<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 1, Commission File No. 1-14635
1999
CRESTLINE CAPITAL CORPORATION
Maryland 52-2151967
(State of Incorporation) (I.R.S. Employer Identification
Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(240) 694-2000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- -----------------------
<S> <C>
Common Stock, $.01 par value (21,926,000 shares New York Stock Exchange
outstanding as of January 1, 1999)
</TABLE>
The aggregate market value of shares of common stock held by non-affiliates
at March 1, 1999 was $289,968,000.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Document Incorporated by Reference
Notice of 1999 Annual Meeting and Proxy Statement
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FORWARD-LOOKING STATEMENTS
Certain matters discussed herein or delivered in connection with this Form
10-K are forward-looking statements within the meaning of the Private
Litigation Reform Act of 1995. Certain, but not necessarily all, of such
statements can be identified by the use of forward-looking terminology, such
as "believes," "expects," "may," "will," "should," "estimates" or
"anticipates" or the negative thereof or comparable terminology. All forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual transactions, results, performance or
achievements of Crestline Capital Corporation and its subsidiaries (the
"Company") to be materially different from any future transactions, results,
performance or achievements expressed or implied by such forward-looking
statements. These may include: (i) national and local economic and business
conditions or governmental regulations that will affect demand, prices, wages
or other costs for hotels and senior living communities; (ii) the level of
rates and occupancy that can be achieved by such properties; (iii ) the
Company's ability to compete effectively in areas such as access, location,
quality of properties and rate structures; (iv) the ability to maintain the
properties in a first-class manner (including meeting capital expenditure
requirements); (v) the availability and terms of financing; (vi) governmental
actions and initiatives including tax law changes that may eliminate the need
for a lease structure by lodging and senior living REITs; (vii) changes to the
public pay systems for medical care and the need for compliance with
environmental, licensure and safety requirements; and (viii) the effect on the
Company of the Year 2000 issue. Although the Company believes the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions and business opportunities, it can give no assurance that its
expectations will be attained or that any deviations will not be material. The
Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
Items 1 & 2. Business and Properties
General
The Company is engaged in the business of leasing and subleasing hotels,
owning senior living communities and the asset management of hotels and senior
living communities. The Company is one of the largest leasing companies in the
lodging industry and currently leases 120 full-service hotels and subleases 71
limited-service hotels from Host Marriott Corporation ("Host Marriott"). The
Company's hotels are operated under long-term management agreements that were
assigned to the Company by Host Marriott for the term of the hotel leases with
most of the Company's hotels managed by Marriott International, Inc.
("Marriott International"). The Company is also one of the largest owners of
senior living communities and currently owns 31 senior living communities with
over 7,400 units located in 13 states. All of the Company's communities are
managed by Marriott International under long-term operating agreements.
The Company became a publicly traded company on December 29, 1998 (the
"Distribution Date") when Host Marriott completed its plan of reorganizing its
business by spinning off the Company to the shareholders of Host Marriott (the
"Distribution") as part of a series of transactions pursuant to which Host
Marriott elected to be considered a real estate investment trust ("REIT"). In
connection with the Distribution, shareholders of Host Marriott received one
share of Company common stock for every ten shares of Host Marriott stock.
Because REITs are not permitted to derive revenues directly from the operation
of hotels, it became necessary for Host Marriott to lease or sublease its
hotels to an unrelated party. By completing the Distribution, the Company
became the third party leasing vehicle used by Host Marriott to lease or
sublease substantially all of its hotels.
Business of the Company
Lodging and Asset Management Services. The Company leases 120 full-service
hotels and subleases 71 limited-service hotels from Host Marriott. The full-
service hotel portfolio is managed by Marriott International and other lodging
managers under, among others, the "Marriott," "Ritz-Carlton," "Four Seasons,"
"Hyatt" and "Swissotel" brand names, and the limited-service hotels are
managed by Marriott International under the "Courtyard by Marriott" and
"Residence Inn" brand names. The Company also provides asset management
services for Host Marriott's hotel portfolio.
2
<PAGE>
The full-service hotels leased by the Company are in the upscale and luxury
segments of the lodging industry. Within the upscale and luxury segment, the
Company's hotels have outperformed its competitive set. Based on data provided
by Smith Travel Research, the upscale and luxury segments achieved an average
occupancy of 71.2% and a room revenue per available room ("REVPAR") increase
of 5.3% for 1998. The Company's full-service hotel lease portfolio achieved an
average occupancy of 77.5% and a REVPAR increase of 7.5% in 1998. 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 1993 through 1998. 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 and
extended-stay segments 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 its hotel leases, the Company participates 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
Company's leases, the Company is obligated to pay to the lessor rent based
upon the greater of a fixed dollar amount of rent ("Minimum Rent") or fixed
percentages of various categories of revenues derived from the operation of
the leased hotels. The Company in turn has contracted 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, and the Company is typically responsible for all
expenses of operation of the hotels, including costs incurred by the managers.
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 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 operating profits grow faster
than the rents payable under the leases). 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 operating
profits grow slower than the rents payable under the leases). However,
successful hotel performance does allow the managers to share in the growth of
the profits of the hotels in the form of higher incentive management fees. In
particular, Marriott International receives approximately 50% of its
management fee income from the Company's leased hotels in the form of
incentive management fees. The Company views this as a positive because it
helps to strengthen the alignment of the managers' interests with the
Company's. 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 a hotel non-competition agreement entered into by
Host Marriott with Marriott International in 1993 and a non-competition
agreement entered into by the Company with Host Marriott in connection with
the Distribution, the Company generally is 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 original hotels leased
from Host Marriott at
3
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the time of the Distribution, from owning or acquiring any full-service hotels
not leased from Host Marriott. The Company is also subject to certain
restrictions relating to leasing, operating and managing full-service hotels
under its agreement with Host Marriott.
Senior Living. The Company owns a portfolio of 31 senior living communities
(the "Communities") with over 7,400 units located in 13 states. These assets
were acquired by the Company in 1997 and 1998 and are managed by Marriott
Senior Living Services, Inc. ("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; special care centers;
and healthcare units. The Company believes that few competitors offer this
continuum which allows residents to age in place over time.
