)(4)............. 53 Director Nominee
Kelvin L. Davis(1)(4)... 34 Director Nominee
John W. Marriott,
III(1)................. 37 Director Nominee
John B. Morse,
Jr.(3)(4).............. 52 Director Nominee
Michael A. Wild-
ish(2)(3).............. 38 Director Nominee
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Nominating and Corporate Governance Committee
(3) Member of Compensation Policy Committee.
(4) Member of Audit Committee.
Executive officers are appointed by and serve at the discretion of the Board
of Directors. The following is a biographical summary of the experience of the
directors, director nominees and executive officers of the Company:
Bruce D. Wardinski. Mr. Wardinski, Chairman of the Board, President and
Chief Executive Officer of the Company, joined Host in 1987 as a Senior
Financial Analyst of Financial Planning and Analysis and was named Manager in
June 1988. He was appointed Director of Financial Planning and Analysis of
Host in 1989, Director of Project Finance in January 1990, Senior Director of
Project Finance in June 1993, Vice President of Project Finance in June 1994
and Senior Vice President of International Development in October 1995. In
June 1996, Mr. Wardinski was elected Senior Vice President and Treasurer of
Host. Prior to joining Host, Mr. Wardinski was with the public accounting firm
of PricewaterhouseCoopers LLP. Mr. Wardinski also currently serves on the
board of Fairfax Opportunities Unlimited, a not-for-profit advocacy group
representing disabled individuals.
James L. Francis. Mr. Francis, Executive Vice President and Chief Financial
Officer of the Company, joined Host in July 1997 as Vice President of Finance
and became Assistant Treasurer of Host in February 1998. He was Vice President
and Division Controller, Courtyard by Marriott/Fairfield Inn at Marriott
International from 1993 to 1994, served as Brand Executive, Courtyard by
Marriott at Marriott International from 1994 to 1995, served as Vice President
of Finance, Lodging-Reengineering Team Leader of Marriott International from
1995 to 1997 and was promoted to Vice President of Finance, Lodging-Asset
Management and Owner Relations of Marriott International in 1997 prior to his
joining Host in that year.
Bruce F. Stemerman. Mr. Stemerman, Executive Vice President--Asset
Management of the Company, joined Host in 1989 as Director--Partnership
Services. He was promoted to Vice President--Lodging Partnerships of Host in
1994 and became Senior Vice President--Asset Management of Host in 1996. Prior
to joining Host, Mr. Stemerman was with the public accounting firm of
PricewaterhouseCoopers LLP.
97
<PAGE>
Steven J. Fairbanks. Mr. Fairbanks, Executive Vice President, joined Host in
1996 as Vice President--Acquisitions. In 1997, he was elected Senior Vice
President--Acquisitions of Host. Prior to joining Host, he served as Vice
President of Capital Management and Development Corporation from 1992 until
1996. He had previously served as a principal with Eastbanc from 1988 to 1992.
Larry K. Harvey. Mr. Harvey, Senior Vice President and Corporate Controller
of the Company, joined Host in 1994 as Senior Manager--Corporate Accounting.
In 1995, Mr. Harvey was promoted to Director--Corporate Accounting of Host. He
was promoted to Senior Director--Corporate Accounting of Host in 1997 and Vice
President--Corporate Accounting of Host in 1998. Prior to joining Host, Mr.
Harvey was with the public accounting firm of PricewaterhouseCoopers LLP.
Tracy M. J. Colden. Ms. Colden, Senior Vice President, General Counsel and
Secretary of the Company, joined Host as an Attorney in 1996. She was promoted
to Senior Attorney of Host in June 1996 and became Assistant General Counsel
of Host in June 1997. Prior to joining Host, Ms. Colden was an attorney with
the law firm of Hogan & Hartson L.L.P.
Christopher J. Nassetta. Mr. Nassetta, a director of the Company, joined
Host in October 1995 as Executive Vice President and was elected Chief
Operating Officer of Host in 1997. Prior to joining Host, Mr. Nassetta served
as President of Bailey Realty Corporation from 1991 until 1995. He had
previously served as Chief Development Officer and in various other positions
with The Oliver Carr Company from 1984 through 1991.
Adam M. Aron. Mr. Aron, a director nominee of the Company, has held the
position of Chairman of the Board and Chief Executive Officer of Vail Resorts,
Inc. since July 1996. Prior to joining Vail Resorts, Inc., Mr. Aron served as
President and Chief Executive Officer of Norwegian Cruise Line Ltd. from 1993
until 1996. He had previously served as Senior Vice President--Marketing of
United Airlines from 1990 to 1993. Prior to joining United Airlines, Mr. Aron
was the Senior Vice President--Marketing for Hyatt Hotels Corporation from
1987 to 1990. Mr. Aron also currently serves on the Board of Directors of the
Sunterra Corporation and the Florsheim Group, Inc.
Louise M. Cromwell. Ms. Cromwell, a director nominee of the Company, has
served as Senior Counsel in the Real Estate Practice Group of Shaw, Pittman,
Potts & Trowbridge since January 1998. From April 1984 to December 1997, Ms.
Cromwell was a Partner at Shaw, Pittman. She currently acts as General Counsel
of Federal City Council. Ms. Cromwell is a member of the National Association
of Corporate Directors, The Greater Washington Board of Trade, Leadership
Washington and the Board of Directors of The Economic Club of Washington.
Kelvin L. Davis. Mr. Davis, a director nominee of the Company, has served as
President and Chief Operating Officer of Colony Capital, Inc. and Colony
Advisors, Inc., international real estate investment and management firms,
since August 1997, and has served in various other capacities with these
companies since 1991. Prior thereto, Mr. Davis served as a principal of RMB
Realty, Inc., the real estate development vehicle of Robert M. Bass. Prior to
his affiliation with RMB Realty, Inc., Mr. Davis worked at Goldman, Sachs &
Co. in New York City and with Trammell Crow Company in Dallas and Los Angeles.
John W. Marriott, III. Mr. Marriott, a director nominee of the Company,
became Senior Vice President of Marriott International's Mid Atlantic Region
in June 1996. Since 1993, Mr. Marriott has held successive positions as
Director of Finance in Marriott International's Treasury Department, Director
of Finance in Host's Finance and Development Department and Vice President,
Lodging Development for The Ritz-Carlton Hotel Company LLC. In 1989, Mr.
Marriott served as Executive Assistant to the Chairman of Host, J.W. Marriott,
Jr., who is his father. He has also held positions as Director of Corporate
Planning, Finance, Director of Marketing for a hotel and General Manager. He
joined Marriott Corporation in 1986 as a Sales Manager and subsequently served
as a Restaurant Manager and as Director of Food and Beverages. Mr. Marriott
serves on the Board of Directors of Sodexho Marriott Services, Inc.
98
<PAGE>
John B. Morse, Jr. Mr. Morse, a director nominee of the Company, has held
the position of Vice President, Finance, and Chief Financial Officer of The
Washington Post Company since 1989. Prior to holding such position, Mr. Morse
served as Vice President and Controller of The Washington Post Company from
July 1989 to November 1989. Mr. Morse also currently serves as the President
of Washington Post Telecommunications, Inc. and Washington Post Productions,
Inc., subsidiaries of The Washington Post Company. Prior to joining The
Washington Post Company, Mr. Morse was a Partner with the public accounting
firm of PricewaterhouseCoopers LLP.
Michael A. Wildish. Mr. Wildish, a director nominee of the Company, has been
a Managing Director in the investment firm of Donaldson, Lufkin & Jenrette
since 1997. Prior to joining Donaldson, Lufkin & Jenrette, Mr. Wildish worked
in the investment firm of Lazard Freres & Co. LLC, where he served as a
General Partner from 1996 to 1997, as Vice President from 1992 to 1995 and as
an Associate from 1989 to 1991. Prior to joining Lazard Freres & Co. LLC, Mr.
Wildish served as an Associate with the investment firm of Goldman, Sachs &
Co. from 1986 to 1989.
Upon completion of the Distribution, the Board of Directors will be divided
into three classes, each consisting of approximately one-third of the total
number of directors. At the Distribution Date, there will be eight directors.
Class I directors, consisting of Louise M. Cromwell, John W. Marriott, III and
Bruce D. Wardinski, will hold office until the 1999 annual meeting of
stockholders; Class II directors, consisting of Adam M. Aron, Christopher J.
Nassetta and Michael A. Wildish, will hold office until the 2000 annual
meeting of stockholders; and Class III directors, consisting of Kelvin L.
Davis and John B. Morse, will hold office until the 2001 annual meeting of
stockholders.
COMMITTEES OF THE BOARD OF DIRECTORS
Promptly following consummation of the Distribution, the Board of Directors
of the Company will establish the following committees:
Executive Committee. The Executive Committee will possess and may exercise
all the authority and powers of the Board in the management of the business
and affairs of the Company, except those reserved to the Board by the DGCL.
The Executive Committee will consist of four members: Messrs. Davis, Marriott,
Nassetta and Wardinski. Mr. Wardinski will be Chairman of the Executive
Committee.
Audit Committee. The Audit Committee will recommend to the Board of
Directors appointment of independent auditors; approve the scope of audits and
other services to be performed by the independent and internal auditors;
consider whether the performance of any professional service by the auditors
other than services provided in connection with the audit function could
impair the independence of the outside auditors; and review the results of
internal and external audits, the accounting principles applied in financial
reporting and financing and operational controls. The Audit Committee will
consist of three members: Messrs. Davis and Morse and Ms. Cromwell. Mr. Morse
will be the Chairman of the Audit Committee.
Compensation Policy Committee. The Compensation Policy Committee's functions
will include recommendations on policies and procedures relating to senior
officers' compensation and various stock plans, and approval of individual
salary adjustments and stock awards in those areas. The Compensation Policy
Committee will consist of three members: Messrs. Aron, Morse and Wildish. Mr.
Wildish will be the Chairman of the Compensation Policy Committee.
Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee will consider candidates for election as directors and
will be responsible for keeping abreast of, and making recommendations with
regard to, corporate governance. In addition, the Nominating and Corporate
Governance Committee will advise the Board of Directors on a range of matters
affecting the Board of Directors and its committees, including qualification
of director candidates, compensation of directors, selection of committee
chairs, committee assignments and related matters. The Nominating and
Corporate Governance Committee will consist of three members: Messrs. Aron and
Wildish and Ms. Cromwell. Ms. Cromwell will be the Chairperson of the
Nominating and Corporate Governance Committee.
99
<PAGE>
EXECUTIVE COMPENSATION
None of the Company's executive officers has received compensation from or
on behalf of the Company since its inception. The 1999 salaries expected to be
paid to the Company's Chief Executive Officer and each of the other four most
highly compensated executive officers whose salary and bonus are expected to
exceed $100,000 for that year are as follows: Mr. Wardinski--$450,000; Mr.
Francis--$275,000; Mr. Fairbanks--$200,000; Mr. Stemerman--$200,000; and Mr.
Harvey--$160,000. These executive officers also are expected to be eligible to
receive bonuses in 1999 under the Performance-Based Annual Incentive Bonus
Plan (described below) to be established by the Company in connection with the
Distribution of up to $337,500; $137,500; $100,000; $100,000; and $80,000,
respectively. In addition, concurrently with completion of the Distribution,
these executive officers are expected to receive restricted stock awards under
the 1998 Comprehensive Stock Incentive Plan to be established by the Company
in connection with the Distribution totaling 325,000 shares; 105,000 shares;
50,000 shares; 50,000 shares; and 40,000 shares, respectively. Approximately
30% of the restricted stock awards will vest over a three-year period. The
remaining 70% will be performance-based. See "--Employee Benefit Plans."
COMPENSATION OF DIRECTORS
Directors who are also officers of the Company will receive no additional
compensation for their services as directors. Directors elected by the holders
of the Company's Common Stock who are not officers will receive an annual
retainer fee of $25,000 as well as an attendance fee of $1,250 for each
stockholders' meeting, meeting of the Board of Directors or meeting of a
committee of the Board of Directors, regardless of the number of meetings held
on a given day. The chair of each committee of the Board of Directors will
receive an additional annual retainer fee of $1,000. Any individual director
receiving these fees may elect to defer payment of all such fees or any
portion thereof pursuant to the Company's Executive Deferred Compensation Plan
and/or the Company's Non-Employee Directors' Deferred Stock Compensation Plan.
Under the Company's Non-Employee Directors' Deferred Stock Compensation Plan,
each non-employee director will receive an annual director stock award of 500
shares of Common Stock to the extent eligible for such award. Directors also
will be reimbursed for travel expenses and other out-of-pocket costs incurred
in attending meetings or in visiting Marriott or other hotel properties or
Communities controlled by the Company, Host REIT or Marriott International.
Non-Employee Directors' Plan. The Company will establish the Company Non-
Employee Directors' Deferred Stock Compensation Plan (the "Non-Employee
Directors' Plan") for purposes of attracting and retaining qualified non-
employee directors. The Company will reserve 70,000 shares of Common Stock for
issuance under the Non-Employee Directors' Plan. Under the terms of the Non-
Employee Directors' Plan, a non-employee director may elect to defer payment
of part or all of his director's fees from the Company until such individual
is no longer a member of the Board. In addition, the Non-Employee Directors'
Plan provides for annual grants of 500 shares of Common Stock, effective
following each annual meeting of the stockholders of the Company commencing
with the annual meeting in 1999. Non-employee directors may elect to receive
payment of their benefits under the Non-Employee Directors' Plan in Common
Stock paid in lump sum or annual installments.
EMPLOYEE BENEFIT PLANS
Employee Benefits and Other Employment Matters Allocation Agreement. Prior
to the Distribution Date, the Company and Host will enter into an Employee
Benefits and Other Employment Matters Allocation Agreement (the "Benefits
Allocation Agreement"). The Benefits Allocation Agreement will govern the
allocation of responsibilities with respect to various compensation, benefits
and labor matters. The Benefits Allocation Agreement is expected to provide
that effective on the Distribution Date the Company (or one of its
subsidiaries) will assume from Host certain liabilities relating to covered
benefits and labor matters with respect to individuals who were employed by
Host (or one of its subsidiaries) before the Distribution Date who will be
employed by the Company (or one of its subsidiaries) on or after the
Distribution Date ("Transferred Employees"). The Benefits Allocation Agreement
is expected to require Host to transfer, as soon as administratively
practicable after the Distribution, the account balances of Transferred
Employees under the Host Marriott Corporation (HMC) Retirement and Savings
Plan to the Company Retirement and Savings Plan
100
<PAGE>
(described below). The Benefits Allocation Agreement is expected to provide
that the Company will assume from Host, all liabilities and obligations of
Host for the accrued benefits of Transferred Employees under Host's Executive
Deferred Compensation Plan.
Additionally, the Benefits Allocation Agreement is expected to govern the
treatment of awards held by Transferred Employees under the Host Marriott
Corporation 1997 Comprehensive Stock Incentive Plan (the "Host Stock Plan").
The Benefits Allocation Agreement is expected to provide that all unexercised
options held by Transferred Employees under the Host Stock Plan as of the
Distribution Date will be converted into options for Common Stock of the
Company ("substituted options"). The exercise price and number of shares of
Common Stock of the Company covered by the converted options is expected to
preserve the Aggregate Spread (as defined in the Benefits Allocation
Agreement) immediately before the conversion. It is expected that under the
Benefits Allocation Agreement, Transferred Employees who hold restricted share
awards pursuant to the Host Stock Plan will receive, as part of the
Distribution and in accordance with the terms of the Host Stock Plan, one
restricted share of Common Stock for each ten restricted shares of Host common
stock. Additionally, the Benefits Allocation Agreement is expected to provide
that the deferred stock awards of Transferred Employees will be converted into
awards of Common Stock with an Aggregate Value (determined under the Benefits
Allocation Agreement) equal to the value before the conversion.
Comprehensive Stock Incentive Plan. The Company will establish the 1998
Comprehensive Stock Incentive Plan for purposes of attracting and retaining
highly qualified employees. The terms of the 1998 Comprehensive Stock
Incentive Plan will be substantially similar to the Host Stock Plan, as in
effect before the Distribution Date. The Company will reserve 4,000,000 shares
of Common Stock for issuance under the Comprehensive Stock Incentive Plan. The
1998 Comprehensive Stock Incentive Plan will be administered by the
Compensation Policy Committee of the Board. The Compensation Policy
Committee's responsibilities in administering the 1998 Comprehensive Stock
Incentive Plan are to take actions authorized by the 1998 Comprehensive Stock
Incentive Plan or reasonably necessary to carry out its purposes. The
Compensation Policy Committee is also authorized to interpret the 1998
Comprehensive Stock Incentive Plan, and its decisions, determinations and
interpretations are final and binding.
Under the terms of the 1998 Comprehensive Stock Incentive Plan, the
Compensation Policy Committee may award eligible full-time employees (i)
options to purchase Common Stock, (ii) deferred Common Stock, (iii) restricted
Common Stock, (iv) stock appreciation rights ("SARs"), (v) special recognition
awards or (vi) other equity-based awards, including but not limited to phantom
Common Stock, performance-based Common Stock, bonus Common Stock or similar
securities or rights. All grants under the Comprehensive Stock Incentive Plan
will be for Common Stock.
Options (other than options covered by the Benefits Allocation Agreement)
granted to officers and key employees will have an exercise price of not less
than the fair market value on the date of grant. Incentive stock options
granted under the 1998 Comprehensive Stock Incentive Plan will expire no later
than ten years after the date of grant and non-qualified stock options will
expire no later than 15 years after the date of grant. Under the terms of the
Comprehensive Stock Incentive Plan, the Compensation Policy Committee may
award deferred Common Stock to eligible full-time employees. Deferred Common
Stock may be granted as part of a bonus award or deferred stock agreement.
Deferred Common Stock will generally vest over ten years in annual
installments commencing one year after the date of grant. The 1998
Comprehensive Stock Incentive Plan also provides for the issuance of
restricted shares of Common Stock to officers and key executives to generally
be distributed over three or five years in annual installments based on
continued employment and the attainment of certain performance criteria.
Under the terms of the 1998 Comprehensive Stock Incentive Plan, the
Compensation Policy Committee may grant bonus awards to eligible full-time
employees. Bonus awards may be part of a management incentive program which
pays part of the annual performance bonus awarded to managers and other key
employees in shares of Common Stock. A bonus award entitles the holder to
receive a distribution of Common Stock in accordance with the underlying
agreement. Generally, holders of bonus awards vest in the shares covered by
101
<PAGE>
their award over ten years in annual installments commencing one year after
grant. Unless the holder of a bonus award elects otherwise, vested shares are
distributed in ten consecutive, approximately equal annual installments.
The 1998 Comprehensive Stock Incentive Plan authorizes the Compensation
Policy Committee to grant SARs to eligible full-time employees. SARs awarded
under the 1998 Comprehensive Stock Incentive Plan give the holder the right to
an amount equal to the appreciation in the value of the Common Stock over the
specified price. SARs may be paid in the Common Stock, cash or other form or
combination form of payout.
Under the 1998 Comprehensive Stock Incentive Plan, the Company also may
award an eligible full-time employee or officer a Special Recognition Award.
Special Recognition Awards may be paid in the form of Common Stock or an
option to purchase Common Stock at an amount not less than fair market value
on the date of grant.
Stock Purchase Plan. The Company will establish the Company Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Company will reserve 430,000
shares of Common Stock for issuance under the Stock Purchase Plan. The Stock
Purchase Plan will be available to any employee of the Company or a subsidiary
who: (i) is an active employee on January 1 of each calendar year, (ii) is
generally employed for more than five months in any calendar year, (iii) works
more than 20 or more hours per week and (iv) after the purchase of Common
Stock under the Stock Purchase Plan, would not own (or be deemed to own)
Common Stock possessing 5% or more of the total combined voting power or value
of all classes of stock of the Company or any subsidiary.
Executive Deferred Compensation Plan. Pursuant to the Benefits Allocation
Agreement, the Company is expected to establish the Company Executive Deferred
Compensation Plan (the "Executive Deferred Compensation Plan"). The following
individuals are eligible to participate in the Executive Deferred Compensation
Plan: (i) any employee of the Company who receives an annual compensation of
in excess of $120,000 or such other designated amount, (ii) any bonus eligible
employee with three years of service and annual compensation in excess of
$75,000, (iii) selected management employees of an acquired entity, (iv) any
employee of the Company whose benefits under the 401(k) Plan (described below)
for the prior plan year were reduced in accordance with the applicable limits,
(v) members of the Board or (vi) designated former participants. A participant
may generally elect to defer a portion of his compensation (or directors' fees
in the case of a member of the Board) under the Executive Deferred
Compensation Plan.
Performance-Based Annual Incentive Bonus Plan. The Company intends to
establish a Performance-Based Annual Incentive Bonus Plan (the "Annual
Incentive Bonus Plan") to promote the Company's pay for performance philosophy
by providing executives with financial incentives to achieve key business and
individual performance objectives. The annual bonus payments for the Chief
Executive Officer and the other four most highly compensated executive
officers will be tied primarily to achievement of specific financial goals and
a smaller portion of the annual bonus is tied to the achievement of individual
and team objectives. All Annual Incentive Bonus Plan criteria will be set
annually and approved by the Compensation Policy Committee of the Board of
Directors.
Under the Annual Incentive Bonus Plan, goals and objectives will be
established for a minimum level, a target level and a maximum level of
performance. Actual performance will be measured relative to these levels for
each objective in order to determine the actual payout for each objective. No
payment will be made if performance fails to meet the minimum level for that
objective.
401(k) Plan. The Company will establish the Company Retirement and Saving
Plan (the "401(k) Plan"), in connection with the Distribution. The 401(k) Plan
will be available to all eligible employees. A participant may elect to
contribute from a portion of his or her compensation to the 401(k) Plan. The
Company may make a discretionary contribution (including a matching
contribution), in an amount, if any, determined annually by the Board, to the
401(k) Plan for the benefit of eligible employees. The 401(k) Plan is expected
to allow participants to elect to invest part or all of their 401(k) Plan
benefits in Common Stock. The Company has reserved 37,000 shares of Common
Stock for issuance under the 401(k) Plan.
102
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) acts committed in bad faith or active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The Company's Charter contains such a provision which
eliminates such liability to the maximum extent permitted by Maryland law.
In accordance with the MGCL, the Company's Charter and Bylaws obligate it,
to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to (a) any present or former director or officer who is made party to the
proceeding by reason of his service in that capacity or (b) any individual
who, while a director or officer of the Company and at the request of the
Company, serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity, against any claim or
liability to which he may become subject by reason of such status. The MGCL
permits a corporation to indemnify its directors and officers, among others,
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceedings to which they may
be made a party by reason of their service in those or other capacities unless
it is established that (i) the act or omission of the director or officer was
material to the matter giving rise to the proceedings and (a) was committed in
bad faith or (b) was the result of active and deliberate dishonesty, (ii) the
director or officer actually received an improper personal benefit in money,
property or services or (iii) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission
was unlawful. However, under the MGCL, a Maryland corporation may not
indemnify for an adverse judgement in a suit by or in the right of the
corporation. In accordance with the MGCL, the Company's Bylaws require it, as
a condition to advancing expenses, to obtain (i) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company as authorized by the
Company's Bylaws and (ii) a written statement by or on his behalf to repay the
amount paid or reimbursed by the Company if it shall ultimately be determined
that the standard of conduct was not met.
INDEMNIFICATION AGREEMENTS
The Company intends to enter into separate indemnification agreements with
its directors and officers. The indemnification agreements will provide, among
other things, that the Company will indemnify its directors and officers to
the fullest extent permitted by law and advance to its directors and officers
all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted.
103
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AFTER THE DISTRIBUTION
Executive officers, directors and director nominees will receive shares of
Common Stock of the Company in the Distribution in respect of Host common
stock held by them on the Record Date. The Distribution will be made on the
basis of one share of Common Stock of the Company for every ten shares of Host
common stock held on the Record Date.
For purposes of providing an indication of the beneficial ownership of
certain persons following the Distribution, the following table sets forth the
number of shares of Common Stock of the Company that will be beneficially
owned immediately following the Distribution (assuming all outstanding Host
stock options are exercised prior to the Distribution), assuming a record date
of September 30, 1998 for this purpose, by (i) each person then serving as an
executive officer and director of the Company, (ii) all director nominees,
(iii) all directors, director nominees and executive officers of the Company
as a group and (iv) persons or entities owning 5% or more of the outstanding
shares of Host common stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF PERCENT
BENEFICIAL NUMBER OF OF
OWNER(1) SHARES(2) SHARES(3)
---------------- --------- ---------
<S> <C> <C>
Bruce D. Wardinski........................................ 16,172 *
James L. Francis.......................................... 11,136 *
Bruce F. Stemerman........................................ 4,389 *
Steven J. Fairbanks....................................... 1,159 *
Larry K. Harvey........................................... 592 *
Tracy M. J. Colden........................................ 221 *
Christopher J. Nassetta................................... 35,620 *
Adam M. Aron.............................................. 0 *
Louise M. Cromwell........................................ 0 *
Kelvin L. Davis........................................... 5,000 *
John W. Marriott, III(4).................................. 22,864 *
John B. Morse, Jr. ....................................... 0 *
Michael A. Wildish........................................ 0 *
J. W. Marriott, Jr. (5)................................... 1,327,501 5.3%
Richard E. Marriott(6).................................... 1,320,320 5.3
Blackstone Entities(7).................................... 4,370,000 17.6
Dresdner RCM Global Investors LLC(8)...................... 1,359,597 5.5
FMR Corp.(9).............................................. 2,253,257 9.1
Southeastern Asset Management, Inc.(10)................... 3,675,800 14.8
All Directors, Director Nominees and Executive Officers as
a Group (13 persons)..................................... 87,103 *
</TABLE>
- --------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is 10400
Fernwood Road, Bethesda, Maryland 20817.
(2) As of September 30, 1998, 204,602,476 shares of Host common stock were
outstanding. Assuming a record date of September 30, 1998 for purposes of
this table, such number of shares of Host common stock outstanding would
result in the distribution of approximately 20,450,000 shares of Common
Stock of the Company in the Distribution. An additional approximately
4,370,000 shares of Common Stock will be held by the Blackstone Entities
if the Blackstone Acquisition is consummated. The information in the table
assumes the Blackstone Acquisition is consummated. For purposes of this
table, a person is deemed to have "beneficial ownership" of the number of
shares of Common Stock of the Company that such person would have had the
right to acquire within 60 days of September 30, 1998 upon exercise of
options to purchase shares of Host common stock granted pursuant to Host's
stock incentive plans. The following number of Host shares can be acquired
by the named persons through the exercise of Host stock options
exercisable within 60 days of September 30, 1998: for Mr. Wardinski,
22,950; for Mr. Francis, 11,048; for Mr. Stemerman, 27,250; for Mr.
Fairbanks, 1,212; for Mr. Harvey, 4,450; for Ms. Colden, 1,200; for J.W.
Marriott, Jr., 810,447; and for Richard E. Marriott, 55,700.
104
<PAGE>
(3) For purposes of computing the percentage of outstanding shares held by
each person, all shares of Host common stock that such person has the
right to acquire within 60 days pursuant to the exercise of options are
deemed to be outstanding, but are not deemed to be outstanding for the
purposes of computing the ownership percentage of any other person.
(4) Includes 1,442 shares held by Mr. Marriott as trustee for three trusts
for the benefit of his children, 1,917 shares owned by three trusts for
the benefit of his children in which his wife serves are co-trustee and
316 owned by his wife.
(5) Includes: (i) 197,775 shares held in trust for which J.W. Marriott, Jr.
is the trustee or a co-trustee; (ii) 6,843 shares held by the wife of
J.W. Marriott, Jr.; (iii) 70,456 shares held in trust for which the wife
of J.W. Marriott, Jr. is the trustee or a co-trustee; (iv) 245,179
shares held by the J. Willard Marriott Foundation of which J.W.
Marriott, Jr. is a co-trustee; (v) 270,759 shares held by a limited
partnership whose general partner is a corporation of which J.W.
Marriott, Jr. is the controlling stockholder; and (vi) 8,000 shares held
by a limited partnership whose general partner is J.W. Marriott, Jr.;
does not include shares held by the adult children of J.W. Marriott,
Jr.; J.W. Marriott, Jr. disclaims beneficial ownership of all such
shares.
(6) Includes: (i) 187,471 shares held in trust for which Richard E. Marriott
is the trustee or a co-trustee; (ii) 6,822 shares held by the wife of
Richard E. Marriott; (iii) 60,383 shares held in trust for which the
wife of Richard E. Marriott is the trustee or a co-trustee; (iv) 245,179
shares held by the J. Willard Marriott Foundation of which Richard E.
Marriott is a co-trustee; and (v) 230,273 shares held by a corporation
of which Richard E. Marriott is the controlling stockholder; does not
include shares held by the adult children of Richard E. Marriott;
Richard E. Marriott disclaims beneficial ownership of all such shares.
(7) The Blackstone Entities constitute a series of affiliated partnerships.
Initially, a majority of the Common Stock received pursuant to the
Blackstone Acquisition will be held by such affiliated partnerships, but
it is expected that eventually they will be distributed by such
affiliated partnerships to their partners.
(8) Represents shares of Common Stock of the Company that would be held by
Dresdner RCM Global Investors LLC ("Dresdner RCM") and its affiliates,
RCM Limited L.P. ("RCM Limited") and RCM General Corporation ("RCM
General"), and by Dresdner Bank AG, of which Dresdner RCM is a wholly
owned subsidiary. Dresdner RCM has reported in a Schedule 13G under the
Exchange Act, filed with the Commission, sole dispositive power over
12,943,675 shares of Host common stock and shared dispositive power over
282,000 shares of Host common stock. Of these shares, Dresdner RCM has
reported sole voting power over 8,854,200 shares and does not share
voting power with respect to any shares. In addition, Dresdner Bank AG
has reported in a separate Schedule 13G under the Exchange Act, filed
with the Commission, sole dispositive and voting power over 370,300
shares of Host common stock, and such shares are included in the number
reported in this table. The principal business address of Dresdner RCM,
RCM Limited and RCM General is Four Embarcadero Center, San Francisco,
California 94111. The principal business address of Dresdner Bank AG is
Jurgen Ponto-Platz 1, 60301 Frankfurt, Germany.
(9) Represents the shares of Common Stock of the Company that would be held
by FMR Corp. ("FMR") and its subsidiaries, Fidelity Management Trust
Company ("FMT") and Fidelity Management & Research Company ("FM&R"). FMR
has reported in a Schedule 13G under the Exchange Act filed with the
Commission, that FMR, through its control of FM&R and certain investment
funds for which FM&R acts as an investment adviser, has sole power to
dispose of 22,474,835 shares of Host common stock owned by such
investment funds, including the 15,610,500 shares of Host common stock
(or 7.64% of the total shares outstanding of Host common stock as of
September 30, 1998) held by the Fidelity Magellen Fund. FMR has no power
to vote or direct the voting of the shares of Host common stock owned by
the investment funds, which power resides with the Board of Directors of
such investment funds. FMR, through its control of FMT and certain
institutional accounts for which FMT serves as investment manager, has
sole dispositive power over 57,739 shares, the sole power to vote or
direct the voting of 44,301 shares of Host common stock, and no power to
vote or direct the voting of 13,438 shares of Host common stock owned by
institutional accounts. The principal business address for FMR, FMT and
FM&R is 82 Devonshire Street, Boston, Massachusetts 02109.
(10) Represents shares of Common Stock of the Company that are held by
Southeastern Asset Management, Inc. ("SAM"). SAM reported in a Schedule
13G under the Exchange Act, filed with the Commission, sole dispositive
power over 21,730,700 shares of Host common stock and shared dispositive
power over 14,968,300 shares of Host common stock. Of these shares, SAM
has reported sole voting power over 18,338,100 shares, shared voting
power over 14,968,300 and no power to vote 3,451,600 shares. The
principal business address of SAM is 6075 Poplar Avenue, Suite 900,
Memphis, Tennessee 38119.
105
<PAGE>
CERTAIN RELATIONSHIPS
In addition to entering into the Hotel Leases and related agreements, for
purposes of governing certain ongoing relationships between the Company and
Host after the Distribution and to provide for an orderly transition, the
Company and Host have entered into or will enter into: (i) a Distribution
Agreement, providing for, among other things, the Distribution and the
division between the Company and Host of certain assets and liabilities; (ii)
a Tax Sharing Agreement, pursuant to which the Company and Host would agree to
allocate tax liabilities that related to periods prior to the Distribution
Date; (iii) an Employee Benefits and Other Employment Matters Allocation
Agreement, providing for certain compensation, benefit and labor matters; (iv)
Asset Management Agreements, pursuant to which the Company would provide to
Host REIT and a noncontrolled subsidiary of Host REIT asset management
services related to their rights and responsibilities as owner of the hotels;
(v) a Non-Competition Agreement, pursuant to which the Company and Host would
agree not to engage in certain businesses; (vi) Guaranty Agreements, pursuant
to which the Company would guarantee a certain amount of the lease and related
management agreement obligations of the Company subsidiaries that will lease
or sublease hotels from Host REIT; (vii) a Pooling Agreement, pursuant to
which all leased full-service hotels would be separated into four identified
"pools" of hotels for purposes of calculating the amount of the guarantee; and
(viii) a Corporate Transitional Services Agreement, pursuant to which Host
would provide certain limited administrative services to the Company. See
"Business and Properties--Relationship with Host after the Distribution." The
terms of the foregoing agreements were negotiated by the Company with Host,
but because the Company was a wholly owned subsidiary of Host at such time,
such negotiation may not necessarily have been on an arms-length basis and,
accordingly, may not necessarily reflect fair market terms.
Louise M. Cromwell, who is a director nominee and will become a director of
the Company in connection with the Distribution, is Senior Counsel in the Real
Estate Practice Group of Shaw, Pittman, Potts & Trowbridge in Washington, D.C.
Shaw, Pittman has been retained by the Company during 1998 to provide certain
real estate-related legal services to the Company for which the Company
expects to pay Shaw, Pittman legal fees totaling approximately $625,000.
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of the Charter and Bylaws and by the provisions of
applicable law. Copies of the Charter and Bylaws are included as exhibits to
the Registration Statement of which this Prospectus is a part.
GENERAL
Upon completion of the Distribution, the Company's authorized capital stock
will consist of 85,000,000 shares, initially consisting of 75,000,000 shares
of Common Stock, par value $.01 per share (the "Common Stock"), and 10,000,000
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock").
The Board of Directors is authorized, without a vote of stockholders, to
classify or reclassify any unissued shares of capital stock and to establish
the preferences and rights of any preferred or other class or series of stock
to be issued. Upon completion of the Distribution, the Company will have
outstanding approximately 24,820,000 shares of Common Stock (assuming the
Blackstone Acquisition is consummated) and no outstanding shares of Preferred
Stock. All of the shares of Common Stock of the Company that will be
outstanding immediately following the Distribution will be validly issued,
fully paid and non-assessable.
COMMON STOCK
Subject to the provisions of the Charter regarding restrictions on the
transfer of shares of capital stock, each outstanding share of Common Stock of
the Company entitles the holder to one vote on all matters submitted to a vote
of stockholders, including the election of directors, and, except as provided
with respect to any other class or series of shares of capital stock, the
holders of shares of Common Stock of the Company will possess the exclusive
voting power. There is no cumulative voting in the election of directors,
which means that the holders of a majority of the outstanding Common Stock of
the Company can elect all of the directors then standing for election.
106
<PAGE>
Subject to the preferential rights of any other classes or series of capital
stock and to the provisions of the Charter regarding restrictions on transfers
of shares of capital stock, holders of Common Stock of the Company are
entitled to receive distributions if, as and when authorized and declared by
the Board of Directors, out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the
Company.
Holders of shares of Common Stock of the Company have no preferences,
conversion, sinking fund, redemption rights or preemptive rights to subscribe
for any securities of the Company. Subject to the provisions of the Charter
regarding restrictions on transfer of shares of capital stock, shares of
Common Stock of the Company have equal distribution, liquidation and other
rights.
The Charter will authorize the Board of Directors to reclassify any unissued
shares of Common Stock of the Company into other classes or series of stock,
including preferred stock, and to establish the number of shares in each class
or series and to set the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption for each such class or
series.
PREFERRED STOCK
The Charter initially will authorize the Board of Directors to issue
10,000,000 shares of Preferred Stock and to classify or reclassify any
unissued preferred shares into one or more classes or series of stock,
including Common Stock of the Company. Prior to issuance of shares of any
class or series of stock other than Common Stock of the Company, the Board of
Directors is required, under the MGCL, to set, subject to the provisions of
the Charter regarding the restriction on transfer of shares of capital stock,
the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such class or
series. Thus, the Board of Directors could authorize the issuance of Preferred
Stock or other stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of shares of Common
Stock of the Company or otherwise be in their best interest. As of the date
hereof, no shares other than Common Stock of the Company are outstanding, but
the Company may issue Preferred Stock or other stock in the future. Although
the Board of Directors has no intention at the present time of doing so (other
than in connection with the proposed Stockholders Rights Plan), it could
authorize the Company to issue a class or series of shares that could,
depending upon the terms of such class or series, delay, defer or prevent a
transaction or a change in control of the Company that might involve a premium
price for holders of shares of Common Stock of the Company or otherwise be in
their best interest.
POWER TO ISSUE ADDITIONAL COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock
and to classify or reclassify unissued Common Stock or Preferred Stock and
thereafter to cause the Company to issue such classified or reclassified
shares of stock in one or more classes or series will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the Common Stock of the Company, will be
available for issuance without further action by the Company's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may
be listed or traded.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Charter and the Bylaws contain, among other things, certain provisions
described below that may reduce the likelihood of a change in the Board of
Directors or voting control of the Company without the consent of the Board of
Directors. These provisions, together with certain provisions of Maryland law,
could have the
107
<PAGE>
effect of discouraging, delaying or preventing tender offers or takeover
attempts that some or a majority of the stockholders might consider to be in
the stockholders' best interest, including offers or attempts that might
result in a premium over the market price for the Common Stock.
Classified Board; Board Size Fixed Within a Range. The Charter will provide
that the Board of Directors initially will consist of eight members and may
thereafter be increased or decreased in accordance with the Bylaws, provided
that the total number of directors may not be fewer than three nor more than
thirteen. Pursuant to the Bylaws, the number of directors shall be fixed by
the Board of Directors within the limits set forth in the Charter. Further,
the Charter will provide that the Board of Directors will be divided into
three classes of directors, with each class to consist as nearly as possible
of an equal number of directors. At each annual meeting of stockholders, the
class of directors to be elected at such meeting will be elected for a three-
year term, and the directors in the other two classes will continue in office.
Because stockholders will have no right to cumulative voting for the election
of directors, at each annual meeting of stockholders of a majority of the
outstanding Common Stock will be able to elect all of the successors to the
class of directors whose term expires at that meeting.