The senior living industry encompasses the independent living, assisted
living (including special care) 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 have special care centers that 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 a non-competition agreement entered into with
Marriott International in connection with the Company's acquisition of Forum
Group, Inc. ("Forum") in 1997, as amended, the Company generally is precluded
from operating or managing (but not owning or leasing) senior living
communities until June 21, 2010.
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; senior living; and asset management.
Lodging. Based on the number of hotels leased or subleased from Host
Marriott, the Company is 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 Marriott that may arise from
Host Marriott's own growth through acquisition. Since 1994, Host Marriott has
acquired or purchased controlling interests in over 100 full-service hotels
for an aggregate price of over $6 billion and Host Marriott 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 Marriott in the future. The Company may
also pursue the acquisition and/or leasing of limited-service hotels from Host
Marriott and its affiliates, which currently hold interests in partnerships
owning 120 Courtyard by Marriott and 50 Residence Inn hotels. In the second
quarter of 1999, the Company acquired a 74% limited partnership interest in
the Marriott Residence Inn USA Limited Partnership (the "Partnership") from a
private Japanese investor for $34.4 million. The Partnership owns 11 Residence
Inn properties managed by Marriott International. The total consideration for
the acquisition was $89 million, including the consolidation of $54.6 million
of debt. Host Marriott owns a 5% general partner interest in the Partnership.
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 Marriott, including Hospitality Properties Trust,
Inc., the owner of the 71 limited-service hotels subleased from Host Marriott.
Current federal income tax law does not allow REITs to derive revenues
directly from the
4
<PAGE>
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 revenues of a hotel. The Company, therefore, believes that there
will be leasing opportunities with some hotel REITs other than Host Marriott
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.
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, including third party hotel management, after October
8, 2000, when the restrictions under the hotel non-competition agreement with
Marriott International expire.
Senior Living. The Company owns a premier portfolio of senior living
communities and was ranked as the eighth largest owner of senior living
communities by The American Senior Housing Association in 1998. The portfolio
encompasses the full continuum of care by offering a combination of
independent living (55% of units), assisted living (20% of units), special
care centers (3% of units) and healthcare accommodations (22% of units).
During 1998, the portfolio achieved an average occupancy of approximately
92.2% and an average daily rate of over $88.
In 1999, the Company intends to add 239 units at five Communities at a cost
of approximately $23 million which will be the final phase of a four-year $88
million expansion program that will have ultimately resulted in the addition
of 861 units to 21 of the Company's Communities. In the first quarter of 1999,
161 of the 239 expansion units were opened. Upon the completion of the
expansion program, the total number of units at the Company's Communities is
expected to be almost 7,500 units. 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 and opportunistically 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.
Similar to hotels, REITs are not permitted to derive revenues directly from
the operation of senior living communities. The Company will attempt to
duplicate its role as a hotel lessee into the senior living market since the
business fundamentals for establishing leasing arrangements with senior living
REITs are similar to those of hotel REITs. The Company believes that there
will be leasing opportunities with senior living REITs and operators that will
seek to align themselves with a company that understands the senior living and
leasing business. Accordingly, the Company will seek to establish
relationships with such REITs and operators.
Asset Management. The Company's asset management team (which was transferred
from Host Marriott 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 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
5
<PAGE>
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
Marriott, 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 services encompassed by
the asset management function including, among others:
. monitoring property/brand performance;
. reviewing operating results, budgets and forecasts;
. reviewing, approving and overseeing capital expenditure projects;
. analyzing competitive supply conditions in each market;
. pursuing expansion and repositioning opportunities;
. assessing return on investment expenditure opportunities;
. addressing regulatory, property tax, lender and ground lessor issues;
. performing property inspections and ensuring that the property is
maintained; and
. performing due diligence in connection with an acquisition or disposition;
In connection with the Distribution, the Company entered into contracts with
Host Marriott and its affiliates for a term of two years (with a one-year
automatic renewal) to provide asset management services to Host Marriott and
its affiliates for its hotel portfolio.
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. The Company does not expect the asset
management business to contribute a significant amount to the Company's
operating results in the near future.
Hotel Lodging Industry
The lodging industry posted strong gains in 1998 as higher average daily
rates drove strong increases in REVPAR. Over the last five years, the lodging
industry has benefited significantly from a favorable supply/demand imbalance,
driven in part by low construction levels combined with high gross domestic
product ("GDP") growth. Recently, however, supply has begun to moderately
outpace demand, causing slight declines in occupancy rates in the upscale and
luxury full-service segments in which we operate. According to Smith Travel
Research, supply in the Company's competitive set increased 1.2% in 1998 while
demand in the competitive set decreased 0.2% for 1998. At the same time,
occupancy declined one percentage point in the competitive set compared to
1997.
These declines in occupancy, however, were more than offset by increases in
average daily rates which generated higher REVPAR. According to Smith Travel
Research, average daily rate and REVPAR for the
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competitive set increased 6.8% and 5.3%, respectively, in 1998. The current
amount of excess supply in the lodging industry is relatively moderate and
much less severe than that experienced in the lodging industry beginning in
1989, in part because of the greater financial discipline and lending
practices imposed by financial institutions and public markets today relative
to those during the late 1980s.
Within the upscale and luxury full-service segment, the Company's leased
hotels have outperformed the overall sector. The attractive locations of the
Company's hotels, the limited availability of new building sites for new
construction of competing full-service hotels, and the lack of availability of
financing for new full-service hotels has allowed the Company to maintain
REVPAR and average daily rate premiums over the competitive set in these
service segments. Average daily rates for the Company's leased full-service
hotels increased 7.6% for 1998. The increase in average daily rate helped
generate a strong increase in full-service hotel REVPAR of 7.5% in 1998.
The Company believes that the current environment of excess supply will most
likely continue over the next twelve to eighteen months, although any excess
supply is expected to be moderate given the fact that demand is expected to
grow at the same 1% to 2% rate as projected GDP and new construction has been
significantly limited by capital constraints. Given the relatively long lead
time to develop urban, convention and resort hotels, the Company believes that
growth in room supply in upscale and luxury full-service sub-markets in which
the Company operates will remain moderate through the year 2000. However,
there can be no assurance that growth in supply will remain moderate or that
REVPAR and operating profits will continue to improve.