Filling of Board Vacancies; Removal. Vacancies on the Board of Directors may
be filled by the concurring vote of a majority of the remaining directors and,
in the case of a vacancy resulting from the removal of a director by the
stockholders, by the stockholders by a least two-thirds of all the votes
entitled to be cast in the election of directors. Under Maryland law,
directors may fill any vacancy only until the next annual meeting of
stockholders. The Charter will provide that, except for any directors who may
be elected by holders of a class or series of stock other than the Common
Stock, directors may be removed only for cause and only by the affirmative
vote of stockholders holding at least two-thirds of all the votes entitled to
be cast for the election of directors.
Stockholder Action by Unanimous Written Consent. Pursuant to the MGCL and
the Company's Bylaws, any action required or permitted to be taken by the
stockholders must be effected at a duly called annual or special meeting of
such holders, and may not be effected by any consent in writing by such
holders, unless such consent is unanimous.
Call of Special Meetings. The Company's Charter provides that special
meetings of the stockholders may be called by the President, the Board of
Directors of the Company or any other person specified in the Company's
Bylaws. The Company's Charter further provides that the Secretary of the
Company also is required to call a special meeting of the stockholders on the
written request of stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting. The Company's Bylaws contain similar
provisions to the Company's Charter regarding the calling of special
stockholder meetings. In addition, the Company's Bylaws provide that special
stockholder meetings may be called by the holders of any class or series of
stock having a preference over the Company's Common Stock as to dividends or
upon liquidation in the manner (if any) specified in articles supplementary
filed as part of the Company's Charter.
Advance Notice of Director Nominations and New Business. The Company's
Bylaws provide that (i) with respect to an annual meeting of stockholders,
nominations of persons for election to the Board of Directors and the proposal
of business to be considered by stockholders may be made only (a) pursuant to
the Company's notice of meeting, (b) by the Board of Directors or (c) by a
stockholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Company's Bylaws and (ii) with
respect to special meetings of the stockholders, only the business specified
in the Company's notice of meeting may be brought before the meeting of
stockholders and nominations of persons for election to the Board of Directors
may be made only (x) pursuant to the Company's notice of the meeting, (y) by
the Board of Directors or (z) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder
who is entitled to vote at the meeting and has complied with the advance
notice provisions set forth in the Bylaws. The advance notice provisions
contained in the Company's Bylaws generally require nominations and new
business proposals by stockholders to be delivered by the Secretary of the
Company not later than the close of business on the 60th day nor earlier than
the close of business on the 90th day prior to the first
108
<PAGE>
anniversary of the preceding year's annual meeting. Notwithstanding the
foregoing, to be timely for the 1999 annual meeting of stockholders, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on
the 60th day prior to such meeting or the tenth day following the day on which
public announcement is first made of the date of the 1999 annual meeting nor
earlier than the close of business on the 90th day before the date of such
annual meeting.
Merger, Consolidation, Share Exchange and Transfer of Assets. Pursuant to
the Charter, subject to the terms of any class or series of stock at the time
outstanding, the Company may merge with or into another entity, may
consolidate with one or more other entities, may participate in a share
exchange or may transfer its assets within the meaning of the MGCL, but any
such merger, consolidation, share exchange or transfer of assets must be
approved (i) by the Board of Directors in the manner provided in the MGCL and
(ii) by the stockholders by the affirmative vote of two-thirds of all votes
entitled to be cast thereon to the extent a stockholder vote is required under
the MGCL to effect any such transaction. In general, such transactions by a
Maryland corporation, such as the Company, must first be approved by a
majority of the entire Board of Directors and thereafter approved by
stockholders by the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter (unless the charter provides for a greater or lesser
stockholder vote but not less than a majority of the number of votes entitled
to be cast on the matter). Under the MGCL, certain mergers may be accomplished
without a vote of stockholders. For example, no stockholder vote is required
for a merger of a subsidiary of a Maryland corporation into its parent,
provided the parent owns at least 90% of the subsidiary. In addition, a merger
need not be approved by stockholders of a Maryland successor corporation if
the merger does not reclassify or change the outstanding shares or otherwise
amend the charter, and the number of shares to be issued or delivered in the
merger is not more than 20% of the number of its shares of the same class or
series outstanding immediately before the merger becomes effective. A share
exchange need be approved by a Maryland successor only by its Board of
Directors. Under the MGCL, a "transfer of assets" is defined to mean any sale,
lease, exchange or other transfer of all or substantially all of the assets of
the corporation but does not include (i) a transfer of assets by a corporation
in the ordinary course of business actually conducted by it, (ii) a mortgage,
pledge or creation of any other security interest in any or all of the assets
of the corporation, whether or not in the ordinary course of its business,
(iii) an exchange of shares of stock through voluntary action under any
agreement with the stockholders, or (iv) a transfer of assets to one or more
persons if all the equity interests of the person or persons are owned,
directly or indirectly, by the corporation. Pursuant to the MGCL, a voluntary
dissolution of the Company also would require the affirmative vote of two-
thirds of al the votes entitled to be cast on the matter.
Amendments to the Company's Charter and Bylaws. Under the MGCL, in order to
amend the charter, the board of directors first must adopt a resolution
setting forth the proposed amendment and declaring its advisability and direct
that the proposed amendment be submitted to stockholders for their
consideration either at an annual or special meeting of stockholders.
Thereafter, the proposed amendment must be approved by stockholders by the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter, unless a greater or lesser proportion of votes (but not less than a
majority of all votes entitled to be cast) is specified in the charter. The
provisions contained in the Company's Charter relating to restrictions on
transferability of shares of capital stock, the classified Board and fixing
the size of the Board within the range set forth in the Charter, as well as
the provisions relating to removal of directors and the filling of Board
vacancies may be amended only by a resolution adopted by the Board of
Directors and approved at an annual or special meeting of the stockholders by
the affirmative vote of the holders of not less than two-thirds of the votes
entitled to be cast on the matter. Other amendments to the Charter generally
may be effected by requisite action of the Board of Directors and approval by
stockholders by the affirmative vote of not less than a majority of the votes
entitled to be cast on the matter. As permitted under the MGCL, the Company's
Bylaws provide that directors have the exclusive right to amend the Bylaws.
Amendment of this provision of the Charter also would require Board action and
approval by stockholders by not less than two-thirds of all votes entitled to
be cast on the matter.
Maryland Business Combination Law. Under the MGCL, unless an exemption is
available, certain "business combinations" (including certain issuances of
equity securities) between a Maryland corporation and any Interested
Stockholder or an affiliate of the Interested Stockholder are prohibited for
five years after the most
109
<PAGE>
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the Board of Directors and approved by the affirmative vote of at least (i)
80% of all the votes entitled to be cast by holders of the outstanding shares
of voting stock and (ii) two-thirds of the votes entitled to be cast by
holders of voting stock other than voting stock held by the Interested
Stockholder who will (or whose affiliate will) be a party to the business
combination or any affiliate or associate of the Interested Stockholder,
voting together as a single voting group, unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the
same form as previously paid by the Interested Stockholder for its shares. A
business combination that is approved by the board of directors of a Maryland
corporation at any time before an Interested Stockholder first becomes an
Interested Stockholder is not subject to the special voting requirements. The
Board of Directors of the Company has not opted out of the business
combination provisions of the MGCL. Consequently, the five-year prohibition
and the super-majority vote requirements will apply to a business combination
involving the Company and any Interested Stockholder (except as noted below);
however, as permitted by the MGCL, the Company's Board of Directors may elect
to opt out of these provisions in the future.
In connection with the Distribution, the Board of Directors has adopted a
resolution exempting from the operation of the "business combination" statute
transactions involving Host REIT, Marriott International, J.W. Marriott, Jr.
and Richard E. Marriott; provided that any such transaction with Marriott
International that is not in the ordinary course of business or with J.W.
Marriott, Jr. or Richard E. Marriott must be approved by a majority of the
directors of the Company 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 the MGCL.
Maryland Control Share Acquisition Law. Under the MGCL, "control shares"
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter, excluding shares owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares which, if aggregated with all other such shares previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority or (iii)
a majority or more of all voting power. Control shares do not include shares
the acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisitions of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition.
The control share acquisition statute does not apply to (i) shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (ii) acquisitions or exempted by the charter or bylaws
110
<PAGE>
of the corporation. The Board of Directors of the Company has not opted out of
the control share provisions of the MGCL but, as permitted by the MGCL, may
elect to opt out of these provisions in the future.
Stockholder Rights Plan. In connection with the Distribution, the Board of
Directors intends to adopt a Stockholder Rights Plan pursuant to a rights
agreement ("Rights Agreement") and declare a dividend of one preferred stock
purchase right (a "Right") for each outstanding share of Common Stock. All
Common Stock issued by the Company between the date of adoption of the Rights
Agreement and the Rights Distribution Date (as defined below), or the date, if
any, on which the Rights are redeemed will have Rights attached to them. It is
expected that the Rights will expire ten years after adoption of the Rights
Agreement, unless earlier redeemed or exchanged. Each Right, when exercisable,
would entitle the holder to purchase a fraction of a share of a newly created
series of junior preferred stock. Until a Right is exercised, the holder
thereof, as such, would have no rights as a stockholder of the Company
including, without limitation, the right to vote or to receive dividends.
The Rights Agreement is expected to provide that the Rights initially attach
to all certificates representing shares of Common Stock then outstanding. The
Rights will separate from the Common Stock and a distribution of Rights
certificates will occur (a "Rights Distribution Date") upon the earlier to
occur of (i) ten days following a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of Common Stock (the "Stock Acquisition Date") or (ii) ten
business days (or such later date as the Board of Directors may determine)
following the commencement of a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person of
20% or more of the outstanding shares Common Stock. Until the Rights
Distribution Date, the Rights would be evidenced by the Common Stock
certificates, and will be transferred with, and only with, the Common Stock
certificates.
It is expected that, if a person becomes the beneficial owner of 20% or more
of the then outstanding Common Stock (except pursuant to an offer for all
outstanding Common Stock which the directors by a two-thirds vote determine to
be fair to and otherwise in the best interests of the Company and its
stockholders), each holder of a Right would, after the end of a redemption
period, have the right to exercise the Right by purchasing Common Stock (or,
in certain circumstances, cash, property or other securities of the Company)
having a value equal to two times such amount.
If at any time following the Stock Acquisition Date, (i) the Company is
acquired in a merger or other business combination transaction in which it is
not the surviving corporation (other than a merger which follows an offer
described in the preceding paragraph), or (ii) 50% or more of the Company's
assets or earning power is sold or transferred, each holder of a Right would
have the right to receive, upon exercise, common shares of the acquiring
company having a value equal to two times the purchase price of the Right,
subject to the Ownership Limit.
It is expected that, in general, the Board of Directors of the Company may
redeem the Rights at a normal price per Right at any time until ten days after
an Acquiring Person has been identified as such. If the decision to redeem the
Rights occurs after a person becomes an Acquiring Person, the decision would
require the concurrence of directors by a two-thirds vote.
The Rights will have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company. The Rights, however, will not interfere with any merger or other
business combination approved by the Board of Directors since the Board may,
at its option, at any time prior to any person becoming an Acquiring Person,
redeem all rights or amend the Rights Agreement to exempt the person from the
Rights Agreement.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For Host REIT to qualify as a REIT under the Code, Host REIT cannot own,
either directly or by attribution from one or more actual or constructive
owners of 10% or more of Host REIT, 10% or more of the Company or
111
<PAGE>
any other tenant of Host REIT. In order to assist Host REIT in meeting this
requirement, the Company has adopted the Ownership Limit, which provides that
no person or persons acting as a group may own, or be deemed to own by virtue
of certain attribution provisions of the Code, more than (i) 9.8% of the
lesser of the number or value of shares of the Common Stock of the Company
outstanding or (ii) 9.8% of the lesser of the number or value of the issued
and outstanding preferred shares of any class or series of Company capital
stock. The ownership attribution rules under the Code are complex and may
cause Common Stock of the Company owned actually or constructively by a group
of related individuals and/or entities to be owned constructively by one
individual or entity. As a result, the acquisition of less than 9.8% of the
Common Stock of the Company (or the acquisition or ownership of an interest in
an entity that owns, actually or constructively, the Common Stock of the
Company) by an individual or entity, could, nevertheless, cause that
individual or entity, or another individual or entity, to own constructively
in excess of 9.8% of the outstanding Common Stock of the Company and thus
subject such Common Stock of the Company to the remedies' provisions under the
Ownership Limit as described below. The Board of Directors of the Company may
grant an exemption from the Ownership Limit with respect to a person if it
determines that such ownership will not cause the Company or any subsidiary of
the Company that is a tenant of Host REIT to be considered a "related party
tenant" for purposes of the REIT qualification rules, and Host REIT consents
thereto. As a condition of a waiver, the Board of Directors and Host REIT may
require undertakings or representations from the applicant with respect to
such determination. Pursuant to the terms of the Charter, the Ownership Limit
will become effective as of the Distribution Date. A person who would exceed
the Ownership Limit solely by reason of the receipt of shares of Common Stock
of the Company in the Distribution is excepted from the Ownership Limit to the
extent that such person holds such shares. Any person who acquires or attempts
or intends to acquire actual or constructive ownership of shares of Company
capital stock that will or may violate the Ownership Limit is required to give
notice immediately to the Company and Host REIT and provide the Company and
Host REIT with such other information as the Company and Host REIT may request
in order to determine the effect of such transfer on Host REIT's status as a
REIT.
If any purported transfer of shares of Company capital stock or any other
event would otherwise result in any person violating the Ownership Limit, then
any such purported transfer will be void and of no force or effect with
respect to the purported transferee (the "Prohibited Transferee") as to that
number of shares that exceeds the Ownership Limit (referred to as "excess
shares") and the Prohibited Transferee shall acquire no right or interest (or,
in the case of any event other than a purported transfer, the person or entity
holding record title to any such shares in excess of the Ownership Limit (the
"Prohibited Owner") shall cease to own any right or interest) in such excess
shares. Any such excess shares described above will be transferred
automatically, by operation of law, to a trust, the beneficiary of which will
be a qualified charitable organization selected by the Company (the
"Beneficiary"). Such automatic transfer shall be deemed to be effective as of
the close of business on the Business Day (as defined in the Charter) prior to
the date of such violating transfer. Within 20 days of receiving notice from
the Company of the transfer of shares to the trust, the trustee of the trust
(who shall be designated by the Company and be unaffiliated with the Company
or Host REIT and any Prohibited Transferee or Prohibited Owner) will be
required to sell such excess shares to a person or entity who could own such
shares without violating the Ownership Limit, and distribute to the Prohibited
Transferee an amount equal to the lesser of the price paid by the Prohibited
Transferee for such excess shares or the sales proceeds received by the trust
for such excess shares. In the case of any excess shares resulting from any
event other than a transfer, or from a transfer for no consideration (such as
a gift), the trustee will be required to sell such excess shares to a
qualified person or entity and distribute to the Prohibited Owner an amount
equal to the lesser of the fair market value of such excess shares as of the
date of such event or the sales proceeds received by the trust for such excess
shares. In either case, any proceeds in excess of the amount distributable to
the Prohibited Transferee or Prohibited Owner, as applicable, will be
distributed to the Beneficiary. Prior to a sale of any such excess shares by
the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all
voting rights with respect to such excess shares. Subject to Maryland law,
effective as of the date that such shares are transferred to the trust, the
trustee shall have the authority (at the trustee's sole discretion and subject
to applicable law) (i) to rescind as void any vote cast by a Prohibited
Transferee prior to the discovery by the Company that such shares have been
transferred to the trust and (ii) to recast such vote in accordance with the
desires of the trustee acting
112
<PAGE>
for the benefit of the Beneficiary. However, if the Company has already taken
irreversible corporate action, then the trustee shall not have the authority
to rescind and recast such vote. Any dividend or other distribution paid to
the Prohibited Transferee or Prohibited Owner (prior to the discovery by the
Company that such shares had been automatically transferred to a trust as
described above) will be required to be repaid to the trustee upon demand for
distribution to the Beneficiary. The Charter provides that if the transfer to
the trust as described above is not automatically effective (for any reason)
to prevent violation of the Ownership Limit, the transfer of the excess shares
will be void. In addition, shares of Company capital stock held in the trust
shall be deemed to have been offered for sale to the Company, or its designee,
at a price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the trust (or, in the case of a
devise or gift, the market value at the time of such devise or gift) and (ii)
the market value of such shares on the date the Company, or its designee,
accepts such offer. The Company will have the right to accept such offer until
the trustee has sold the shares held in the trust. Upon such a sale to the
Company, the interest of the Beneficiary in the shares sold will terminate and
the trustee will distribute the net proceeds of the sale to the Prohibited
Owner.
The Ownership Limit will not apply if (i) Host REIT no longer qualifies as a
REIT, (ii) Host REIT determines that it is no longer in the best interests of
Host REIT to attempt to qualify, or continue to qualify, as a REIT or (iii)
the Company determines, and Host REIT concurs, that Host REIT derives less
than 1% of its gross income pursuant to the Hotel Leases. All certificates
representing shares of Company capital stock shall bear a legend referring to
the restrictions described above. These ownership limitations could have the
effect of delaying, deferring or preventing a takeover or other transaction in
which holders of some, or a majority, of Common Stock of the Company 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.
REGISTRATION RIGHTS AGREEMENT
The Company has granted the Blackstone Entities certain registration rights
with respect to the shares of the Common Stock of the Company to be
transferred to them by Host REIT as a portion of the consideration in the
Blackstone Acquisition. While these registration rights require the Company to
file a registration statement covering all such shares by April 30, 1999, the
Blackstone Entities may only offer for sale (i) up to 50% of such shares
beginning July 1, 1999, (ii) an additional 25% of the shares beginning October
1, 1999 and (iii) the remaining 25% of the shares beginning January 1, 2000.
In addition, the Company has granted certain piggyback registration rights to
the Blackstone Entities allowing them to participate in registered offerings
by the Company or other stockholders. The Company will bear expenses incident
to its registration requirements under the registration rights agreement,
except that such expenses shall not include any underwriting discounts or
commissions or transfer taxes, if any, relating to such shares.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and the Registrar for the Common Stock is Bank of New
York.
113
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Distribution could adversely affect the prevailing market price of the
Common Stock and the Company's ability to raise capital in the future. Upon
completion of the Distribution, the Company will have a total of approximately
24,820,000 shares of Common Stock outstanding assuming the Blackstone
Acquisition is consummated (approximately 20,450,000 shares if the Blackstone
Acquisition is not consummated), of which approximately 20,375,000 shares will
be freely tradable without restriction under the Securities Act by persons
other than "affiliates" of the Company, as defined under the Securities Act.
The remaining approximately 4,370,000 shares of Common Stock outstanding
representing the shares to be transferred by Host REIT to the Blackstone
Entities if the Blackstone Acquisition is consummated, will be "restricted
securities" as that term is defined by Rule 144 promulgated under the
Securities Act.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned restricted
shares for at least one year is entitled to sell, within any three-month
period, a number of such shares that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock or (ii) the average
weekly trading volume in the Common Stock on the NYSE during the four calendar
weeks preceding the date on which notice of such sale is filed, provided
certain requirements concerning availability of public information, manner of
sale and notice of sale are satisfied. In addition, affiliates must comply
with the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, in order to sell shares of Common Stock that are
not restricted securities. Under Rule 144(k), a person who is not an affiliate
and has not been an affiliate for at least three months prior to the sale and
who has beneficially owned restricted shares for at least two years may resell
such shares without compliance with the foregoing requirements. In meeting the
one-year and two-year holding periods described above, a holder of restricted
shares can include the holding periods of a prior owner who was not an
affiliate. The one-year and two-year holding periods described above do not
begin to run until the full purchase price or other consideration is paid by
the person acquiring the restricted shares from the issuer or an affiliate.