Leased and Subleased Hotel Properties
The Company's full-service hotel lease portfolio represents quality
properties in the upscale and luxury full-service lodging segments. The full-
service hotel properties are operated under, among others, the "Marriott,"
"Ritz-Carlton," "Four Seasons," "Hyatt" and "Swissotel" brand names. In
addition, the limited-service hotels subleased from Host Marriott are operated
under the "Courtyard by Marriott" (moderate-price) and "Residence Inn"
(extended-stay) brand names.
The following tables set forth certain information with respect to the
operations of the hotels leased or subleased by the Company following the
Distribution for fiscal years 1998 and 1997:
<TABLE>
<CAPTION>
Fiscal Year 1998
---------------------------------------------
Number Number Average
of Hotels of Rooms Hotel Revenues Occupancy Daily Rate REVPAR(1)
--------- -------- -------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Full-service............ 120 56,230 $3,756,589 77.5% $143.59 $111.29
Moderate-price.......... 53 7,606 224,727 80.5 90.71 73.04
Extended-stay........... 18 2,178 71,775 84.1 102.15 85.86
--- ------
191 66,014
=== ======
<CAPTION>
Fiscal Year 1997
---------------------------------------------
Number Number Average
of Hotels of Rooms Hotel Revenues Occupancy Daily Rate REVPAR(1)
--------- -------- -------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Full-service............ 120 56,230 $3,461,732 77.6% $133.39 $103.52
Moderate-price.......... 53 7,606 211,889 81.1 84.30 68.38
Extended-stay........... 18 2,178 69,720 83.3 99.96 83.27
--- ------
191 66,014
=== ======
</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.
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Full-Service. The Company's leased full-service hotels average nearly 500
rooms. Twelve of the hotels 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 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 or its
affiliates serve as the manager for 98 of the 120 full-service hotels leased
by the Company and all but twelve are part of Marriott International's full-
service hotel system.
The chart below sets forth certain performance information for the 120 full-
service hotels currently leased by the Company:
<TABLE>
<CAPTION>
Fiscal Year
----------------
1998 1997
------- -------
<S> <C> <C>
Number of properties....................................... 120 120
Number of rooms............................................ 56,230 56,230
Average daily rate......................................... $143.59 $133.39
Occupancy percentage....................................... 77.5% 77.6%
REVPAR..................................................... $111.29 $103.52
REVPAR % change............................................ 7.5% --
</TABLE>
Revenues in 1998 for nearly all of the full-service hotels leased by the
Company from Host Marriott were improved or comparable to 1997. 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 the full-service hotel properties
increased 7.5% for fiscal year 1998 as average room rates increased 7.6%
although average occupancy decreased slightly. Overall, this resulted in
strong revenue growth. Revenues expanded at an 8.5% rate for the hotels and
house profit margins increased by almost one percentage point. The Company
believes that the full-service hotels leased by the Company from Host Marriott
have outperformed the industry's average REVPAR growth rates. The relatively
high occupancy rates of the hotels allowed the managers of the hotels to
increase average room rates by selectively raising room rates.
The Company and the hotel managers will continue to focus on cost control in
an attempt to ensure that hotel revenues increases serve to maximize house and
operating profit. While control of fixed costs serves to improve profit
margins as hotel revenues 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.
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The following table presents certain information for the full-service hotels
leased by the Company by geographic region for fiscal year 1998:
<TABLE>
<CAPTION>
Average
Number
Number of Average
of Guest Average Daily
Geographic Region Hotels Rooms Occupancy Rate REVPAR
----------------- ------ ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Atlanta............................. 11 486 72.2% $142.95 $103.19
Florida............................. 12 504 78.6% 136.19 107.10
Mid-Atlantic........................ 17 364 76.2% 125.48 95.04
Midwest............................. 15 365 75.0% 126.26 94.73
New York............................ 12 631 84.1% 188.60 158.67
Northeast........................... 10 381 78.1% 136.20 106.36
South Central....................... 18 497 77.0% 123.04 94.68
Western............................. 25 514 77.2% 150.47 116.17
Average all regions............... 120 469 77.5% 143.59 111.29
</TABLE>
Limited-Service--Courtyard by Marriott Hotels. The Courtyard by Marriott
hotels 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 subleased by
the Company features meeting rooms and a restaurant and lounge with
approximately 80 seats.
The table below sets forth comparable performance information for the
Courtyard by Marriott hotels subleased by the Company:
<TABLE>
<CAPTION>
Fiscal Year
--------------
1998 1997
------ ------
<S> <C> <C>
Number of properties......................................... 53 53
Number of rooms.............................................. 7,606 7,606
Average daily rate........................................... $90.71 $84.30
Occupancy percentage......................................... 80.5% 81.1%
REVPAR....................................................... $73.04 $68.38
REVPAR % change.............................................. 6.8% --
</TABLE>
The Courtyard by Marriott hotels subleased by the Company benefited in 1998
from REVPAR growth of 6.8% due to increases in room rates of nearly 7.6%,
although occupancy decreased by over one half of a percentage point. The
Courtyard by Marriott hotels subleased by the Company were generally fully
occupied during the business week and enjoyed high occupancies during the
weekends. Revenues in 1998 increased over 6% while house profit margins
remained flat from the prior year.
The following table presents certain information for the Courtyard by
Marriott properties subleased by the Company by geographic region for fiscal
year 1998:
<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........................ 9 143 79.1% $80.41 $63.57
Mid-Atlantic..................... 11 144 80.7% 93.98 75.39
Mid-west......................... 6 142 79.0% 81.19 64.11
Northeast........................ 15 142 81.4% 96.74 78.74
South Central.................... 3 153 76.3% 79.94 60.98
Western.......................... 9 144 82.8% 97.06 80.35
Average all regions............ 53 144 80.5% 90.71 73.04
</TABLE>
9
<PAGE>
Limited-Service--Residence Inns. The Residence Inns 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 table below sets forth comparable performance information for the
Residence Inns subleased by the Company from Host Marriott:
<TABLE>
<CAPTION>
Fiscal Year
---------------
1998 1997
------- ------
<S> <C> <C>
Number of properties........................................ 18 18
Number of rooms............................................. 2,178 2,178
Average daily rate.......................................... $102.15 $99.96
Occupancy %................................................. 84.1% 83.3%
REVPAR...................................................... $ 85.86 $83.27
REVPAR % change............................................. 3.1% --
</TABLE>
For 1998, REVPAR increased 3.1% for the Residence Inns subleased by the
Company from Host Marriott, due to an increase in room rates of 2.2% and an
increase in occupancy of almost one percentage point. At an average occupancy
rate of 84.1% for 1998, these properties were near full occupancy during the
business week and enjoyed high occupancies during the weekends. Revenues in
1998 increased almost 3% and house profit remained relatively flat, which
resulted in a two percentage point decrease in the house profit margin from
the prior year reflecting the additional supply that has entered the market.
The following table presents certain information for Residence Inn extended-
stay properties subleased by the Company by geographic region for fiscal year
1998:
<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 80.4% $ 93.80 $75.43
Mid-Atlantic..................... 2 112 81.6% 97.76 79.75
Midwest.......................... 3 153 84.0% 118.30 99.36
Northeast........................ 3 110 88.1% 99.11 87.32
South Central.................... 3 119 85.3% 89.21 76.13
Western.......................... 5 119 83.2% 103.99 86.48
Average all regions............ 18 121 84.1% 102.15 85.86
</TABLE>
10
<PAGE>
Hotel Properties 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 leased or subleased to the
Company. 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
Mountain Shadows Resort.................................................. 337
Scottsdale Suites........................................................ 251
The Ritz-Carlton, Phoenix(1)............................................. 281
California
Coronado Island Resort................................................... 300
Cost Mesa Suites......................................................... 253
Desert Springs Resort and Spa............................................ 884
Fullerton................................................................ 224
Hyatt Regency, Burlingame(3)............................................. 793
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 Francisco Airport.................................................... 684
San Francisco Fisherman's Wharf(2)....................................... 285
San Francisco............................................................ 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
Vail Mountain Resort..................................................... 349
Connecticut
Hartford/Farmington...................................................... 380
Hartford/Rocky Hill...................................................... 251
Florida
Biscayne Bay Hotel and Marina............................................ 605
Fort Lauderdale Marina................................................... 580
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, Amelia Island(1)....................................... 449
The Ritz-Carlton, Naples(1).............................................. 463
Georgia
Atlanta Marriott Marquis................................................. 1,671
Atlanta Midtown Suites................................................... 254
Atlanta Norcross......................................................... 222
</TABLE>
<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
Atlanta Northwest........................................................ 400
Atlanta Perimeter Center................................................. 400
Grand Hyatt, Atlanta(3).................................................. 439
JW Marriott at Lenox..................................................... 371
The Four Seasons, Atlanta(3)............................................. 246
The Ritz-Carlton, Atlanta(1)............................................. 447
The Ritz-Carlton, Buckhead(1)............................................ 553
Swissotel, Atlanta(3).................................................... 348
Illinois
Chicago/Deerfield Suites................................................. 248
Chicago/Downers Grove Suites............................................. 254
Chicago/Downtown Courtyard............................................... 334
Chicago O'Hare........................................................... 681
Chicago O'Hare Suites.................................................... 256
Swissotel, Chicago(3).................................................... 630
Indiana
South Bend............................................................... 300
Louisiana
New Orleans.............................................................. 1,290
Maryland
Bethesda................................................................. 407
Gaithersburg/Washingtonian Center........................................ 284
Massachusetts
Boston/Newton............................................................ 430
Hyatt Regency, Cambridge(3).............................................. 469
Swissotel, Boston(3)..................................................... 498
The Ritz-Carlton, Boston(1).............................................. 275
Michigan
Detroit Livonia.......................................................... 224
Detroit Romulus.......................................................... 245
Detroit Southfield....................................................... 226
The Ritz-Carlton, Dearborn(1)............................................ 308
Minnesota
Minneapolis City Center.................................................. 583
Missouri
Kansas City Airport...................................................... 382
New Hampshire
Nashua................................................................... 251
New Jersey
Hanover.................................................................. 353
Newark Airport........................................................... 590
Park Ridge............................................................... 289
Saddle Brook............................................................. 222
New Mexico
Albuquerque.............................................................. 411
New York
New York Marriott Financial Center....................................... 504
New York Marriott Marquis................................................ 1,911
New York World Trade Center.............................................. 820
The Drake (Swissotel), New York(3)....................................... 494
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Location Rooms
- -------- ------
<S> <C>
North Carolina
Charlotte Executive Park(2)............................................ 298
Greensboro-High Point Airport.......................................... 299
Raleigh Crabtree Valley................................................ 375
Research Triangle Park................................................. 224
Ohio
Dayton................................................................. 399
Oklahoma
Oklahoma City.......................................................... 354
Oklahoma City Waterford(2)............................................. 197
Oregon
Portland............................................................... 503
Pennsylvania
Four Seasons, Philadelphia(3).......................................... 365
Philadelphia........................................................... 1,200
Philadelphia Airport................................................... 419
Pittsburgh City Center(2).............................................. 400
Tennessee
Memphis................................................................ 404
Texas
Dallas/Fort Worth...................................................... 492
Dallas Quorum.......................................................... 547
El Paso................................................................ 296
Houston Airport........................................................ 566
Houston Medical Center................................................. 386
JW Marriott Houston.................................................... 503
Plaza San Antonio(2)................................................... 252
San Antonio Rivercenter................................................ 999
San Antonio Riverwalk.................................................. 500
Utah
Salt Lake City......................................................... 510
Virginia
Fairview Park.......................................................... 395
Hyatt Regency, Reston(3)............................................... 514
Key Bridge............................................................. 588
Norfolk Waterside(2)................................................... 404
Pentagon City Residence Inn............................................ 300
The Ritz-Carlton, Tysons Corner(1)..................................... 397
Washington Dulles Airport.............................................. 370
Washington Dulles Suites............................................... 254
Westfields............................................................. 335
Williamsburg........................................................... 295
Washington
Seattle SeaTac Airport................................................. 459
Washington, D.C.