If the Blackstone Acquisition is consummated by Host REIT, the Blackstone
Entities will have certain registration rights with respect to approximately
18% of the outstanding shares of Common Stock of the Company. If such holders
cause a large number of shares to be sold in the public market, such sales
could have an adverse effect on the trading price of the Common Stock. In
addition, if the Company is required, pursuant to such registration rights, to
include shares held by such persons in any registration statement that the
Company files to raise additional capital, the inclusion of such shares could
have an adverse effect on the Company's ability to raise needed capital.
Following the Distribution, the Company intends to register on one or more
registration statements on Form S-8 under the Securities Act the shares of
Common Stock issuable under the Company's stock option and other employee
benefit plans for directors, officers and employees of the Company and its
subsidiaries. Of the 4,537,000 shares to be reserved for issuance under these
plans, approximately 630,000 shares will be subject to stock options or
restricted stock expected to be granted by the Company concurrently upon
completion of the Distribution. Officers and employees of Host who become
officers and employees of the Company at the time of the Distribution also
will have their existing awards held under the Host stock option and alter
benefit plans converted into awards for Common Stock in accordance with the
terms of the Employee Benefits and Other Employment Matters Allocation
Agreement to be entered into by Host and the Company. See "Management--
Employee Benefit Plans--Comprehensive Stock Incentive Plan" and "Description
of Capital Stock--Registration Rights Agreement."
114
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION
The following discussion summarizes the federal income tax consequences
reasonably anticipated to be material to Host Stockholders in connection with
the Distribution. The following discussion is intended to address only those
federal income tax consequences that are generally relevant to all Host
Stockholders. Accordingly, it does not discuss all aspects of federal income
taxation that might be relevant to a specific Host Stockholder in light of his
particular investment or tax circumstances. Therefore, it is imperative that a
common stockholder of Host review the following discussion and consult with
his or her own tax advisors to determine the interaction of his individual tax
situation with the anticipated tax consequences of the Distribution.
The following discussion provides general information only, is not
exhaustive of all possible tax considerations and is not intended to be (and
should not be construed as) tax advice. For example, this summary does not
give a detailed description of any state, local or foreign tax considerations.
In addition, the discussion does not purport to deal with all aspects of
taxation that may be relevant to a Host Stockholder subject to special
treatment under the federal income tax laws, including, without limitation,
insurance companies, financial institutions or broker-dealers, tax-exempt
organizations (except to the extent discussed under the heading "Federal
Income Tax Consequences of the Distribution--Tax Consequences of the
Distribution to Tax-Exempt Host Stockholders") or foreign corporations and
persons who are not citizens or residents of the United States (except to the
extent discussed under the heading "Federal Income Tax Consequences of the
Distribution--Tax Consequences of the Distribution to Non-U.S. Host
Stockholders").
The information in this section is based on the Code, current, temporary and
proposed Treasury Regulations thereunder, the legislative history of the Code,
current administrative interpretations and practices of the IRS (including its
practices and policies as endorsed in private letter rulings, which are not
binding on the IRS), and court decisions, all as of the date hereof. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and court decisions will not significantly
change the current law or adversely affect existing interpretations of current
law. Any such change could apply retroactively to transactions preceding the
date of the change. No assurance can be provided that the statements set forth
herein (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged. Neither Host nor Host
REIT has requested or plans to request any rulings from the IRS concerning the
tax consequences of the Distribution.
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to Crestline and Host,
has delivered an opinion to Crestline that the discussion under the heading
"Federal Income Tax Consequences," to the extent that it contains descriptions
of federal income tax law, is correct in all material respects. A copy of the
opinion is included as an Exhibit to the Registration Statement of which this
Prospectus is a part. The opinion does not address the actual tax consequences
of the Distribution to the Host Stockholders. In particular, it does not
address the fair market value of the Distribution or the amount of the current
and accumulated E & P of Host and Host REIT, both of which are relevant to
determining the actual tax consequences of the Distribution to the Host
Stockholders.
The opinion is based on the Code and Treasury Regulations in effect on the
date hereof, current administrative interpretations and positions of the IRS
and existing court decisions. No assurance can be given that future
legislation, Treasury Regulations, administrative interpretations or court
decisions will not significantly change the law or the above conclusion
reached by counsel. Any such change could apply retroactively. In addition, an
opinion of counsel merely represents counsel's best judgement with respect to
the probable outcome on the merits and is not binding on the IRS or the
courts. Accordingly, even if there is no change in the applicable law, no
assurance can be provided that the above opinion will not be challenged by the
IRS or sustained by a court if so challenged.
115
<PAGE>
The following discussion is not intended to be, and should not be construed
by a Host Stockholder as, tax advice. THE SPECIFIC TAX ATTRIBUTES OF A
PARTICULAR HOST STOCKHOLDER COULD HAVE A MATERIAL IMPACT ON THE TAX
CONSEQUENCES OF THE DISTRIBUTION. THEREFORE, IT IS ESSENTIAL THAT EACH HOST
STOCKHOLDER CONSULT WITH HIS OR HER OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH STOCKHOLDER'S PARTICULAR
TAX SITUATION, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY
STATE, LOCAL OR FOREIGN TAXING JURISDICTION. THE FOLLOWING DISCUSSION IS NOT
INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Tax Consequences of the Distribution to U.S. Host Stockholders. As used
herein, the term "U.S. Host Stockholder" means a Host Stockholder who (for
United States federal income tax purposes) is (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source, or (iv) a
trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
A U.S. Host Stockholder will include the fair market value of his or her
share of the Distribution on the Distribution Date in gross income as ordinary
income (to the extent that the Distribution is considered made out of the U.S.
Host Stockholder's share of the portion of the current and accumulated E&P of
Host and Host REIT through the end of 1998 allocable to the Distribution). The
fair market value of the Distribution will equal the sum of (i) the fair
market value (on the Distribution Date) of the Common Stock that he or she
receives in the Distribution, plus (ii) the amount of any cash he or she
receives in lieu of fractional shares of Common Stock. Host currently
estimates that the fair market value of the Distribution will be approximately
$1.30 per share of Host common stock. No assurance can be provided that this
estimate will be accurate. If the fair market value of the Distribution on the
Distribution Date is greater than Host's current estimate, then a U.S. Host
Stockholder will include the additional amount in gross income as ordinary
income to the extent of the U.S. Host Stockholder's share of the portion of
the current and accumulated E&P of Host and Host REIT through the end of 1998
allocable to the Distribution. In this regard, it should be noted that federal
income tax law does not provide definitive guidance regarding the
determination of the fair market value of publicly traded securities (which
the Common Stock will be on the Distribution Date). Several courts have held
that the fair market value of such securities for federal income tax purposes
equals the average of the high and low sales prices of such securities on the
date of determination, and Host intends to take this position, but there can
be no assurance that the IRS would not seek to establish a different fair
market value for the Common Stock (e.g., the final sales price of the Common
Stock on the New York Stock Exchange on the Distribution Date).
Host and Host REIT currently believe that the entire Distribution will be
considered made out of the portion of Host and Host REIT's current and
accumulated E&P through the end of 1998 allocable to the Distribution. The
calculation of such E&P, however, is very complex. The amount will include (i)
the allocated consolidated E&P of Host (including each of its predecessors)
accumulated from 1929, the first year that the predecessor of Host was a "C"
corporation, through and including Host's 1998 taxable year, and (ii) the
current E&P of Host and Host REIT in 1998. In addition, the calculation
depends upon a number of factual and legal interpretations related to the
activities and operations of Host and its corporate affiliates during its
entire corporate existence and is subject to review and challenge by the IRS.
There can be no assurance that Host and Host REIT's calculation of this E&P
will be respected by the IRS or that a challenge to such calculation by the
IRS would not be sustained by a court. Hogan & Hartson L.L.P. will express no
opinion as to the amount of the current and accumulated E&P of Host and Host
REIT.
In the event that the fair market value of the Distribution received by a
U.S. Host Stockholder exceeds his or her share of the portion of Host and Host
REIT's current and accumulated E&P through the end of 1998
116
<PAGE>
allocable to the Distribution, the Distribution will be treated first as a
tax-free return of capital to such U.S. Host Stockholder, reducing the
adjusted basis in his or her Host common stock by the amount of such excess
(but not below zero) and then, if such basis is reduced to zero and there is
remaining excess, as capital gain to the extent of such remaining excess
(provided that such Host Stockholder has held the Host common stock as a
capital asset).
A U.S. Host Stockholder's initial tax basis in the Common Stock received in
the Distribution will equal the fair market value of such stock on the
Distribution Date. A U.S. Host Stockholder's holding period in the stock will
begin on the day after the Distribution Date.
Backup Withholding for the Distribution. Under the backup withholding rules,
a U.S. Host Stockholder may be subject to backup withholding at the rate of
31% with respect to the Distribution unless such stockholder (1) is a
corporation or comes within another exempt category and, when required,
demonstrates this fact or (2) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. A U.S.
Host Stockholder that does not provide Host with a correct taxpayer
identification number also may be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the U.S. Host
Stockholder's income tax liability. See "--Tax Consequences of the
Distribution to Non-U.S. Host Stockholders."
Tax Consequences of the Distribution to Tax-Exempt Host
Stockholders. Provided that a tax-exempt Host Stockholder (except certain tax-
exempt Host Stockholders) has not held its Host common stock as "debt financed
property" within the meaning of the Code and such Host common stock is not
otherwise used in a trade or business, the Distribution will not constitute
unrelated business taxable income ("UBTI"). For a tax-exempt Host Stockholder
that is a social club, voluntary employee benefit association, supplemental
unemployment benefit trust or qualified group legal services plan exempt from
federal income taxation under Code Sections 501 (c)(7), (c)(9), (c)(17) or
(c)(20), respectively, the Distribution will constitute UBTI unless the
organization is properly able to deduct amounts set aside or placed in reserve
for certain purposes so as to offset the income generated by its investment in
Host. Such Host Stockholders should consult their own tax advisors concerning
these "set aside" and reserve requirements.
Tax Consequences of the Distribution to Non-U.S. Host Stockholders. A Host
Stockholder that is a nonresident alien individual, foreign corporation,
foreign partnership or foreign estate or trust (collectively, a "Non-U.S. Host
Stockholder") will include the fair market value of his or her share of the
Distribution on the Distribution Date in gross income as ordinary income to
the extent that the Distribution is considered made out of the portion of the
current and accumulated E&P of Host and Host REIT through the end of 1998
allocable to the Distribution. For a discussion regarding the fair market
value of the Distribution and the extent to which the Distribution will be
attributable to such E&P, see "--Tax Consequences of the Distribution to U.S.
Host Stockholders" above.
For Non-U.S. Host Stockholders, the Distribution will be subject to
withholding of United States federal income tax on a gross basis (that is,
without allowance of deductions) at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless it is treated as
effectively connected with the conduct by the Non-U.S. Host Stockholder of a
United States trade or business. Certain certification and disclosure
requirements must be satisfied to be exempt from withholding under the
effectively connected income exemption. If the Distribution is effectively
connected with a United States trade or business, a Non-U.S. Host Stockholder
will be subject to tax on the Distribution on a net basis (that is, after
allowance of deductions) at graduated rates, in the same manner as U.S. Host
Stockholders are taxed with respect to the Distribution and generally will not
be subject to withholding. A Non-U.S. Host Stockholder that is a corporation
also may be subject to an additional branch profits tax on the Distribution at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty. Host expects to withhold United States income tax at the rate of 30%
on any distribution made to a Non-U.S. Host Stockholder unless (i) a lower
treaty rate applies and any required form or certification
117
<PAGE>
evidencing eligibility for that lower rate is filed with Host or (ii) a Non-
U.S. Host Stockholder files an IRS Form 4224 with Host claiming that the
Distribution is effectively connected income. The Company anticipates that any
such withholding taxes will have the effect of reducing the number of shares
of Common Stock (or any cash in lieu of fractional shares) that a Non-U.S.
Host Stockholder will receive in the Distribution.
In the event that the fair market value of the Distribution received by a
Non-U.S. Host Stockholder exceeds his or her share of the portion of Host and
Host REIT's current and accumulated E&P through the end of 1998 allocable to
the Distribution, the Distribution will be treated first as a tax-free return
of capital to such Non-U.S. Host Stockholder, reducing the adjusted basis in
his or her Host common stock by the amount of such excess (but not below
zero). If such basis is reduced to zero and there is remaining excess, the
Distribution would give rise to gain from a deemed sale or exchange of such
Host common stock.
Gain recognized upon a deemed sale or exchange of Host common stock pursuant
to the Distribution by a Non-U.S. Host Stockholder who owned more than 5% of
the Host common stock at any time during the five-year period ending on the
Distribution Date generally would be subject to United States taxation because
such stock constitutes a "United States real property interest" within the
meaning of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA").
Such gain would not be subject to United States taxation under FIRPTA as a
sale of a "United States real property interest" for a Non-U.S. Host
Stockholder who did not own more than 5% of the Host common stock at any time
during the five-year period ending on the Distribution Date because Host
common stock is "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the NYSE).
Notwithstanding the foregoing, gain from a deemed sale or exchange of Host
common stock pursuant to the Distribution not otherwise subject to FIRPTA
would be taxable to any Non-U.S. Host Stockholder who is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States. In such case, the
nonresident alien individual would be subject to a 30% United States
withholding tax on the amount of the gain.
If gain on a deemed sale or exchange of Host common stock pursuant to the
Distribution were subject to taxation under FIRPTA, the Non-U.S. Host
Stockholder would be subject to regular United States income tax with respect
to such gain in the same manner as a taxable U.S. Host Stockholder (subject to
any applicable alternative minimum tax, a special alternative minimum tax in
the case of nonresident alien individuals and the possible application of the
30% branch profits tax in the case of foreign corporations).
As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that Host would be required to withhold 10%
of any distribution to a Non-U.S. Host Stockholder in excess of Host and Host
REIT's current and accumulated E&P through the end of 1998. Consequently,
although Host intends to withhold at a rate of 30% on the entire amount of any
distribution (or a lower applicable treaty rate), to the extent that Host does
not do so, any portion of the Distribution not subject to withholding at a
rate of 30% (or a lower applicable treaty rate) would be subject to
withholding at a rate of 10%. However, a Non-U.S. Host Stockholder may seek a
refund of such amounts from the IRS if it is subsequently determined that the
Distribution was, in fact, in excess of such E&P, and the amount withheld
exceeded the Non-U.S. Host Stockholder's United States tax liability, if any,
with respect to the Distribution.
To the extent that withholding tax is owed with respect to a Non-U.S. Host
Stockholder with respect to Common Stock received in the Distribution, the
Company anticipates that the transfer agent will sell in the market a portion
of the shares of Common Stock distributable to the Non-U.S. Host Stockholder
to pay the withholding taxes, and the actual number of shares of Common Stock
received pursuant to the Distribution will be net of the shares sold.
118
<PAGE>
LEGAL MATTERS
The validity of the Common Stock to be distributed in the Distribution and
certain tax matters will be passed upon for the Company by Hogan & Hartson
L.L.P., Washington, D.C.
EXPERTS
The financial statements and schedule of HMC Senior Communities, Inc. as of
January 2, 1998 and for the period from June 21, 1997 (inception) through
January 2, 1998 and the financial statements of Forum Group, Inc. and
Subsidiaries, as Partitioned for Sale to Host Marriott Corporation, as of
January 3, 1997 and for the twenty-four week period ended June 20, 1997 and
the forty-week period ended January 3, 1997 included in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
The combined financial statements of Forum Group, Inc. and subsidiaries, as
partitioned for sale to Host Marriott Corporation as of March 31, 1996 and
1995 and for the years then ended have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock of the Company described herein. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information, reference is made hereby to the Registration Statement, exhibits
and schedules. Statements contained herein concerning any documents are not
necessarily complete and, in each instance, reference is made to the copies of
such documents filed as exhibits to the Registration Statement. Each such
statement is qualified in its entirety by such reference. Copies of these
documents may be inspected without charge at the principal office of the
Commission at 450 5th Street, N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission at 7 World Trade Center, Suite 1300, New
York, New York 10048, at Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661, and at 5670 Wilshire Boulevard, Suite 1100, Los
Angeles, California 90036, and copies of all or any part thereof may be
obtained from the Commission upon payment of the charges prescribed by the
Commission. Copies of such material may also be obtained from the Commission's
Web Site (http://www.sec.gov).
Following the Distribution, the Company will be required to comply with the
reporting requirements of the Securities Exchange Act of 1934 (the "Exchange
Act") and will file annual, quarterly and other reports with the Commission.
The Company will also be subject to the proxy solicitation requirements of the
Exchange Act and, accordingly, will furnish audited financial statements to
its stockholders in connection with its annual meetings of stockholders.
119
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following financial information is included on the pages indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HMC SENIOR COMMUNITIES, INC., WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF
HOST MARRIOTT CORPORATION
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheet as of January 2, 1998......................... F-3
Consolidated Statement of Operations for the Period from June 21, 1997
(inception) through January 2, 1998..................................... F-4
Consolidated Statement of Stockholders' Equity for the Period from June
21, 1997 (inception) through January 2, 1998............................ F-5
Consolidated Statement of Cash Flows for the Period from June 21, 1997
(inception) through January 2, 1998..................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Condensed Consolidated Balance Sheet as of September 11, 1998
(unaudited)............................................................. F-17
Condensed Consolidated Statement of Operations for the Thirty-six Weeks
Ended September 11, 1998 and the Twelve Weeks Ended September 12, 1997
(unaudited)............................................................. F-18
Condensed Consolidated Statement of Cash Flows for the Thirty-six Weeks
Ended September 11, 1998 and the Twelve Weeks Ended September 12, 1997
(unaudited)............................................................. F-19
Notes to Condensed Consolidated Financial Statements (unaudited)......... F-20
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED FOR SALE TO HOST MARRIOTT
CORPORATION
Report of Independent Public Accountants................................. F-22
Consolidated Balance Sheet as of January 3, 1997......................... F-23
Consolidated Statement of Operations for the twenty-four week period
ended June 20, 1997 and the forty-week period ended January 3, 1997..... F-24
Consolidated Statement of Cash Flows for the twenty-four week period
ended June 20, 1997 and the forty-week period ended January 3, 1997..... F-25
Notes to Consolidated Financial Statements............................... F-26
Independent Auditors' Report............................................. F-34
Combined Balance Sheets as of March 31, 1996 and 1995.................... F-35
Combined Statements of Operations for the years ended March 31, 1996 and
1995.................................................................... F-36
Combined Statements of Cash Flows for the years ended March 31, 1996 and
1995.................................................................... F-37
Notes to Combined Financial Statements................................... F-38
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheet of HMC Senior
Communities, Inc. ("HMCSC"), which is the senior living communities' business
of Host Marriott Corporation, as defined in Note 1 to the consolidated
financial statements, as of January 2, 1998, and the related consolidated
statements of operations, stockholder's equity and cash flows for the period
from June 21, 1997 (inception) through January 2, 1998. These consolidated
financial statements are the responsibility of Host Marriott Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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 audit provides 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 HMCSC as
of January 2, 1998 and the results of its operations and its cash flows for
the period from June 21, 1997 (inception) through January 2, 1998 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
May 1, 1998
F-2
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED BALANCE SHEET
JANUARY 2, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net.......................................... $633,840
Other assets......................................................... 1,332
Restricted cash...................................................... 10,686
Cash and cash equivalents............................................ 17,644
--------
Total assets....................................................... $663,502
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt................................................................. $349,934
Deferred income taxes................................................ 58,705
Accounts payable and other accrued liabilities....................... 15,543
Amounts due to Marriott International, net........................... 3,172
Accrued interest..................................................... 4,906
Due to Host Marriott Corporation..................................... 2,151
Deferred revenue..................................................... 2,027
--------
Total liabilities.................................................. 436,438
--------
Stockholder's equity:
Common stock, 100 shares authorized, issued and outstanding, no par
value............................................................... --
Additional paid-in capital........................................... 226,706
Retained earnings.................................................... 358
--------
Total stockholder's equity......................................... 227,064
--------
Total liabilities and stockholder's equity....................... $663,502
========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES.............................................................. $ 36,900
--------
OPERATING COSTS AND EXPENSES
Depreciation and amortization......................................... 10,635
Base management fees to Marriott International........................ 6,481
Property taxes........................................................ 3,626
Other................................................................. 187
--------
Total operating costs and expenses.................................. 20,929
--------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............... 15,971
Corporate expenses.................................................... (2,304)
Interest expense...................................................... (13,396)
Interest income....................................................... 336
--------
INCOME BEFORE INCOME TAXES............................................ 607
Provision for income taxes............................................ (249)
--------
NET INCOME............................................................ $ 358
========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Balance, June 21, 1997.............................. $-- $ -- $--
Common stock issued............................... -- -- --
Capital contributions by Host Marriott Corpora-
tion............................................. -- 226,706 --
Net income........................................ -- -- 358
---- -------- ----
Balance, January 2, 1998............................ $-- $226,706 $358
==== ======== ====
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 358
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization..................................... 10,635
Change in amounts due to Marriott International................... 10,073
Change in amounts due to Host Marriott............................ 2,151
Equity in earnings of affiliate................................... (997)
Change in other operating accounts................................ 3,156
---------
Cash provided by operating activities............................... 25,376
---------
INVESTING ACTIVITIES
Capital expenditures.............................................. (33,345)
Increase in capital improvement reserve........................... (67)
---------
Cash used in investing activities................................... (33,412)
---------
FINANCING ACTIVITIES
Contribution of cash.............................................. 7,319
Repayments of debt................................................ (2,142)
Issuances of debt................................................. 20,407
Change in financing reserves...................................... 96
---------
Cash provided by financing activities............................... 25,680
---------
Increase in cash and cash equivalents............................... 17,644
Cash and cash equivalents, beginning of period...................... --
---------
Cash and cash equivalents, end of period............................ $ 17,644
=========
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott Corporation:
Property and equipment............................................ $ 601,033
Other assets...................................................... 9,892
Debt assumed...................................................... (331,669)
Other liabilities................................................. (9,479)
Deferred revenue.................................................. (2,054)
Deferred income taxes............................................. 58,435
Expansion costs paid by Host Marriott Corporation, which have been
included in additional paid-in capital........................... 10,099
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On June 21, 1997, Host Marriott Corporation ("Host Marriott") acquired all
of the outstanding stock of Forum Group Inc. ("Forum Group") from Marriott
Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott International,
Inc. ("Marriott International") for $190 million of cash and the assumption of
$270 million of debt and concurrently contributed all of the assets and
liabilities of Forum Group to HMC Senior Communities, Inc. ("HMCSC"). In
connection with the acquisition, Forum Group assigned to Marriott
International its interest as manager under long-term operating agreements
(See Note 6). The acquisition of the Forum Group was accounted for under the
purchase method of accounting.
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spinning-off
HMCSC to the shareholders of Host Marriott, and contributing Host Marriott's
hotels and certain other assets and liabilities to a newly formed Delaware
limited partnership, Host Marriott, L.P., whose sole general partner will be
HMC Merger Corporation, a newly formed Maryland corporation which will be
renamed Host Marriott Corporation upon its merger with Host Marriott. After
the proposed reorganization, HMCSC will lease hotels from Host Marriott, L.P.
and Marriott International will continue to manage the hotels under long-term
management agreements.
Consummation of the reorganization is subject to significant contingencies,
including final Board approval and consent of stockholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates and
other third parties. Accordingly, there can be no assurance that the
reorganization will be completed.
The accompanying consolidated financial statements include the historical
accounts of HMCSC, representing 31 senior living communities (the
"Communities") located in 13 states, expected to be spun-off as part of the
reorganization described above.
HMCSC operates as a unit of Host Marriott utilizing Host Marriott's
employees, insurance and administrative services. HMCSC has no employees.
Periodically, certain operating expenses, capital expenditures and other cash
requirements of HMCSC are paid by Host Marriott and charged directly or
allocated to HMCSC. Certain general and administrative costs of Host Marriott
are allocated to HMCSC using a variety of methods, principally including Host
Marriott's specific identification of individual cost items and otherwise
through allocations based upon estimated levels of effort devoted by its
general and administrative departments to individual entities or relative
measures of size of the entities based on assets. In the opinion of
management, the methods for allocating corporate, general and administrative
expenses and other direct costs are reasonable. It is not practical to
estimate the costs that would have been incurred by HMCSC if it had been
operated on a stand-alone basis.
The consolidated financial statements present the financial position,
results of operations and cash flows of HMCSC beginning on June 21, 1997 (the
date Host Marriott acquired the stock of the Forum Group) through January 2,
1998. Host Marriott's basis in the assets and liabilities of HMCSC has been
carried over to these financial statements. All material intercompany
transactions and balances between HMCSC and its subsidiaries have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of HMCSC and its
subsidiaries and controlled affiliates. Investments in affiliates over which
HMCSC has the ability to exercise significant influence, but does not control,
are accounted for using the equity method. All material intercompany
transactions and balances have been eliminated.
F-7
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fiscal Year
HMCSC's fiscal year ends on the Friday nearest to December 31.
Revenues
Revenues represent house profit from the Communities. House profit reflects
the net revenues flowing to HMCSC as property owner and represents gross
community operating sales less property-level expenses excluding depreciation
and amortization, real and personal property taxes, insurance, management fees
and certain other costs which are classified as operating costs and expenses
in the accompanying statement of operations.
Resident fees and health care service revenues are generated primarily from
monthly charges for independent living units and daily charges for assisted
living suites and nursing beds, and are recognized monthly based on the terms
of the residents' agreements. Advance payments received for services are
deferred until the services are provided. Included in resident fees revenue is
ancillary revenue, which is generated on a "fee for service" basis for
supplemental items requested by residents and is recognized as the services
are provided.
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursements under these contractual arrangements are subject
to retroactive adjustments based on agency reviews. Revenues from health care
services are recorded net of estimated contractual allowances in the
accompanying consolidated financial statements. Management believes that
reserves recorded are adequate to cover any retroactive adjustments arising
from such reviews.
HMCSC has considered the impact of EITF 97-2 on its financial statements and
has determined that it requires HMCSC to include property-level revenues and
operating expenses of its senior living communities in its statements of
operations. HMCSC will adopt EITF 97-2 in the fourth quarter of 1998 with
retroactive effect in prior periods to conform to the new presentation. The
effect of this change will be to increase 1997 revenues and operating costs
and expenses by approximately $74.1 million and will have no impact on
operating profit or net income. See Note 3.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
date of purchase are considered cash equivalents.
Property and Equipment
Property and equipment is recorded at cost, or if contributed by Host
Marriott, is recorded at Host Marriott's basis. Replacements and improvements
that extend the useful life of property and equipment 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 10
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.
In cases where management is holding for sale a particular Community, HMCSC
assesses impairment based on whether the estimated sales price less cost 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 a decision is made to
dispose of the Community. Otherwise, impairment is assessed based on whether
it is probable that undiscounted future cash flows from each Community will be
less than its net book value. If a Community is impaired, its basis is
adjusted to its fair value.
F-8
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk
Financial instruments that potentially subject HMCSC to significant
concentration of credit risk consist principally of cash and cash equivalents.
HMCSC maintains cash and cash equivalents with various high credit-quality
financial institutions and limits the amount of credit exposure with any
institution.
Working Capital
Pursuant to the terms of HMCSC's Operating Agreements (see Note 6), HMCSC is
required to provide Marriott International with working capital and supplies
to meet the operating needs of the Communities. Marriott International
converts cash advanced by HMCSC into other forms of working capital consisting
primarily of operating cash, inventories, resident deposits and trade
receivables and payables which are maintained and controlled by Marriott
International. Upon the termination of the Operating Agreements, Marriott
International is required to convert working capital and supplies into cash
and return it to HMCSC. As a result of these conditions, the individual
components of working capital and supplies controlled by Marriott
International are not reflected in the accompanying consolidated balance
sheet.
Deferred Revenue
Monthly fees deferred for the non-refundable portion of the entry fees are
included as deferred revenue in the accompanying balance sheet. These amounts
are recognized as revenue as health care services are performed over the
expected term of the residents' contracts.
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.
New Accounting Standards
In 1997, the Company adopted Statement of Financial Accounting Standards No.
129 "Disclosure of Information About Capital Structure." The adoption of this
statement did not have a material effect on these consolidated financial
statements.
F-9
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. REVENUES
House profit generated by the Communities consist of the following for the
period from June 21, 1997 (inception) through January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Community Sales
Routine.......................................................... $ 99,989
Ancillary........................................................ 10,980
--------
Total Community Sales.......................................... 110,969
--------
Department Costs
Routine.......................................................... 64,516
Ancillary........................................................ 9,553
--------
Total Department Costs......................................... 74,069
--------
Department Profit
Routine.......................................................... 35,473
Ancillary........................................................ 1,427
--------
Revenues....................................................... $ 36,900
========
</TABLE>
Community sales consist of routine and ancillary sales. Routine sales are
generated from monthly charges for independent living units and daily charges
for assisted living suites and nursing beds, and are recognized monthly based
on the terms of the residents' agreements. Advance payments received for
services are deferred until the services are provided. Ancillary sales are
generated on a "fee for service" basis for supplementary items requested by
residents, and are recognized as the services are provided.
Total sales include amounts estimated by management to be reimbursable
through Medicare, Medicaid and other third party payor agreements. Medicare
and Medicaid represented 11% and 3%, respectively, of sales for the period
from June 21, 1997 (inception) through January 2, 1998. Reimbursement
arrangements are subject to audit and retroactive adjustment. Provisions are
made for potential adjustments that may result. To the extent those provisions
vary from settlements, sales are charged or credited when the adjustments
become final. There were no adjustments in the period presented related to
reimbursement arrangements. In management's opinion, any adjustments related
to current and prior years' operations will be immaterial to current and
future financial statements. Audits under the reimbursement agreements have
been completed through fiscal year 1996 and there were no material audit
adjustments.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at January 2, 1998 (in
thousands):
<TABLE>
<S> <C>
Land and land improvements...................................... $102,714
Buildings and leasehold improvements............................ 518,056
Furniture and equipment......................................... 23,705
--------
644,475
Less accumulated depreciation and amortization.................. (10,635)
--------
$633,840
========
</TABLE>
F-10
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, LTJ Senior Communities Corporation ("LTJ"), a wholly owned
subsidiary of HMCSC, acquired 49% of the remaining 50% interest in Leisure
Park Venture Limited Partnership (the "Partnership") which owns a 418-unit
retirement community in New Jersey for approximately $23 million, including
the assumption of approximately $15 million of debt. Subsequent to this
acquisition, HMCSC indirectly owns a 99% interest in the Partnership. Marriott
International owns the remaining 1% limited partner interest.
In the first quarter of 1998, LTJ also acquired the Gables of Winchester in
suburban Boston, a 124-unit upscale senior living community, for $21 million
and entered into conditional purchase agreements for two Marriott Brighton
Gardens assisted living communities with the Summit Companies of Denver,
Colorado. After the anticipated completion of construction in the first
quarter of 1999, HMCSC may acquire these two 160-unit properties located in
Denver and Colorado Springs, Colorado, for approximately $35 million, if they
achieve certain operating performance criteria. All three of these communities
will be operated by Marriott International under long-term operating
agreements.
5. RESTRICTED CASH
Restricted cash consists of the following at January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Debt service reserve fund........................................ $ 1,528
Fixed asset reserve fund......................................... 4,300
Real estate tax reserve fund..................................... 3,590
Insurance reserve fund........................................... 1,268
-------
$10,686
=======
</TABLE>
The debt service, fixed asset, real estate tax and insurance reserve funds
consist of cash transferred into segregated escrow accounts out of sales
generated by the Communities, pursuant to HMCSC's secured debt agreements.
These funds are periodically disbursed by the collateral agent to pay for debt
service, capital expenditures, insurance premiums and real estate taxes
relating to the secured properties. In some cases, to ensure prompt payment,
HMCSC utilizes its unrestricted cash to pay for capital expenditures,
insurance premiums and real estate taxes and is subsequently reimbursed for
such payments out of funds held in the appropriate escrow account.
6. OPERATING AGREEMENTS
The Communities are subject to operating agreements (the "Operating
Agreements") which provide for Marriott International to operate the
Communities, generally for an initial term of 25 to 30 years with renewal
terms subject to certain performance criteria at the option of Marriott
International of up to an additional five to ten years. The Operating
Agreements provide for payment of base management fees generally equal to five
to eight percent of gross sales and incentive management fees generally equal
to zero to 20% of Operating Profit (as defined in the Operating Agreements)
over a priority return to HMCSC. In the event of early termination of the
Operating Agreements, Marriott International will receive additional fees
based on the unexpired term and expected future base and incentive management
fees. HMCSC has the option to terminate certain, but not all, management
agreements if specified performance thresholds are not satisfied. No Operating
Agreement with respect to a single Community is cross-collateralized or cross-
defaulted to any other Operating Agreement, and any single Operating Agreement
may be terminated following a default by HMCSC or Marriott International,
although such termination will not trigger the cancellation of any other
Operating Agreement.
F-11
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of the Operating Agreements, Marriott International is
required to furnish the Communities with certain services ("Central
Administrative Services") which are provided on a central or regional basis to
all properties in the Marriott Retirement Community System. These services
include the development and operation of computer systems, computer payroll
and accounting services, marketing and public relations services, and such
additional services as may from time-to-time be performed more efficiently on
a central or regional level. The Operating Agreements require payment of
Central Administrative Services fees equal to 2% of gross sales beginning in
the third quarter of 1998.
Marriott International is required under the Operating Agreements to deduct
an amount from gross sales and place the funds into an interest-bearing
reserve account to cover the cost of (a) certain routine repairs and
maintenance to the Communities which are normally capitalized and (b)
replacements and renewals to the Communities' property and improvements. The
annual payment amount (expressed as a percentage of gross sales) generally
will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through
2007, and 3.5% thereafter. The amount contributed for the period June 21, 1997
(inception) through January 2, 1998 was $2,025,000. The Operating Agreements
provide that HMCSC shall provide Marriott International with sufficient funds
to cover the cost of certain major or non-routine repairs, alterations,
improvements, renewals and replacements to the Communities which are required
to maintain a competitive, efficient and economical operating condition in
accordance with Marriott standards or for the continued safe and orderly
operation of the Communities.
7. AMOUNTS DUE TO MARRIOTT INTERNATIONAL
The components of the amounts due to Marriott International, net, at January
2, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Community operating expenses payable to Marriott International..... $ 7,648
Management fees payable to Marriott International.................. 1,262
Community working capital due to HMCSC............................. (6,093)
Other, net......................................................... 355
-------
Total............................................................ $ 3,172
=======
</TABLE>
F-12
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT
Debt consists of the following at January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Mortgage Debt:
Secured by eight Communities with $232 million of assets, with an
interest rate of 10.01%, maturing through 2020 (balance includes
fair value adjustment of $15.5 million)............................ $137,713
Secured by nine Communities with $110 million of assets, with an
interest rate of 9.93%, maturing through 2001 (balance includes
fair value adjustment of $2.6 million)............................. 49,353
Secured by one Community with $29 million of assets, with an average
rate of 7.45%, maturing through 1999 (repaid in 1998).............. 26,403
--------
213,469
--------
Notes payable to Marriott International, with a rate of 9%, maturing
through 2001 (repaid in 1998)........................................ 92,195
--------
Other notes:
Revenue Bonds with a rate of 5.875%, maturing through 2027.......... 14,700
Other notes, with an average rate of 6.6%, maturing through December
2027............................................................... 18,943
Capital lease obligations........................................... 10,627
--------
44,270
--------
Total debt........................................................ $349,934
========
</TABLE>
Debt maturities at January 2, 1998, excluding the unamortized fair value
adjustments of approximately $18 million resulting from recording the
mortgages at their fair value on June 21, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 54,515
1999............................................................. 30,197
2000............................................................. 4,503
2001............................................................. 88,043
2002............................................................. 2,504
Thereafter....................................................... 152,046
--------
$331,808
========
</TABLE>
In conjunction with the acquisition of Forum Group Inc., HMCSC recorded the
debt assumed at its fair value, which exceeded the face value by approximately
$19 million. HMCSC is amortizing this adjustment to interest expense over the
remaining life of the related debt. The amortization for the period from June
21, 1997 (inception) through January 2, 1998 totaled $834,000. Cash paid for
interest for the period from June 21, 1997 (inception) through January 2, 1998
totaled $8,183,000.
In conjunction with the June 21, 1997 acquisition of Forum Group Inc., HMCSC
assumed approximately $197 million in mortgage debt, $11 million in capital
lease obligations (see Note 9), as well as issued $72 million in notes payable
to Marriott International. Subsequent to the acquisition, HMCSC issued
additional notes payable to Marriott International for additional expansion
units totaling approximately $20 million. These notes were guaranteed by Host
Marriott. In the second quarter of 1998, Host Marriott repaid the $92 million
in notes payable to Marriott International.
F-13
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, in connection with the acquisition of the remaining 50%
interest in the Leisure Park Venture Limited Partnership (see Note 4), HMCSC
assumed approximately $15 million of debt.
The net assets of 17 of the Communities are subject to mortgage debt which
places restrictions on their assets. The net assets of the Communities totaled
approximately $150 million at January 2, 1998. The indentures governing these
mortgages contain covenants that, among other things, require maintenance of
segregated cash collection of all rents, separate cash reserves for debt
service, property improvements, real estate taxes and insurance, limit the
ability to incur additional indebtedness, issue stock or admit additional
partners, pay dividends or make certain distributions, enter into or cancel
leases, enter into certain transactions with affiliates or sell certain
assets.
During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of the debt was recorded as a
capital contribution to HMCSC, there was no gain or loss on the prepayment.
9. LEASES
HMCSC leases certain property under non-cancelable capital and operating
leases. Future minimum annual rental commitments for all non-cancelable leases
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998................................................... $ 1,274 $ 278
1999................................................... 1,287 278
2000................................................... 1,300 278
2001................................................... 1,320 278
2002................................................... 1,338 278
Thereafter............................................. 13,672 3,062
------- ------
Total minimum lease payments........................... 20,191 $4,452
======
Less amount representing interest...................... (9,564)
-------
Present value of minimum lease payments................ $10,627
=======
</TABLE>
HMCSC leases two communities under capital leases expiring in 2016. Upon the
expiration of the lease or anytime prior to lease expiration, HMCSC has the
first right of refusal (the "Option") to submit a counter offer to any
acceptable bona fide offer from a third party within 30 days of notice from
the lessor. If HMCSC fails to exercise its Option, then the lessor may proceed
with the sale of the leased property and all assets therein.
HMCSC also has one long-term operating ground lease which expires in 2013.
The operating lease includes three renewal options exercisable in five year
increments through the year 2028.
Rent expense for the period from June 21, 1997 (inception) through January
2, 1998 was $141,000.