Washington Metro Center................................................ 456
Canada
Calgary................................................................ 380
Toronto Airport........................................................ 423
Toronto Eaton Centre................................................... 459
Toronto Delta Meadowvale(3)............................................ 374
------
Total.................................................................. 56,230
======
Limited-Service--Courtyard by Marriott:
Arizona
Phoenix Camelback...................................................... 155
Scottsdale Mayo........................................................ 100
California
Camarillo.............................................................. 130
</TABLE>
<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
Fountain Valley.......................................................... 150
Los Angeles Airport...................................................... 146
Laguna Hills............................................................. 137
San Jose Airport......................................................... 151
Torrance................................................................. 151
Delaware
Wilmington............................................................... 152
Florida
Boca Raton............................................................... 152
Jacksonville Mayo Clinic................................................. 146
Miami Lakes.............................................................. 151
Georgia
Atlanta Airport North.................................................... 152
Atlanta Cumberland....................................................... 182
Atlanta Jimmy Carter Blvd................................................ 121
Atlanta Midtown.......................................................... 168
Macon.................................................................... 108
Illinois
Chicago Arlington Heights North.......................................... 152
Indiana
Indianapolis Carmel...................................................... 149
Iowa
Quad Cities.............................................................. 113
Maryland
Columbia................................................................. 152
Greenbelt................................................................ 152
Massachusetts
Boston Danvers........................................................... 121
Boston Foxborough........................................................ 149
Boston Lowell............................................................ 121
Boston Milford........................................................... 151
Boston Norwood........................................................... 148
Boston Stoughton......................................................... 152
Boston Woburn............................................................ 125
Michigan
Auburn Hills............................................................. 148
Minnesota
Eden Prairie............................................................. 149
Missouri
Kansas City Airport...................................................... 149
Kansas City South........................................................ 149
New Jersey
Hanover.................................................................. 149
Mahwah................................................................... 146
Tinton Falls............................................................. 121
New York
Fishkill................................................................. 152
Syracuse................................................................. 149
North Carolina
Charlotte Research Park.................................................. 152
Fayetteville............................................................. 108
Raleigh Durham Airport................................................... 151
Pennsylvania
Philadelphia Airport..................................................... 152
Pittsburgh Airport....................................................... 148
Willow Grove............................................................. 149
Rhode Island
Newport.................................................................. 148
South Carolina
Spartanburg.............................................................. 113
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
Tennessee
Chattanooga............................................................. 114
Texas
Dallas Northpark........................................................ 160
Virginia
Arlington/Rosslyn....................................................... 162
Dulles Airport.......................................................... 149
Williamsburg............................................................ 151
Washington
Bellevue................................................................ 152
Wisconsin
Brookfield.............................................................. 148
-----
Total................................................................... 7,606
=====
Limited-Service--Residence Inns:
Arizona
Flagstaff............................................................... 102
Scottsdale.............................................................. 122
Tempe................................................................... 126
California
Fountain Valley......................................................... 122
Rancho Bernardo......................................................... 123
Georgia
Atlanta Alpharetta...................................................... 103
Illinois
Chicago Downtown........................................................ 221
Maryland
Annapolis............................................................... 102
</TABLE>
<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
Massachusetts
Westborough............................................................. 109
Michigan
Warren.................................................................. 133
New Mexico
Albuquerque............................................................. 112
New York
Syracuse................................................................ 102
North Carolina
Durham.................................................................. 122
Ohio
Columbus................................................................ 106
Pennsylvania
Willow Grove............................................................ 118
Tennessee
Nashville Brentwood..................................................... 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.
13
<PAGE>
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.
The Company believes, however, that many senior living markets, and in
particular the 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 components are located could cause the Company's assisted living
components to experience decreased occupancy, depressed operating margins and
lower operating results.
Senior Living Communities
As of the date hereof, the Company's senior living communities portfolio
consists of 31 upscale properties with over 7,400 units. The Communities
represent high quality assets in the senior living lodging segment and offer a
combination of independent living, assisted living, special care and
healthcare components that differ mostly by the level of senior care services
provided.
The Communities provide a residential atmosphere in a campus environment
that offer residents an array of services and accommodations with amenities
such as dining facilities, lounges, and game and craft rooms. The residents
are provided with meals, housekeeping, security and transportation and each
unit is equipped with a 24 hour emergency call system. Each resident enters
into a residency agreement that may be terminated by the resident on short
notice.
The independent living components, which represent 55% of the Company's
senior living units, generally consist of large apartments or villas that vary
in size from studios to two-bedrooms which are designed to offer the resident
with a residential and independent environment.
Assisted living components, which represent 20% of the Company's senior
living units, offer the residents a smaller apartment designed to provide a
supportive environment that encourages independent living. The Company's
assisted living facilities provide the residents with assistance with
activities of daily living ("ADLs") such as eating, bathing, grooming,
dressing or medicine reminders.
Special care center components, which represent 3% of the Company's senior
living units, provide personal assistance with Alzheimer's disease or other
forms of dementia. Residents in the Company's special care centers are
provided private rooms in a facility designed to meet the special needs of
Alzheimer's disease.
Healthcare components, which represent 22% of the Company's senior living
units, are designed for residents who develop further physical or cognitive
frailties. The Company's healthcare facilities offer its residents private or
semi-private rooms with a skilled nursing staff on-site. The Company's
healthcare beds are licensed by their respective states and are generally
operated as skilled nursing facilities. All of the Company's healthcare
facilities also provide ancillary healthcare services such as physical,
occupational and speech and learning therapy at an additional cost to the
residents.
In most cases, each resident of the independent living component of a
Community is entitled to priority admission in the assisted living, special
care or healthcare component. The average age of the Communities is 14 years.