F-14
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
Total deferred tax assets and liabilities as of January 2, 1998 were as
follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets................................................ $ 15,125
Deferred tax liabilities........................................... (73,830)
--------
Net deferred income tax liability................................ $(58,705)
========
</TABLE>
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 January 2, 1998 was as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment............................................. $(68,687)
Debt adjustment to fair value at acquisition....................... 7,591
Other, net......................................................... 2,391
--------
Net deferred income tax liability................................ $(58,705)
========
</TABLE>
The provision for income taxes consists of the following for the period from
June 21, 1997 (inception) through January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Current--Federal..................................................... $ (25)
--State........................................................... (5)
-----
(30)
-----
Deferred--Federal.................................................... 238
--State........................................................... 41
-----
279
-----
$249
=====
</TABLE>
A reconciliation of the statutory Federal tax rate to HMCSC's effective
income tax rate for the period from June 21, 1997 (inception) through January
2, 1998 follows:
<TABLE>
<S> <C>
Statutory federal tax rate............................................. 35.0%
State income taxes, net of federal tax benefit......................... 6.0
----
41.0%
====
</TABLE>
HMCSC is included in the consolidated federal income tax return of Host
Marriott and its affiliates (the "Group") for the period from June 21, 1997
(inception) through January 2, 1998. Tax expense is allocated to HMCSC as a
member of the Group based upon the relative contribution to the Group's
consolidated taxable income/loss and changes in temporary differences. This
allocation method results in federal and net state tax expense allocated for
all periods presented that is substantially equal to the expense that would
have been recognized if HMCSC had filed separate tax returns. HMCSC reimburses
Host Marriott for the allocable share of current taxes payable relating to the
period that HMCSC has been included in Host Marriott's consolidated federal
income tax return.
F-15
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court for the Southern
District of Indiana (the "Indiana Court") against the general partner of one
of HMCSC's subsidiary partnerships, Forum Retirement Partners, L.P. alleging
breach of the partnership agreement, breach of fiduciary duty, fraud, insider
trading and civil conspiracy/aiding and abetting. On February 4, 1998, the
Plaintiff, MSLS, the general partner, Forum Group and HMCSC entered into a
Settlement and Release Agreement (the "Settlement Agreement"), pursuant to
which Host Marriott agreed to purchase, at a price of $4.50 per unit, the
partnership units of each limited partner electing to join in the Settlement
Agreement. HMCSC held 79% of the outstanding limited partner units in the
partnership at that time. HMCSC also agreed to pay as much as an additional
$1.25 per unit to the settling limited partners, under certain conditions, in
the event that HMCSC within three years following the date of settlement
initiates a tender offer for the purchase of units not presently held by HMCSC
or the settling limited partners. On February 5, 1998, the Indiana Court
entered an order approving the dismissal of the Plaintiff's case.
In connection with the Settlement Agreement on March 25, 1998, HMCSC
acquired 1,000,894 limited partner unit shares for approximately $4,504,000.
The purchase price of the shares approximated fair value and accordingly, no
portion of the purchase price has been expensed. As a result of this purchase,
HMCSC's ownership interest in the partnership was increased to approximately
86%.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
HMCSC believes the carrying amount of its financial instruments (excluding
property indebtedness) approximates their fair value due to the relatively
short maturity of these instruments. There is no quoted market value available
for any of HMCSC's financial instruments.
Valuations of debt are determined based on expected future payments
discounted at risk-adjusted rates. The debt was adjusted to its fair value in
conjunction with Host Marriott's acquisition of the Communities on June 21,
1997. As of January 2, 1998, the fair value of debt approximated its carrying
value.
F-16
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 11, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net.......................................... $649,528
Amounts due from Marriott International, net......................... 4,097
Other assets......................................................... 14,290
Cash and cash equivalents............................................ 26,504
--------
Total assets....................................................... $694,419
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt................................................................. $213,034
Deferred income taxes................................................ 61,376
Due to Host Marriott Corporation, net................................ 12,989
Accounts payable and other accrued liabilities....................... 13,639
Deferred revenue..................................................... 1,310
--------
Total liabilities.................................................. 302,348
--------
Stockholder's equity:
Common stock, 100 shares authorized, issued and outstanding, no par
value............................................................... --
Additional paid-in capital........................................... 386,627
Retained earnings.................................................... 5,444
--------
Total stockholder's equity......................................... 392,071
--------
Total liabilities and stockholder's equity......................... $694,419
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-17
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND TWELVE WEEKS ENDED
SEPTEMBER 12, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-SIX TWELVE
WEEKS ENDED WEEKS ENDED
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
REVENUES.......................................... $57,800 $16,036
------- -------
OPERATING COSTS AND EXPENSES
Depreciation and amortization..................... 14,759 4,866
Base management fees to Marriott International.... 9,408 3,159
Property taxes and insurance...................... 4,773 1,462
Other............................................. 863 251
------- -------
Total operating costs and expenses.............. 29,803 9,738
------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND
INTEREST......................................... 27,997 6,298
Corporate expenses................................ (2,937) (954)
Interest expense.................................. (17,560) (6,035)
Interest income................................... 1,120 240
------- -------
INCOME BEFORE INCOME TAXES........................ 8,620 (451)
Provision for income taxes........................ (3,534) 185
------- -------
NET INCOME........................................ $ 5,086 $ (266)
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-18
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND TWELVE WEEKS ENDED
SEPTEMBER 12, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-SIX TWELVE WEEKS
WEEKS ENDED ENDED
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ 5,086 $ (266)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 14,759 4,866
Change in amounts due to Marriott
International.................................. (5,353) 9,259
Change in amounts due to Host Marriott
Corporation.................................... 10,507 5,096
Equity in earnings of affiliate................. 51 (19)
Change in other operating accounts.............. (6,026) 2,551
------- --------
Cash provided by operating activities............. 19,024 21,488
------- --------
INVESTING ACTIVITIES
Capital expenditures............................ (8,007) (18,409)
Increase in capital improvement reserve......... 478 386
------- --------
Cash used in investing activities................. (7,529) (18,022)
------- --------
FINANCING ACTIVITIES
Issuances (repayments) of debt.................. (3,502) 19,191
Change in financing reserves.................... 867 2,205
------- --------
Cash used in financing activities................. (2,635) 21,396
------- --------
Increase in cash and cash equivalents............. 8,860 9,571
Cash and cash equivalents, beginning of period.... 17,644 6,401
------- --------
Cash and cash equivalents, end of period.......... $26,504 $ 15,972
======= ========
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott Corporation:
Property and equipment........................ $22,439 --
Other......................................... 4,084 --
Mortgage and other debt paid by Host
Marriott..................................... 133,203 --
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-19
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. On June 21, 1997, Host Marriott Corporation ("Host Marriott") acquired
all of the outstanding stock of Forum Group Inc. ("Forum Group"), from
Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott
International, Inc. ("Marriott International") for $190 million of cash and
the assumption of $270 million of debt and concurrently contributed all of the
assets and liabilities of Forum Group, Inc. to HMC Senior Communities, Inc.
("HMCSC"). In connection with the acquisition, Forum Group assigned to
Marriott International its interest as manager under long-term operating
agreements. The acquisition of the Forum Group was accounted for under the
purchase method of accounting.
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spinning-off Host
Marriott's senior living business ("Senior Living") into a separate
corporation, the Senior Living Communities Company and contributing Host
Marriott's hotels and certain other assets and liabilities to a newly formed
Delaware limited partnership, Host Marriott, L.P., whose sole general partner
will be HMC Merger Corporation, a newly formed Maryland corporation which will
be renamed Host Marriott Corporation upon its merger with Host Marriott (the
"REIT Conversion"). After the proposed REIT Conversion, HMCSC will lease
hotels from Host Marriott, L.P. and Marriott International will continue to
manage the hotels under long term management agreements.
Consummation of the REIT Conversion is subject to significant contingencies,
including final Board approval, consent of shareholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates and
other third parties. Accordingly, there can be no assurance that the REIT
Conversion will be completed.
The accompanying consolidated financial statements include the historical
accounts of HMCSC, representing 31 senior living communities (the
"Communities") located in 13 states, expected to be spun-off as part of the
REIT Conversion described above.
The accompanying condensed consolidated financial statements have been
prepared by HMCSC without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted. HMCSC
believes the disclosures made are adequate to make the information presented
not misleading. However, the condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's audited financial statements for the
period from June 21, 1997 (inception) through January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of September 11, 1998 and the
results of operations and cash flows for the thirty-six weeks ended September
11, 1998 and the twelve weeks ended September 12, 1997. Interim results are
not necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations.
2. Revenues represent house profit from the Communities. House profit
reflects the net revenues flowing to HMCSC as property owner and represents
gross community operating sales less property-level expenses excluding
depreciation and amortization, real and personal property taxes, insurance,
management fees and certain other costs which are classified as operating
costs and expenses.
Resident fees and health care service revenues are generated primarily from
monthly charges for independent living units and daily charges for assisted
living suites and nursing beds, and are recognized monthly based on the terms
of the residents' agreements. Advance payments received for services are
deferred until the services are provided. Included in resident fees revenue is
ancillary revenue, which is generated on a "fee for service" basis for
supplemental items requested by residents and is recognized as the services
are provided.
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursements under these contractual arrangements
F-20
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are subject to retroactive adjustments based on agency reviews. Revenues and
receivables from health care services are recorded net of estimated
contractual allowances in the accompanying consolidated financial statements.
Management believes that reserves recorded are adequate to cover any
retroactive adjustments arising from such reviews.
House profit generated by the Communities consist of the following for the
thirty-six weeks ended September 11, 1998 and twelve weeks ended September 12,
1997 (in thousands):
<TABLE>
<CAPTION>
THIRTY-SIX TWELVE WEEKS
WEEKS ENDED ENDED
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
Community Sales
Routine........................................... $149,581 $42,249
Ancillary......................................... 16,410 4,265
-------- -------
Total Community Sales........................... 165,991 46,514
-------- -------
Department Costs
Routine........................................... 94,709 26,821
Ancillary......................................... 13,482 3,658
-------- -------
Total Department Costs.......................... 108,191 30,479
-------- -------
Department Profit
Routine........................................... 54,872 15,428
Ancillary......................................... 2,928 607
-------- -------
Revenues........................................ $ 57,800 $16,035
======== =======
</TABLE>
HMCSC has considered the impact of EITF 97-2 on its financial statements and
has determined that it requires HMCSC to include property-level revenues and
operating expenses of its senior living communities in its statements of
operations. HMCSC will adopt EITF 97-2 in the fourth quarter of 1998 with
retroactive effect in prior periods to conform to the new presentation. The
effect of this change will be to increase revenues and operating costs and
expenses for the thirty-six weeks ended September 11, 1998 and the twelve
weeks ended September 12, 1997 by approximately $108 million and $30 million,
respectively, and will have no impact on operating profit or net income.
3. In the first quarter of 1998, HMCSC also acquired the Gables of
Winchester in suburban Boston, a 124-unit upscale senior living community, for
$21 million and entered into conditional purchase agreements for two Marriott
Brighton Gardens assisted living communities from the Summit Companies of
Denver, Colorado. After the anticipated completion of construction in the
first quarter of 1999, HMCSC may acquire these two 160-unit properties located
in Denver and Colorado Springs, Colorado, for approximately $35 million, if
they achieve certain operating performance criteria. All three of these
communities will be operated by Marriott International under long-term
operating agreements.
4. During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of debt was recorded as a capital
contribution to HMCSC. In the second quarter of 1998, Host Marriott prepaid
$92 million of 9% unsecured debt provided by Marriott International related to
the Communities. Host Marriott then held a $92 million, which was contributed
as capital to HMCSC in the third quarter of 1998. In the third quarter of
1998, Host Marriott also contributed $14.8 million in unsecured intercompany
notes.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Marriott Senior Living Services, Inc.:
We have audited the accompanying consolidated balance sheet of Forum Group,
Inc. (a business unit wholly-owned by Marriott Senior Living Services, Inc.
("MSLSI")) as partitioned for sale to Host Marriott Corporation (see Note 1),
as of January 3, 1997, and the related consolidated statements of operations
and cash flows for the 40-week period ended January 3, 1997, and the 24-week
period ended June 20, 1997. These financial statements 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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 Forum
Group, Inc., as Partitioned for Sale to Host Marriott Corporation as of
January 3, 1997, and the results of their operations and their cash flows for
the 40-week period ended January 3, 1997 and for the 24-week period ended June
20, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
September 28, 1998
F-22
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
CONSOLIDATED BALANCE SHEET
JANUARY 3, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Property and Equipment, net............................................ $507,325
Due from Manager....................................................... 18,908
Other Assets........................................................... 20,221
Cash and Cash Equivalents.............................................. 18,640
--------
Total Assets......................................................... $565,094
========
LIABILITIES AND EQUITY
Debt................................................................... $244,318
Other Liabilities...................................................... 36,111
--------
Total Liabilities.................................................... 280,429
Equity
Investments and Advances from Parent................................... 284,665
--------
Total Liabilities and Equity......................................... $565,094
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-23
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 24-WEEK PERIOD ENDED JUNE 20, 1997 AND THE 40-WEEK PERIOD ENDED JANUARY
3, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
24-WEEK PERIOD 40-WEEK PERIOD
ENDED ENDED
JUNE 20, 1997 JANUARY 3, 1997
-------------- ---------------
<S> <C> <C>
REVENUES....................................... $33,570 $ 55,987
------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................. 6,698 8,494
Base management fees........................... 5,586 7,935
Property taxes................................. 2,920 3,616
Ground rent, insurance and other............... 391 601
------- --------
Total operating costs and expenses........... 15,595 20,646
------- --------
OPERATING PROFIT BEFORE INTEREST AND MINORITY
INTEREST...................................... 17,975 35,341
Corporate expenses............................. (4,519) (6,380)
Interest expense............................... (9,141) (14,283)
Interest income................................ 598 1,111
Minority interest expense...................... (596) (482)
------- --------
INCOME BEFORE INCOME TAXES..................... 4,317 15,307
Provision for income taxes..................... (1,689) (5,973)
------- --------
NET INCOME..................................... $ 2,628 $ 9,334
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 24-WEEK PERIOD ENDED JUNE 20, 1997 AND THE 40-WEEK PERIOD ENDED JANUARY
3, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
24-WEEK 40-WEEK
PERIOD ENDED PERIOD ENDED
JUNE 20, 1997 JANUARY 3, 1997
------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME.................. $ 2,628 $ 9,334
Adjustments to reconcile
cash from operations:
Depreciation and
amortization............. 6,698 8,494
Changes in operating
accounts:
Other assets............ (225) 2,891
Other liabilities....... (9,580) 6,151
-------- ---------
Cash (used in)/provided by
operating activities....... (479) 26,870
-------- ---------
INVESTING ACTIVITIES
Capital expenditures...... (16,407) (65,577)
Acquisition of Forum
Group, Inc. ............. -- (94,009)
-------- ---------
Cash used in investing
activities................. (16,407) (159,586)
-------- ---------
FINANCING ACTIVITIES
Repayment of debt......... (1,324) (2,281)
Debt prepayments.......... -- (92,111)
Other..................... -- 1,208
Advances from parent...... 13,997 225,834
-------- ---------
Cash provided by financing
activities................. 12,673 132,650
-------- ---------
DECREASE IN CASH AND CASH
EQUIVALENTS................ (4,213) (66)
CASH AND CASH EQUIVALENTS,
beginning of period........ 18,640 18,706
-------- ---------
CASH AND CASH EQUIVALENTS,
end of period.............. $ 14,427 $ 18,640
======== =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Noncash investing and
financing activities:
Property, Plant and
Equipment, net......... $ (3,977) --
Debt.................... 3,977 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On June 21, 1997, HMC Senior Communities, Inc., ("HMCSC") a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott"), acquired all of the
outstanding stock of Forum Group, Inc. and subsidiaries ("Forum") from
Marriott Senior Living Services, Inc. (MSLSI"), a subsidiary of Marriott
International, Inc. ("MI" or the Parent Company), pursuant to a Stock Purchase
Agreement (the "Agreement") dated June 21, 1997. Certain operations and other
assets and liabilities of Forum including seven communities, management fees
and Lifecare bonds, specifically excluded from the Agreement, are not included
in these financial statements. Accordingly, these financial statements include
only assets and liabilities, along with the results from operations generated
therefrom, included in the Agreement (the "Partitioned Business").
The primary operations of the Partitioned Business is the ownership of 29
retirement communities ("Communities"), located in 11 states, managed by a
subsidiary of MSLSI.
The Partitioned Business was an organizational unit of MSLSI and its
majority owned and controlled subsidiaries and affiliates. The Parent Company
is incorporated in the state of Delaware. Its subsidiaries and affiliates are
incorporated or registered in other jurisdictions in the U.S. and a number of
other countries. The Partitioned Business is not a distinct legal entity.
On March 25, 1996, FG Acquisition Corp. ("Acquisition"), an Indiana
corporation and wholly-owned indirect subsidiary of MI acquired approximately
99.1% of the outstanding shares of common stock of Forum. Acquisition paid
total cash consideration of $297 million for the common stock it acquired,
plus certain warrants to purchase common stock which includes $94 million of
cash consideration for the 29 communities sold to HMCSC.
The Securities and Exchange Commission, in Staff Accounting Bulletin Number
55 ("SAB" 55), requires that historical financial statements of a subsidiary,
division, or lesser business component of another entity include certain
expenses incurred by the parent on its behalf. These expenses include officer
and employee salaries, rent or depreciation, advertising, accounting and legal
services, other selling, general and administrative expenses and other such
expenses. Investments and advances from parent represents the net amount of
investments and advances made by MI as a result of the acquisition and
operation of the Partitioned Business. These financial statements include the
adjustments necessary to comply with SAB 55.
Historically, the Partitioned Business' results of operations have been
included in the consolidated U.S. federal income tax return of MI. For
operations that do not pay their own income tax, MI internally allocates
income tax expense at the statutory rate after adjustment for state income
taxes and several other items. The income tax expense and other tax related
information in these statements has been calculated as if the Partitioned
Business had not been eligible to be included in the consolidated tax returns
of MI. The calculation of tax provisions and deferred taxes required certain
assumptions, allocations and estimates, which management believes are
reasonable to accurately reflect the tax reporting for the Partitioned
Business as a stand-alone taxpayer.
These consolidated financial statements include the results of operations
and cash flows of the Partitioned Business previously included in the MI
consolidated financial statements. These consolidated financial statements
have been prepared by management in accordance with generally accepted
accounting principles and include such estimates and adjustments as deemed
necessary to present fairly the consolidated financial position as of January
3, 1997 and the results of operations and cash flows of the Partitioned
Business for the 24-week period ended June 20, 1997 and the 40-week period
ended January 3, 1997.
The Partitioned Business receives certain services and participates in
certain centralized MI activities, the allocated costs of which are included
in these financial statements.
F-26
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the
Partitioned Business after elimination of intercompany accounts and
transactions other than those with other units of MI.
Corporate Services
The Partitioned Business utilized the MI centralized systems for cash
management, payroll, purchasing and distribution, employee benefit plans,
insurance, administrative services and legal services. As a result, cash for
many communities was commingled with MI's general corporate funds. Similarly,
operating expenses, capital expenditures and other cash requirements of the
Partitioned Business were paid by MI and charged directly or allocated to the
Partitioned Business. Amounts are allocated to the Partitioned Business based
primarily on their use of the centralized systems. In the opinion of
management, MI's methods for allocating costs are reasonable; however, such
costs are not necessarily indicative of the costs that would have been
incurred if the Partitioned Business had been operated as an unaffiliated
entity. It is not practicable for the Partitioned Business to estimate what
those costs would have been had the Partitioned Business operated on a stand-
alone basis.