14
<PAGE>
<TABLE>
<CAPTION>
Period from June 21,
1997
Fiscal Year 1998 (31 through January 2, 1998
Properties) (30 properties)
-------------------------- -----------------------
Average Average
Daily Daily
Units(1) Rate Occupancy Units Rate Occupancy
-------- ------- --------- ----- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Independent living........... 4,012 $ 77.15 94.8% 3,855 $ 73.98 94.0%
Assisted living.............. 1,430 83.86 87.1 1,393 80.53 87.2
Special care................. 178 128.38 84.8 178 71.96 53.4
Healthcare................... 1,634 116.80 91.4 1,627 109.97 92.1
----- ------- ---- ----- ------- ----
Combined..................... 7,254 $ 88.44 92.2% 7,053 $ 83.88 91.7%
===== ======= ==== ===== ======= ====
</TABLE>
- --------
(1) Excludes 161 expansion units opened in the first quarter of 1999.
During 1998, the average occupancy at the Communities was approximately
92.2% and the average daily rate was $88.44. Overall occupancies for 1998 and
the period from June 21, 1997 through January 2, 1998 were lower than the
historical occupancies due to the significant number of expansion units added
and the time required to fill the expansion units.
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 totaled approximately $7 million in 1998 and $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 MSLS.
<TABLE>
<CAPTION>
Location Units
- -------- -----
<S> <C>
Arizona
The Forum at Desert Harbor(1)............................................ 240
The Forum at Pueblo Norte................................................ 296
The Forum at Tucson(1)................................................... 327
California
The Remington Club I..................................................... 205
The Remington Club II.................................................... 200
Delaware
Forwood Manor............................................................ 243
Foulk Manor North(1)(3).................................................. 159
Foulk Manor South(1)..................................................... 108
Millcroft(1)............................................................. 198
Shipley Manor(1)......................................................... 159
Florida
Coral Oaks(3)............................................................ 317
The Forum at Deer Creek(1)............................................... 292
Fountainview............................................................. 337
Park Summit(1)........................................................... 281
Springwood Court......................................................... 85
Tiffany House............................................................ 109
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..................................................... 125
New Jersey
Leisure Park............................................................. 418
New Mexico
The Montebello on Academy(1)............................................. 209
Ohio
The Forum at Knightsbridge(1)(2)......................................... 315
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)................................................ 317
Forum at the Woodlands(3)................................................ 356
-----
Total................................................................... 7,415
=====
</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) Includes expansion units opened in the first quarter of 46 units at Foulk
Manor North, 63 units at Coral Oaks and 52 units at Forum at the
Woodlands.
15
<PAGE>
In the first quarter of 1998, 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
second 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 MSLS under long-term operating agreements. If
the Company decides not to exercise its options to purchase either of the two
properties, the Company may have to pay a termination fee of $1 million for
each property.
Marketing
As of the date hereof, 108 of the 120 full-service hotels leased by the
Company are managed or franchised by Marriott International under the brand
names "Marriott" or "Ritz-Carlton" hotels. All 71 of the subleased Courtyard
by Marriott and Residence Inn hotels are also 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 10 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
------- ---------------------------
<C> <S>
Luxury Full-Service... Ritz-Carlton; Four Seasons
Upscale Full-Service.. Marriott Hotels, Resorts and Suites; Crowne Plaza;
Doubletree; Hyatt; Hilton; Radisson; Renaissance;
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>
16
<PAGE>
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 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
overbuilt. 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.
Other Investments
In connection with the Distribution, the Company acquired from Host Marriott
a 25 percent interest in Swissotel Management (USA) LLC, a management company
that manages five hotels in the United States for $4.5 million. Also, in
connection with the Distribution, the Company acquired a five percent interest
in a joint venture with Host Marriott that owns a $129 million first mortgage
secured by eight hotel properties owned by Host Marriott for $6.4 million. The
Company also owns a three percent general partner interest in a partnership
which owns one senior living community.
Relationship with Host Marriott after the Distribution
Hotel Leases. In connection with the Distribution, wholly-owned subsidiaries
of the Company entered into leases (the "Hotel Leases") with Host Marriott on
December 31, 1998 for 121 full-service hotels. In the first quarter of 1999,
Host Marriott sold one of the leased full-service hotels, and the Company and
Host Marriott agreed to terminate the lease reducing the number of hotels
leased from Host Marriott to 120 full-service hotels. Each Hotel Lease has a
fixed term ranging from seven to ten years. The Company is required to pay the
greater of (i) a minimum rent specified in each Hotel Lease, or (ii) a
percentage rent based upon a specified percentage of aggregate sales from the
hotel, including room sales, food and beverage sales, and other income, in
excess of specified thresholds. The amount of minimum rent will be increased
each year based upon any increases in CPI during the previous twelve months.
Percentage rent thresholds will be increased each year based on a blend of any
increases in CPI and the Employment Cost Index during the previous twelve
months. The Hotel Leases will generally provide for a rent adjustment in the
event of damage, destruction, partial taking or certain capital expenditures.
17
<PAGE>
The Company is responsible for paying all of the expenses of operating the
hotels, including all personnel costs, utility costs, and general repair and
maintenance of the hotels. In addition, the Company is responsible for all
fees payable to the hotel manager, including base and incentive management
fees, chain services payments and franchise or system fees. Host Marriott is
responsible for real estate and personal property taxes, property casualty
insurance, ground lease rent, maintaining a reserve fund for FF&E replacements
and capital expenditures.
In the event that Host Marriott disposes of a hotel free and clear of the
Hotel Lease, Host Marriott would have to pay a termination fee equal to the
fair market value of the Company's leasehold interest in the remaining term of
the Hotel Lease using a discount rate of 12%. Alternatively, Host Marriott
would be entitled to (i) substitute a comparable hotel for any hotel that is
sold, with the terms agreed to by the Company, or (ii) sell the hotel subject
to the Hotel Lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve leases without having to
pay a termination fee. Conversely, the Company may terminate up to twelve
full-service leases without penalty upon 180 days notice to Host Marriott.
Also, in the event that changes in the federal income tax laws allow Host
Marriott or its subsidiaries to directly operate the hotels without
jeopardizing its REIT status, Host Marriott may terminate all of the Hotel
Leases upon payment of the termination fee. The payment of the termination fee
will be payable in cash or, subject to certain conditions, shares of Host
Marriott common stock at the election of Host Marriott.
As part of the Distribution, the Company and Host Marriott entered into
guaranty and pooling agreements by which the Company and certain of its
subsidiaries guarantee the Hotel Lease obligations. The Hotel Leases were
placed into four different pools with all of the Hotel Leases having similar
terms placed into the same pool. The parent subsidiary of each pool (the "Pool
Parent") has a full guarantee obligation of the Hotel Leases in its respective
pool. However, for each pool, the cumulative limit of the Company's guaranty
obligation will be the greater of ten percent of the aggregate rent payable
for the immediately preceding fiscal year under all Hotel Leases in the pool
or ten percent of the aggregate rent payable under all Hotel Leases in the
pool for 1999. In the event that the Company's obligation under a guaranty
agreement for a pool is reduced to zero, the Company can terminate its
guaranty and pooling agreement for that pool and Host Marriott can terminate
the Hotel Leases in the pool without penalty.
Upon the commencement of the hotel leases, the Company purchased the working
capital of the hotels from Host Marriott for approximately $95 million with
the purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each Hotel Lease. The
principal amount of each note is due upon the termination of each Hotel Lease.
Upon termination of the Hotel Lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note, the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note,
Host Marriott will pay the Company the difference in cash.
FF&E Leases. In connection with the Distribution, if the average tax basis
of a hotel's FF&E and other personal property exceeded 15% of the aggregate
average tax basis of the hotel's real and personal property (the "Excess
FF&E"), subsidiaries of the Company and affiliates of Host Marriott entered
into lease agreements (the "FF&E Leases") for the Excess FF&E. The terms of
the FF&E Leases generally range from two to three years and rent under the
FF&E Leases is a fixed amount. The Company will have the option at the
expiration of the FF&E Lease term to either (i) renew the FF&E Leases for
consecutive one year renewal terms at a fair market rental rate, or (ii)
purchase the Excess FF&E for a price equal to its fair market value. If the
Company does not exercise its purchase or renewal option, the Company is
required to pay a termination fee equal to approximately one month's rent.
18
<PAGE>
Limited-Service Hotel Subleases. Host Marriott leases 71 limited-service
hotels under the "Residence Inn" and "Courtyard by Marriott" brands (the "HPT
Leases") from Hospitality Properties Trust, Inc ("HPT"). The HPT Leases have
initial terms expiring through 2012 for the Courtyard properties and 2010 for
the Residence Inn properties, and are renewable at the option of Host
Marriott. In connection with the Distribution, subsidiaries of the Company
entered into sublease agreements with Host Marriott for these limited-service
hotels (the "Subleases"). The terms of the Subleases will expire
simultaneously with the expiration of the initial term of the HPT Leases. If
Host Marriott elects to renew the HPT Leases, the Company can elect to also
renew the Subleases for the corresponding renewal term.
Each Sublease provides that generally all of the terms in the HPT Leases
will apply to the Subleases. The HPT Leases require the lessee to pay rent
equal to (i) a fixed minimum rent, less the cost of any repairs, maintenance,
renovations or replacements of the hotel, (ii) plus an additional rent based
upon a specified percentage of gross revenues to the extent they exceed gross
revenues from a base year. In addition, the HPT Leases require the lessee to
pay all repair and maintenance costs, impositions, utility charges, insurance
premiums and all fees payable under the hotel management agreements. Pursuant
to the Subleases, subsidiaries of the Company are required to pay rent to Host
Marriott equal to the minimum rent due under the HPT Leases and an additional
rent based on a percentage of revenues. To the extent the reserves for FF&E
replacements are insufficient to meet the hotel's capital expenditure
requirements, HPT is required to fund the shortfall.
The rent payable under the Subleases is guaranteed by the Company up to a
maximum of $30 million. The Company's wholly-owned subsidiaries that are party
to the Subleases were capitalized with $30 million in notes from the Company
payable upon demand.
In the event that changes in the federal income tax laws allow Host Marriott
or its subsidiaries to directly operate the hotels without jeopardizing its
REIT status, Host Marriott may terminate all of the Subleases upon payment of
the termination fee equal to the fair market value of the Company's leasehold
interests in the remaining term of the Subleases using a discount rate of five
percent.
For the purposes of governing certain of the ongoing relationships between
the Company and Host Marriott after the Distribution and to provide mechanisms
for an orderly transition, the Company and Host Marriott entered into various
agreements in addition to the Hotel Leases, as described below.
Distribution Agreement. The Company and Host Marriott entered into a
distribution agreement (the "Distribution Agreement"), which provides 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 Marriott's 3% general partnership interest in a
partnership, which owns a senior living community; (iv) the transfer to the
Company of the 25% interest in Swissotel Management (USA) LLC; (v) a guarantee
by Host Marriott on certain company debt obligations; and (vi) certain other
agreements governing the relationship between the Company and Host Marriott
following the Distribution. The Company also granted Host Marriott a
contingent right for a period of ten years to purchase the Company's interest
in Swissotel Management (USA) LLC at fair market value in the event the tax
laws are changed so that Host Marriott could own such interest without
jeopardizing its status as a REIT.
Subject to certain exceptions, the Distribution Agreement also provides 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.
Asset Management Agreements. In connection with the Distribution, the
Company entered into asset management agreements (the "Asset Management
Agreements") with Host Marriott and its affiliates for a term of two years
(with a one-year automatic renewal) to provide asset management services to
Host Marriott and its affiliates for its hotel portfolio. These services will
include: (i) monitoring property/brand performance; (ii) pursuing expansion
and repositioning opportunities; (iii) overseeing capital expenditure budgets
and forecasts;
19
<PAGE>
(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.
Tax Sharing Agreement. The Company and Host Marriott entered into a tax
sharing agreement which defines each party's rights and obligations with
respect to deficiencies and refunds of federal, state and other income or
franchise taxes relating to the Company's business for taxable years prior to
the Distribution Date and with respect to certain tax attributes of the
Company after the Distribution Date. Generally, Host Marriott will be
responsible for filing consolidated returns and paying taxes for periods
through the Distribution Date, and the Company will be responsible for filing
returns and paying taxes for subsequent periods.
Corporate Transitional Services Agreement. The Company and Host Marriott
entered into a transitional services agreement, pursuant to which the Company
and Host Marriott will provide certain limited services to each other for a
fee. Among other things, Host Marriott will provide centralized administrative
and computer systems services to the Company for a period of time. 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 Marriott Non-Competition Agreement. The Company and Host Marriott
entered into a non-competition agreement that limits the respective parties'
future business opportunities. The Company is generally precluded until the
earlier of December 31, 2008 or the date when the Company no longer leases at
least 25% of the original hotels leased from Host Marriott at the time of the
Distribution, from owning or acquiring any full-service hotels not leased from
Host Marriott. The Company is also subject to certain restrictions relating to
leasing, operating and managing full-service hotels under its agreement with
Host Marriott.
Employee Benefits and Other Employment Matters Allocation Agreement. The
Company and Host Marriott entered into an employee benefits agreement which
will govern the allocation of responsibilities relating to various
compensation, benefits and labor matters.
Relationship with Marriott International
Marriott International and its wholly-owned subsidiary, Ritz-Carlton Hotel
Company, LLC, serve as the manager for 98 of the 120 full-service hotels
currently leased by the Company and all of the limited-service hotels
currently subleased by the Company under long-term management agreements
between Host Marriott and Marriott International or its affiliates. In
connection with entering into the hotel lease and subleases, the Company, Host
Marriott and Marriott International entered into agreements whereby the
existing hotel management agreements with Marriott International were assigned
to the Company for the term of the corresponding hotel leases or subleases.
For the hotels where it is the manager, Marriott International has a
noneconomic membership interest with certain limited voting rights in the
Company's subsidiaries that are the lessee under the hotel leases. In
addition, Marriott International is the manager for all 31 Communities under
long-term operating agreements.
The Company is also bound by certain non-competition agreements with
Marriott International whereby the Company's business opportunities are
restricted.
Staffing and Labor Costs
Marriott International and the Company's other hotel managers compete with
various other lodging companies in attracting and retaining qualified and
skilled personnel to operate the hotels managed by them. 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 or the
Company's other hotel managers 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.
20
<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 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 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 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. In 1998, Medicare/Medicaid reimbursements
have accounted for approximately 12% 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 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 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
21
<PAGE>
services may be furnished in or by some of the 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.
The Balanced Budget Act of 1997 switches Medicare's retrospective cost-based
reimbursement to a prospective payment system (PPS). The current retrospective
cost-based reimbursement system allows providers to be reimbursed for
reasonable costs, up to certain limits, incurred in providing services. Under
PPS, providers will be paid based on a fixed Federal payment rate. The
implementation of PPS will begin for Communities with cost reporting periods
beginning after July 1, 1998 and will be phased in over a four-year period.
The Company does not believe the implementation of PPS will have a material
impact on its operating results.
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
The Company has approximately 80 corporate employees.
Corporate Offices
The Company plans to relocate its corporate offices in June 1999 to the
following address:
Crestline Capital Corporation
6600 Rockledge Drive
Bethesda, MD 20817
22
<PAGE>
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
23
<PAGE>
PART II
Item 5. Market for Company's Common Stock and Related Stockholder Matters
The common stock is listed on the New York Stock Exchange and is traded
under the symbol "CLJ". Following the Distribution, the Company become a
publicly traded company. The following table sets forth, for the fiscal
periods indicated, the high and low sales prices per share of the common stock
as reported on the New York Stock Exchange Composite Tape. The Company
currently intends to retain future earnings, if any, for use in its business
and does not anticipate paying regular cash dividends on the common stock. As
of January 1, 1999, there were approximately 72,000 holders of common stock.
<TABLE>
<CAPTION>
High Low
-------- ---------
<S> <C> <C>
1998
4th Quarter (December 30, 1998 through January 1, 1999)..... $16 1/16 $14 1/2
1999
1st Quarter (through March 5, 1999)......................... 15 9 13/16
</TABLE>
24
<PAGE>
Item 6. Selected Historical Financial Data
The following table presents selected historical consolidated financial
statement data derived from the Company's consolidated financial statements
for the fiscal year ended January 1, 1999 and for the period from June 21,
1997 through January 2, 1998. The historical data reflects only the operations
of the Communities since their acquisition. Since the leases and subleases of
hotels did not commence until January 1, 1999, there is no historical
operating financial data for the leased and subleased hotels reflected in
these results. 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 Group, Inc. ("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>
Crestline Capital Marriott International Forum
---------------------- ----------------------------- ------------------
Period
from June
21, 1997 Twenty-four Year Ended
through Week Period Forty-Week March 31,
Fiscal Year January 2, Ended Period Ended ------------------
1998 1998 June 20, 1997 January 3, 1997 1996 1995
----------- ---------- ------------- --------------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.............. $241,277 $110,969 $95,403 $150,782 $179,926 $142,527
Operating costs and
expenses............. 204,058 94,998 77,428 115,441 141,173 111,165
Operating profit...... 37,219 15,971 17,975 35,341 38,753 31,362
Corporate expenses.... 6,360 2,304 4,519 6,380 915 431
Interest expense...... 22,861 13,396 9,141 14,283 29,119 23,018
Interest income....... 2,028 336 598 1,111 2,321 1,743
Net income(1)......... 5,915 358 2,628 9,334 5,717 6,714
Earnings per
share(2)............. .27 .02
Other Data:
Depreciation and
amortization......... 22,115 10,635 6,698 8,494 10,172 8,360
Cash from (used in)
operations........... 28,987 25,376 (479) 26,870 26,327 21,518
Cash used in investing
activities........... (30,098) (33,412) (16,407) (159,586) (43,253) (34,269)
Cash provided by
financing
activities........... 50,246 25,680 12,673 132,650 5,896 24,184
Balance Sheet Data:
Total assets.......... $858,753 $663,502 $ -- $565,094 $417,436 $379,127
Total debt(3)......... 213,076 349,934 -- 244,318 325,756 267,228
Total shareholders'
equity............... 459,254 227,064 -- 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
change.
(2) Earnings per share reflects historical net income divided by the weighted
average shares outstanding. Weighted average shares outstanding is based
on