Property and Equipment
Property and equipment is recorded at cost, including interest, land rent
and real estate taxes capitalized during development and construction, net of
accumulated depreciation. Interest capitalized as a cost of property and
equipment for the twenty-four week period ended June 20, 1997 and the forty-
week period ended January 3, 1997 was approximately $252,000 and $440,000
respectively. Interest costs are paid to MI and computed using MI's borrowing
rate for construction expenditures of 9.08% for the twenty-four-week period
ended June 20, 1997 and 7.35% for the forty-week period ended January 3, 1997.
Property and equipment includes capitalized costs incurred in developing the
real estate, including construction in progress for ongoing expansion programs
at various Communities as of January 3, 1997, which will be conveyed to Host
Marriott upon completion. Replacements and improvements that extend the useful
life of property and equipment are capitalized. Depreciation is computed using
the straight-line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings..................... 40 years
Furniture and Equipment....... 4-10 years
</TABLE>
A provision for value impairment is recorded whenever the estimated
undiscounted future cash flows from the property are less than the property's
net carrying value. No such provision was necessary at January 3, 1997.
Due from Manager
The principal component of Due from Manager is working capital under the
control of and utilized by a subsidiary of MSLSI in conjunction with the
operation of Forum's retirement communities. Both majority-owned and wholly-
owned partnerships and corporations within the Partitioned Business have
management agreements in effect with Forum, which require fees of 5% to 8% of
gross operating revenues.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with an
original maturity of three months or less.
F-27
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Revenue from Non-refundable Fees
Monthly fees deferred for the non-refundable portion of the entry fees are a
component of other liabilities. These amounts are recognized as health care
services revenue as services are performed over the expected term of the
resident's contract. See Note 3 for further discussion of entry fees.
Liability for Future Health Care Services
Certain resident and admission agreements at the Communities entitled
residents to receive limited amounts of health care up to defined maximums.
The estimated liabilities associated with the health care obligation have been
accrued in the consolidated balance sheet.
Revenue Recognition
Revenues primarily represent house profit from the Partitioned Business'
Communities. House profit reflects the net revenues flowing to the Partitioned
Business as property owner and represents gross community operating results,
less property-level expenses, excluding depreciation and amortization, real
and personal property taxes, ground and equipment rent, insurance, management
fees and certain other costs, which are classified as operating costs and
expenses in the accompanying statement of operations.
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursement under these contractual arrangements are subject
to retroactive adjustments based on agency reviews. Revenues and receivables
from health care services are presented net of estimated contractual
allowances in the accompanying consolidated financial statements. Management
believes allowances recorded are adequate to cover any adjustments arising
from retroactive adjustments.
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 Partitioned Business has considered the impact of EITF 97-2 on its
financial statements and has determined that it is preferable for it to
include property-level revenues and operating expenses of its senior living
communities in its statements of operations. The Partitioned Business will
adopt EITF 97-2 in the fourth quarter of 1998 and restate prior periods to
conform to the new presentation. The effect of this change will be to increase
1996 and 1997 revenues and operating costs and expenses by approximately $61.8
and $94.8 million for the 24-week period ended June 20, 1997 and the 40-week
period ended January 3, 1997, respectively, and would have no impact on
operating profit or net income.
Use of Estimates
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 as of the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Accordingly, actual results could differ from those
estimates.
Reclassification
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
F-28
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fiscal Year
Forum's fiscal year ends on the Friday nearest to December 31st.
3. CONTINUING CARE AGREEMENTS
Residents of the Lifecare Communities (Brookside, Overland Park and Pueblo
Norte) are required to sign a continuing care agreement ("Care Agreement")
with Forum. The Care Agreements stipulate, among other things, the amount of
all entry fees and monthly fees, the type of residential unit being provided,
and Forum's obligations to provide both health care and non-health care
services. In addition, the Care Agreements provide Forum with the right to
increase future monthly fees. The Care Agreements are terminated upon the
receipt of written termination notice from the resident, or the death of the
resident.
When estimated costs to be incurred under continuing care agreements exceed
estimated revenues, excess costs are accrued currently. Based upon the
expected positive net cash flow, relating to the agreements no liability or
expense has been recorded in the accompanying financial statements.
The components of the entry fees are as follows:
(i) Lifecare Bonds--This component is refundable to the resident or the
resident's estate upon termination or cancellation of the Care Agreement.
Lifecare Bonds are substantially non-interest bearing and equal to either
100%, 90% or 50% initially, depending on the type of plan, of the total
entry fee less any Additional Occupant Lifecare Fee. Lifecare Bonds and
corresponding cash reserves at January 3, 1997 are excluded from the
consolidated balance sheet. Pursuant to the Agreement, MSLSI will retain
the liability for redemption of these bonds.
(ii) Additional Occupant Lifecare Fee--This is a non-refundable fee for
each additional occupant in a residential unit.
(iii) Lifecare Fee--This component is non-refundable and equals the total
entry fee less the two components described in (i) and (ii). These fees are
generally amortized over a 50 to 60 month period, depending on the
individual plan.
4. OTHER ASSETS
Security deposits, normally for one month's rent at the Community, are
recorded as a current liability because residents typically terminate their
rental agreement with a 30-day notice. The liability had a balance of
$5,148,000 at January 3, 1997. In addition, certain states require that
security deposits be placed in an escrow account. These escrow balances
amounted to $7,696,000 at January 3, 1997, and are classified as other assets
in the accompanying consolidated balance sheet. In some cases, to ensure
prompt payment to a resident, unrestricted cash is utilized to pay the
security deposits and is thereafter reimbursed out of funds held in the
appropriate escrow account. Other assets also consists of prepaid real estate
taxes and restricted cash accounts for property additions, debt service and
insurance.
5. DEBT
Debt at January 3, 1997 consisted of the following (in millions):
<TABLE>
<S> <C>
Secured debt, average interest rate 7.6% at
January 3, 1997 maturing through 2020..... $221
Debt due to related party.................. 15
Capital lease obligations.................. 8
----
$244
====
</TABLE>
F-29
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in debt due to related party is approximately $15.5 million of
secured bonds owed to MI.
Aggregate debt maturities, including capital lease obligations, are: 1997 -
$22.3 million; 1998 - $7.1 million; 1999 - $33.2 million; 2000 - $50.4
million, 2001 - $5.5 million and $125.7 million thereafter. Interest paid for
the 24-week period ended June 20, 1997, and the 40-week period ended January
3, 1997, was approximately $9.7 million and $14.3 million, respectively.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of current assets, current liabilities and amounts due to MI
are assumed to be equal to their reported carrying amounts. The fair value of
the Partitioned Business' debt instruments approximates the carrying amount,
with the exception of two fixed-rate debt instruments. These instruments,
which represent property indebtedness, have been calculated to have a fair
value, by discounting the scheduled loan payments to maturity using rates that
are believed to be currently available for debt of similar terms and
maturities. Due to restrictions of transferability and prepayment, previously
modified debt terms and other property specific competitive conditions, the
Partitioned Business may be unable to refinance the indebtedness to obtain
such calculated debt amounts reported. The carrying amount and fair value at
January 3, 1997 of these two fixed-rate debt instruments is $171,264,000 and
$180,979,000 respectively.
7. REVENUES
Revenues are comprised of the following (in thousands):
<TABLE>
<CAPTION>
24-WEEK PERIOD 40-WEEK PERIOD
ENDED ENDED
JUNE 20, 1997 JANUARY 3, 1997
-------------- ---------------
<S> <C> <C>
Community Sales
Routine.................................... $84,646 $136,910
Ancillary.................................. 10,757 13,872
------- --------
Total Community Sales.................... 95,403 150,782
------- --------
Department Costs
Routine.................................... 53,059 82,779
Ancillary.................................. 8,774 12,016
------- --------
Total Department Costs................... 61,833 94,795
------- --------
Department Profit
Routine.................................... 31,587 54,131
Ancillary.................................. 1,983 1,856
------- --------
Revenues................................. $33,570 $ 55,987
======= ========
</TABLE>
Community sales consist of routine and ancillary sales. Routine sales are
generated from monthly charges for independent living units and daily charges
for assisted living suites and nursing beds, and are recognized monthly based
on the terms of the residents' agreements. Advance payments received for
services are deferred until the services are provided. Ancillary sales are
generated on a "fee for service" basis for supplementary items required by
residents and are recognized as the services are provided.
8. INCOME TAXES
Income taxes are calculated under the basis described in Note 1. The
Partitioned Business adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), effective
F-30
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
January 2, 1993. The Partitioned Business' deferred tax assets or liabilities
are included in investments and advances from parent on the consolidated
balance sheet because those amounts are currently being paid to or accrued
from MI. The temporary differences that give rise to significant deferred tax
assets or liabilities are property and equipment, debt premiums and reserves.
The income tax provision (benefit) is determined as if the Partitioned
Business filed a separate income tax return. The provision (benefit) for
income taxes consists of (in thousands):
<TABLE>
<CAPTION>
24-WEEK PERIOD 40-WEEK PERIOD
ENDED ENDED
JUNE 20, 1997 JANUARY 3, 1997
-------------- ---------------
<S> <C> <C>
Current--Federal ............................. $(3,125) $ 617
--State................................... (357) 71
------- ------
(3,482) 688
------- ------
Deferred--Federal ............................ 4,641 4,743
--State................................... 530 542
------- ------
5,171 5,285
------- ------
$ 1,689 $5,973
======= ======
</TABLE>
A reconciliation of the statutory Federal tax rate to the Partitioned
Business' effective income tax rate for the 24-week period ended June 20, 1997
and the 40-week period ended January 3, 1997 follows:
<TABLE>
<S> <C>
Statutory federal tax rate........................................... 35.0%
State income taxes, net of federal tax benefit....................... 4.0%
----
39.0%
====
</TABLE>
The provision or benefit is not indicative of what should have been recorded
if the Partitioned Business had determined the tax provision or benefit based
on its share of MI's allocation of a tax provision or benefit to all entities
included in the consolidated return based on taxable income or loss. However,
the Partitioned Business will reimburse or be reimbursed by MI for its share
of the consolidated provision or benefit based on MI's allocation of the
provision or benefit to all entities included in the consolidated return based
on taxable income or loss. The difference between the liability to or the
receivable from MI and the tax provision or benefit determined as if the
Partitioned Business filed a separate tax return will be recorded as a capital
contribution or a dividend.
9. RELATED PARTY TRANSACTIONS
Due to Marriott International, Inc.
Cash from the Partitioned Business is deposited with MI's general corporate
funds. Similarly, operating expenses, capital expenditures, centralized
services and other cash requirements of the Partitioned Business are
F-31
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
paid by MI and charged directly or allocated to the Partitioned Business. The
intercompany rate for non-capitalization borrowings was 6% for the 24-week
period ended June 20, 1997 and the 40-week period ended January 3,1997. These
borrowings have no specific repayment term.
The Partitioned Business is insured through MI's self-insurance program for
property damage, general liability, workers' compensation and employee medical
coverage. MI charges the Partitioned Business on a per occurrence basis.
Costs Allocated from Marriott International, Inc.
The costs allocated to the Partitioned Business, contained in its
consolidated statements of operations, are approximately $4.7 million and $6.6
million for the 24-week period ended June 20, 1997 and the 40-week period
ended January 3, 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
Effective June 21, 1997, the management agreements between Forum, as
manager, and entities included in the Partitioned Business have either been
assigned to MSLSI or new agreements between MSLSI and those entities have been
executed.
11. LITIGATION
On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court of the Southern District
of Indiana (the "Indiana Court") against Forum Retirement Inc.,
("FRI") a wholly-owned subsidiary of Forum, and general partner of Forum
Retirement Partners L.P. (the "Partnership"), alleging breach of the
partnership agreement, breach of fiduciary duty, fraud, insider trading and
civil conspiracy/aiding and abetting. On February 4, 1998, the Plaintiff,
MSLSI, FRI, Forum and Host Marriott entered into a Settlement and Release
Agreement (the "Settlement Agreement"), pursuant to which Host Marriott agreed
to pay each limited partner electing to join in the Settlement Agreement $4.50
per unit in exchange for (i) the transfer of all Partnership units owned by a
settling limited partner; (ii) an agreement by each settling limited partner
not to purchase additional Partnership units; (iii) a release of all claims
asserted in the litigation; and (iv) a dismissal of the litigation. Because of
the derivative nature of the allegations contained in the Plaintiff's
complaint, the General Partner invited all limited partners, in their sole
discretion, to participate in the Settlement Agreement, and detailed the
requirements for participation in two notices to unitholders, dated March 27,
1998, and May 6, 1998, respectively. Initially, the period within which a
limited partner could elect to participate in the Settlement Agreement was
scheduled to expire on April 27, 1998. This period was extended to May 22,
1998. Host Marriott also agreed to pay as much as an additional $1.25 per unit
to the settling Limited Partners, under certain conditions, in the event that
Host Marriott within three years following the date of settlement initiates a
tender offer for the purchase of units not presently held by Host Marriott or
the settling Limited Partners. On February 5, 1998, the Indiana Court entered
an order approving the dismissal of the Plaintiff's case.
In connection with the Settlement Agreement, Host Marriott initially
acquired 1,000,894 limited partner units from the Plaintiff and related
parties for $4,504,023 on March 25, 1998. Host Marriott subsequently acquired
additional 1,140,901 limited partner units from other limited partners
electing to participate in the Settlement Agreement for $5,134,055. As a
result of these purchases, Host Marriott's current ownership interest in the
Partnership, directly or through affiliates, increased to approximately 93%.
F-32
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 21, 1998, Forum Retirement, Inc. announced that it had received a
proposal from Host Marriott to acquire all remaining outstanding Partnership
Units for $4.50 per Unit. Host Marriott currently owns 14,151,169 of the
15,285,248 outstanding Units of the Partnership. Completion of the proposed
transaction is contingent on several items including but not limited to, FRI
Board approval and approval of an advisory committee of the Board which will
consider the transaction from the perspective of the holders of the remaining
Units and the issuance of a fairness opinion with respect to the proposed
transaction by the financial advisors to such advisory committee.
On July 22, 1998, Harbor Finance Partners, LTD. ("Harbor Finance"), a
Partnership unitholder, filed a purported class action lawsuit relating to
Host Marriott's proposal in Delaware State Chancery Court against Host
Marriott, FRI, two of their affiliates, the Partnership, and FRI's directors.
Harbor Finance alleges in the complaint that these defendants breached their
fiduciary duties to the unitholders by offering an inadequate price for the
units, attempting to improperly influence the market price of the units, and
failing to provide for a mechanism that would establish a fair price for the
units. Harbor Finance is seeking certification of a class, an injunction to
prevent completion of the proposed transaction or, in the alternative,
rescission of the transaction, and compensatory damages. Punitive damages are
not sought in the action. FRI believes that there is no merit to the
allegations contained in the complaint, and that this litigation will not have
a material, adverse effect on the financial performance of the Partnership.
The appointment of the Board's advisory committee and the required fairness
opinion will ensure that an adequate price will be paid.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Forum Group, Inc.:
We have audited the accompanying combined balance sheets of Forum Group,
Inc. and subsidiaries, as partitioned for sale to Host Marriott Corporation as
of March 31, 1996 and 1995 and the related combined statements of operations
and cash flows for the years then ended. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined 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 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Forum Group, Inc.
and subsidiaries, as partitioned for sale to Host Marriott Corporation as of
March 31, 1996 and 1995 and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in note 1 to the combined financial statements, the Company
changed its method of recognizing vacation expense in 1996.
KPMG Peat Marwick LLP
Indianapolis, Indiana
September 3, 1997
F-34
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
COMBINED BALANCE SHEETS
MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
ASSETS -------- --------
<S> <C> <C>
Property and equipment, net.................................. $343,278 $312,987
Cash and cash equivalents.................................... 18,706 29,736
Other assets................................................. 55,452 36,404
-------- --------
$417,436 379,127
======== ========
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C>
Long-term debt............................................... 325,756 267,228
Due to Community Manager..................................... 13,432 10,906
Other liabilities............................................ 28,752 40,357
-------- --------
Total liabilities........................................ 367,940 318,491
Equity
Investments and advances from parent....................... 49,496 60,636
-------- --------
$417,436 $379,127
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Revenues...................................................... $59,525 $48,055
------- -------
Operating costs and expenses:
Depreciation and amortization............................... 10,712 8,360
Management fees............................................. 10,060 8,333
------- -------
20,772 16,693
------- -------
Operating profit before minority interest, corporate expenses,
interest expense and investment income....................... 38,753 31,362
Minority interest............................................. 1,015 289
Corporate expenses............................................ 915 431
Interest expense.............................................. 29,119 23,018
Investment income............................................. 2,321 1,743
------- -------
Income before income taxes, extraordinary loss and cumulative
effect of accounting change.................................. 10,025 9,367
Income taxes.................................................. 1,564 2,400
------- -------
Income before extraordinary loss and cumulative effect of ac-
counting change.............................................. 8,461 6,967
Extraordinary loss on extinguishment of debt.................. 2,078 253
------- -------
Income before cumulative effect of accounting change.......... 6,383 6,714
Cumulative effect of accounting change........................ 666 --
------- -------
Net income.................................................... $ 5,717 $ 6,714
======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 5,717 $ 6,714
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization expense................. 10,172 8,360
Amortization of deferred financing costs.............. 1,775 2,383
Cumulative effect of accounting change, net........... 666 --
Net income of investors on equity method.............. -- (73)
Other owners' interest in operations of combined
companies............................................ 1,015 289
Income from interest rate cap agreement, net.......... (104) --
Loss on sale of facility.............................. 203 --
Tax benefit recorded as additional equity............. -- 4,000
Non-cash portion of extraordinary loss................ 1,887 241
Other accrued revenues and expenses, net.............. 4,996 (396)
--------- --------
Net cash provided by operating activities........... 26,327 21,518
--------- --------
Cash flows from investing activities:
Purchases of retirement communities..................... -- (22,681)
Additions to property and equipment..................... (21,792) (5,803)
Proceeds from facility sales and other investments...... 1,300 --
Purchase of mortgage loans.............................. (18,370) --
Proceeds from sale of interest rate cap................. 5,847 --
Additional investment in Forum Retirement Partners,
L.P., net of acquired cash of $4,872 in 1995........... (6,520) (3,374)
Other................................................... (3,718) (2,411)
--------- --------
Net cash used by investing activities............... (43,253) (34,269)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt............................ 151,907 21,441
Payments on long-term debt.............................. (108,829) (9,121)
Advances (to) from parent............................... (16,857) 15,146
Deferred financing costs................................ (7,951) (2,824)
Distributions to other partners......................... (324) (313)
Resident deposits and restricted cash................... (12,050) (145)
--------- --------
Net cash provided by financing activities........... 5,896 24,184
--------- --------
Net increase (decrease) in cash and cash equivalents...... (11,030) 11,433
Cash and cash equivalents at beginning of year............ 29,736 18,303
--------- --------
Cash and cash equivalents at end of year.................. $ 18,706 $ 29,736
========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-37
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Effective June 21, 1997, Host Marriott Corporation ("Host") acquired all of
the outstanding common stock of Forum Group, Inc. ("Forum"), pursuant to a
Stock Purchase Agreement (the "Agreement") dated June 21, 1997 with Marriott
International, Inc. ("Marriott"). Certain operations and related assets and
liabilities of Forum, including certain communities and management fees,
specifically excluded from the Agreement, are not included in these combined
financial statements. Accordingly, these combined financial statements include
only the assets and liabilities, along with results of operations, of the
communities included in the Agreement ("Partitioned Business").
The primary operations of the Partitioned Business is 29 retirement
communities ("RCs"), located in 11 states, managed by a subsidiary of Marriott
Senior Living Services, Inc. ("MSLSI"), a Marriott subsidiary.
On March 25, 1996, an acquiring subsidiary of Marriott completed a tender
offer for the shares of Forum and purchased over 99% of its outstanding common
stock at $13 per share, an aggregate of approximately $300 million. On June
12, 1996, the acquiring subsidiary merged into Forum, with Forum as the
surviving entity. Costs incurred by Forum to effect Marriott's acquisition
have been excluded from the accompanying combined financial statements.
Additionally, Forum changed its policy regarding the recognition of vacation
expense to conform with Marriott's policy, resulting in a cumulative
adjustment of $1,010,000 in the accompanying combined financial statements,
net of the related income tax benefit of $344,000.
The Securities and Exchange Commission, in Staff Accounting Bulletin Number
55, requires that historical financial statements of a subsidiary, division,
or lesser business component of another entity include certain expenses
incurred by the parent on its behalf. These expenses include officer and
employee salaries, rent or depreciation, advertising, accounting and legal
services, other selling, general and administrative expenses and other such
expenses. These financial statements include such adjustments.
For operations that do not pay income taxes, Marriott internally allocates
income tax expense at the statutory rate after adjustment for state income
taxes and several other items. The income tax expense and related tax
information in these financial statements has been calculated as if the
Partitioned Business had not been eligible to be included in Marriott's
consolidated tax returns. The calculation of tax expense and deferred taxes
necessarily required certain assumptions, allocations and estimates, which
management believes are reasonable to accurately reflect the tax reporting for
the Partitioned Business as a stand-alone taxpayer.
These combined financial statements include the historical financial
position, results of operations and cash flows of the Partitioned Business
previously included in the Forum consolidated financial statements. These
combined financial statements have been prepared by management in accordance
with generally accepted accounting principles and include such estimates and
adjustments as deemed necessary to present fairly the consolidated financial
position, results of operations and cash flows for the Partitioned Business as
of and for the years ended March 31, 1996 and 1995.
Revenues and Expenses
Revenues represent the operating profit from the RCs because Forum has
delegated substantially all of the operating decisions related to the
generation of operating profit from its RCs to the community manager.
Operating profit reflects the net operating revenues flowing to Forum as RC
owner and represents operating
F-38
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
results, less property-level expenses, excluding depreciation, management fees
and minority interests, which are classified as operating costs and expenses
in the accompanying financial statements.
Cash Equivalents
Cash equivalents represent commercial paper and other income-producing
securities having an original maturity of less than three months, are readily
convertible to cash and are stated at cost, which approximates market.
Property and Equipment
Property and equipment are carried at management's estimate of their value
as of March 31, 1992, the effective date of Forum's reorganization, with
subsequent additions recorded at cost. Capital leases are recorded at the
lower of the estimated market value of the assets leased or the present value
of the minimum lease payments. Depreciation is computed on a straight-line
method. The annual rate of depreciation is based on a composite lives of 40
years for buildings and primarily from seven years to ten years for furniture
and equipment. A provision for value impairment is recorded whenever the
estimated undiscounted future cash flows from a property are less than the
property's net carrying value.
Deferred Costs
Fees and other costs incurred to obtain long-term financing are amortized to
interest expense over the term of the related debt on a straight-line basis,
and are a component of other assets. Any unamortized costs are written off and
included with extraordinary charges upon extinguishment.
Costs incurred in the initial occupancy of RCs are amortized on the
straight-line method over the shorter of the life expectancy of the initial
residents or the term of the initial residency agreement, generally one year,
and are a component of other assets.
Due to Community Manager
The principal component of due to community manager is working capital
provided on the behalf of Forum by the community manager in conjunction with
the operation of Forum's retirement communities. The Partitioned Business has
management agreements in effect with Forum, which require fees of 5% to 8% of
gross operating revenues.
Income Taxes
Income taxes are provided to the extent expected to be payable for the
current year, plus or minus the change in deferred income tax liabilities or
assets established for expected future income tax consequences resulting from
differences between the book and tax bases of assets and liabilities.
Use of Estimates
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.
F-39
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SIGNIFICANT TRANSACTIONS
In August 1994, Forum purchased additional limited partner units of Forum
Retirement Partners, L.P. ("Forum Partners") to reach a 57% equity ownership
interest, and consequently its operations are combined into Forum's combined
financial statements from that date. Forum Partners owns and operates nine
RCs. In September 1995, Forum made a tender offer for all outstanding limited
partner units at $2.83 per unit, and an additional 2,644,724 limited partner
units were acquired in December 1995, which increased Forum's ownership to 79%
of the limited partner units. Pro forma unaudited operating results for the
year ended March 31, 1995 as if Forum Partners" results were consolidated from
April 1, 1994 are as follows:
<TABLE>
<S> <C>
Total revenues..................................................... $160,553
Income before extraordinary charge................................. 8,519
Net income......................................................... 8,266
</TABLE>
Other income for 1995 includes Forum's share of Forum Partners' operating
income before extraordinary charge of $73,000 for the four months ended July
31, 1994.
During fiscal 1995, Forum commenced implementation of an approximate $60
million long-term growth plan which included the following transactions:
. In August 1994, acquired an 80% equity interest in Tiffany House
("Tiffany"), a 130-unit assisted living facility in Fort Lauderdale,
Florida,
. In January 1995, acquired a 100% equity interest in The Forum at
Fountainview, an RC in West Palm Beach, Florida with 276 independent
living units and 64 assisted living units,
. In May 1995, acquired an 80% interest in The Forum at the Woodlands, an
RC near Houston, Texas with 240 independent living units and 63 assisted
living units, and
. In June 1995, purchased two delinquent mortgage loans secured by RCs
located in southern Florida for $18,370,000, which was funded through a
$14,063,000 draw on a line of credit and $4,307,000 of working capital.
(On February 16, 1996, Forum foreclosed on the mortgage loan of one RC
containing 88 assisted living units, and subsequent operations of the RC
are included in the accompanying combined financial statements. The other
mortgage loan, which related to a RC containing 152 independent living
units and 102 assisted living units, was foreclosed in May 1996).
During fiscal 1996, Forum relocated its headquarters to Fairfax, Virginia
from Indianapolis, Indiana and costs incurred have been excluded from the
accompanying combined financial statements.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following at March 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land and land improvements................................ $ 52,573 $ 49,737
Buildings and leasehold improvements...................... 286,956 263,411
Furniture and equipment................................... 22,960 18,780
Construction in progress.................................. 10,992 879
-------- --------
373,481 332,807
Less accumulated depreciation............................. 30,203 19,820
-------- --------
$343,278 $312,987
======== ========
</TABLE>
F-40
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) OTHER ASSETS
At March 31, 1996 and 1995, other assets includes restricted cash of
$704,000 and $1,436,000, respectively, deposited by present and prospective
residents of lifecare RCs; $7,576,000 and $5,115,000, respectively, of
resident security deposits; and $13,569,000 and $5,343,000, respectively,
funded under long-term debt and restricted to specific purposes.
(5) LONG-TERM DEBT
Long-term debt is comprised of the following at March 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Mortgage loans:
Secured by eight Forum RCs requiring monthly payments
based on a 25-year term including interest at 10.01%
to maturity in 2003................................... $124,140 $ --
Secured by seven Forum RCs requiring monthly payments
based on a 25-year term including interest at LIBOR
plus 4.180%, not to exceed 8.805%, (8.805% at March
31, 1995) to maturity in 2001. Requires a prepayment
penalty until 1997 with a yield maintenance premium
thereafter and additional payments if debt service
coverage ratio is below specified levels.............. -- 92,146
Secured by nine Forum Partners RCs requiring monthly
payments based on a 20-year term including interest at
9.93% to maturity in 2001. Requires a prepayment
penalty until 1997 with a yield maintenance premium
thereafter and additional payments if debt service
coverage ratio is below specified levels.............. 48,760 49,711
Secured by one Forum RC requiring quarterly interest
payments at LIBOR plus 1.50% (7.40% and 7.81% at March
31, 1996 and 1995, respectively) with quarterly
principal payments based on a 30-year term to maturity
in 1999............................................... 25,653 25,832
Secured by three Forum RCs requiring quarterly interest
payments at LIBOR plus 1.30% (7.20% and 7.61% at March
31, 1996 and 1995, respectively) with quarterly
principal payments based on a 30-year term to maturity
in 1996............................................... 45,490 46,036
Secured by one Forum RC requiring monthly payments
based on a 30-year term including interest at 10.5% to
maturity in 1997...................................... -- 14,321
Other mortgages........................................ 2,845 3,139
-------- --------
246,888 231,185
Acquisition line of credit............................... 29,929 15,865
Bonds payable............................................ 15,450 --
Demand note.............................................. 11,500 --
Senior subordinated notes................................ 10,000 10,000
Working capital credit facility.......................... 2,500 --
Capitalized leases....................................... 7,859 8,171
Other.................................................... 1,630 2,007
-------- --------
$325,756 $267,228
======== ========
</TABLE>
F-41
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In September 1995, Forum obtained a new mortgage loan to retire two existing
mortgage loans totaling $106,000,000 and to pay fees and expenses of
approximately $3,000,000. As a result of the mortgage refinancing, Forum
wrote-off $3,148,000 of deferred financing costs related to the retired
mortgage loans, which was recognized as an extraordinary loss in the
accompanying combined statement of operations, net of the related income tax
benefit of $1,070,000. An interest rate cap agreement was retained as an
investment after the extinguishment of the related mortgage refinancing, and a
mark-to-market gain of $1,554,000, a loss upon subsequent sale of $1,450,000,
and other income of $485,000 was realized while the agreement was held as an
investment, all of which were recorded as components of investment income in
the accompanying combined statement of operations.
During September 1994, Forum Investments I, L.L.C. ("FII"), a wholly-owned
subsidiary of Forum, obtained a $70,000,000 line of credit to finance the
acquisition, rehabilitation and/or expansion of RCs, which are pledged to
secure the line of credit. Interest payments are due monthly at LIBOR plus
5.450% including service costs and other fees of 2.075%, (10.763% at March 31,
1996), and principal amounts borrowed must be paid or converted to a ten-year
term loan by December 7, 1996. Additional principal payments, $6,455,000 as of
March 31, 1996 are required if the debt service coverage ratio is below
specified levels. The lender waived the March 31, 1996 additional principal
payment in exchange for a guarantee of that portion of the mortgage loan by
Forum. Prepayment of amounts converted to long-term debt after October 1, 1999
require a yield maintenance premium.
Bonds payable require variable rate semi-annual interest payments, at 7.375%
at March 31, 1996 and mature in 2008. The bonds payable were purchased by
Marriott in July, 1996.
The demand note resulted from a cash advance from Marriott to help fund
working capital requirements and requires quarterly interest payments at LIBOR
plus 4.5% (9.813% at March 31, 1996).
The senior subordinated notes require interest semi-annually at 12.5% to
maturity in 2003 and a premium payment if prepaid or redeemed.
The working capital credit facility requires interest monthly at LIBOR plus
5.00% including a servicer's fee and a fixed rate fee of 1.55% (10.313% at
March 31, 1996).
Future minimum payments under capitalized leases approximate $1,200,000 for
each of the five years ended March 31, 2001, with approximately $7,200,000 due
thereafter, including imputed interest of approximately $5,300,000. Property
and equipment at March 31, 1996 and 1995 include $11,392,000 and $10,965,000,
respectively, of assets under capital leases, consisting principally of
buildings and leasehold improvements, and related accumulated depreciation was
$1,359,000 and $977,000, respectively. During fiscal 1995, a lease obligation
was refinanced, which resulted in a $253,000 extraordinary loss, net of income
tax benefit of $59,000, in the accompanying combined statement of operations.
At March 31, 1996, scheduled maturities of long-term debt during the next
five years (based on current interest rates) are $91,954,000 in 1997,
$3,906,000 in 1998, $29,690,000 in 1999, $3,648,000 in 2000 and $48,640,000 in
2001. Cash paid for interest was $27,447,000 and $20,005,000 in fiscal years
1996 and 1995.
F-42
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES
Income tax expense differs from the amount computed by applying the U.S.
federal income tax rate of 34% to income before income tax expense,
extraordinary loss and cumulative effect of accounting change as a result of
the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Computed "expected" tax expense.................... $ 1,995 3,079
Reduction of valuation allowance for deferred tax
assets............................................ (691) (4,946)
Tax benefit recorded as additional equity.......... -- 4,000
Amounts added to net deferred tax assets........... (757) --
Other.............................................. (397) 208
---------- ----------
150 2,341
Income taxes allocated to:
Extraordinary charge............................. 1,070 59
Cumulative effect of accounting change........... 344 --
---------- ----------
$ 1,564 2,400
========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at March 31 are as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Deferred tax assets:
Property and equipment, principally due to differences in
the bases of assets as a result of fresh-start
accounting and depreciation methods..................... $18,488 19,403
Net operating loss carryforwards......................... 13,730 11,290
Accrued expenses......................................... 862 818
Losses in consolidated taxable entities.................. -- 3,571
Deferred income.......................................... 958 1,136
Deferred compensation.................................... 699 667
Other.................................................... 826 151
------- ------
Total gross deferred tax assets........................ 35,563 37,036
Less valuation allowance............................... 33,841 34,532
------- ------
Net deferred tax assets................................ 1,722 2,504
------- ------
Deferred tax liabilities:
Gains on property sales.................................. (769) (1,542)
Deferred management fees................................. (593) (593)
Investments, principally due to differences in the bases
of assets as a result of fresh-start accounting......... (360) (369)
------- ------
Total gross deferred tax liabilities................... (1,722) (2,504)
------- ------
Net deferred tax liabilities........................... $ -- --
======= ======
</TABLE>
F-43
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Due to the utilization of net operating loss carryforwards and the
recognition of net deferred tax assets, Forum had no federal income tax
liability at March 31, 1996 and 1995. Other assets included federal income
taxes receivable of $1,250,000 at March 31, 1996 and 1995.
As of March 31, 1996, net operating loss carryforwards for income tax
purposes were estimated to be approximately $167 million before the
application of certain net operating loss carryforward limitations resulting
from changes in ownership. As a result of these limitations, Forum expects the
utilization of net operating loss carryforwards will be limited to
approximately $40 million. These net operating loss carryforwards will expire
in varying amounts through fiscal year 2010. For financial reporting purposes,
any future benefit of net operating loss carryforwards and net deferred tax
assets arising prior to Forum's reorganization will be reported as additional
equity. The maximum tax benefit to be recognized through equity was estimated
to be approximately $34 million at March 31, 1996.
(7) REVENUE
Revenue is comprised of the following for the year ended March 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net operating revenues.................................... $179,926 $142,527
Other income.............................................. 397 746
-------- --------
180,323 143,273
-------- --------
Property level expenses................................... 120,325 95,080
Other expenses............................................ 473 138
-------- --------
120,798 95,218
-------- --------
$ 59,525 $ 48,055
======== ========
</TABLE>
Net operating revenues include routine and ancillary service revenues and
amounts estimated by management to be reimbursable by Medicare and other cost-
based programs. Routine service revenues, generated by monthly charges for
independent living units and daily or monthly charges for assisted living
suites and nursing beds, are recognized based on the terms of the residency
and admission agreements. Ancillary service revenues, generated on a fee for
service basis for supplementary items requested by residents, are recognized
as the services are provided. Cost-based reimbursements are subject to audit
by agencies administering the programs, and estimates are recorded for
potential adjustments that may result. To the extent estimated amounts are
expected to be adjusted, revenues are charged or credited when the adjustments
become determinable.
Resident advance fees under lifecare residency agreements are recognized as
income over the estimated useful lives of the RCs.
(8) COMMITMENTS AND CONTINGENCIES
On January 24, 1994, the Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint (the "Iowa Complaint") in the United States District Court
for the Northern District of Iowa (the "Iowa Court") against Forum Retirement,
Inc. ("FRI"), the wholly-owned subsidiary of Forum which serves as general
partner of Forum Partners, alleging breach of the Partnership Agreement,
breach of fiduciary duty, fraud, insider trading, and civil conspiracy/aiding
and abetting. The Plaintiff subsequently amended the Iowa Complaint, adding
Forum as a defendant. The Iowa Complaint alleged, among other things, that the
Plaintiff holds a substantial number of Units, that the Board of Directors of
FRI is not comprised of a majority of independent directors as required by
F-44
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the Partnership Agreement and as allegedly represented in the Partnership's
1986 Prospectus for its initial public offering, and that FRI's Board of
Directors has approved and/or acquiesced to an 8% management fee charged by
Forum under the Management Agreement. The Iowa Complaint further alleged that
the "industry standard" for such fees is 4%, thereby resulting in an
"overcharge" to the Partnership estimated by the Plaintiff at $1.8 million per
annum beginning in 1994. The Plaintiff sought the restoration of certain
former directors to the Board of Directors of FRI and the removal of certain
other Directors from the Board, an injunction prohibiting the payment of an 8%
management fee, and unspecified compensatory and punitive damages. On April 3,
1995, the Iowa Court entered an order dismissing the Iowa Complaint on
jurisdictional grounds. Although the Plaintiff filed a notice of appeal of the
Iowa Court's ruling, it subsequently dismissed this appeal.
On June 15, 1995, the Plaintiff filed a complaint (the "Indiana Complaint")
in the United States District Court for the Southern District of Indiana (the
"Indiana Court") against FRI and Forum seeking essentially the same relief.
The defendants moved to dismiss the Indiana Complaint for failure to state a
claim for which relief could be granted and, in response, on December 11, 1995
the Plaintiff amended the Indiana Complaint.
The defendants moved to dismiss the amended complaint on similar grounds,
and on May 17, 1996, the Indiana Court ruled on the defendant's motion by
dismissing without prejudice two of the four counts contained in the amended
complaint, namely, the counts for alleged insider trading and civil
conspiracy/aiding and abetting. The litigation is currently in the discovery
stage. FRI intends to vigorously defend against this litigation.
Forum has retirement agreements with certain current and former officers
under which each officer is to be paid 50% of average annual compensation, as
defined, for a period of fifteen years upon reaching age 65. Upon disability
or death prior to retirement, benefits are to be paid for a period of ten
years based on compensation as calculated for retirement benefits. At March
31, 1996 and 1995, Forum had an accrued expense relating to these agreements
of $2,055,000 and $1,963,000, respectively.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the fair value of all
financial assets and liabilities for which it is practicable to estimate. Fair
value is defined in the Statement as the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Forum believes the carrying amount of its
financial instruments other than certain property indebtedness approximates
their fair value due to the relatively short maturity of these instruments.
There is no quoted market value available for any of Forum"s instruments.
Property indebtedness with a carrying amount of $198,350,000 and $166,178,000
has been calculated to have a fair value of $185,340,000 and $158,473,000 by
discounting the scheduled loan payments to maturity using rates that are
believed to be currently available for debt of similar terms and maturities at
March 31, 1996 and 1995, respectively. Due to restrictions of transferability
and prepayment, previously modified debt terms and other property specific
competitive conditions, Forum may be unable to refinance the indebtedness to
obtain such calculated debt amounts reported.
F-45
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESEN-
TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICI-
TATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECU-
RITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 8
The Distribution......................................................... 20
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Pro Forma Financial Statements........................................... 24
Selected Historical Financial Data....................................... 42
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 43
Business and Properties.................................................. 56
Management............................................................... 97
Security Ownership of Certain Beneficial Owners and Management after the
Distribution............................................................ 104
Certain Relationships.................................................... 106
Description of Capital Stock............................................. 106
Shares Eligible for Future Sale.......................................... 114
Federal Income Tax Consequences.......................................... 115
Legal Matters............................................................ 119
Experts.................................................................. 119
Available Information.................................................... 119
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL DECEMBER 18, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CRESTLINE CAPITAL
CORPORATION
COMMON STOCK
---------------
PROSPECTUS
---------------
NOVEMBER 23, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
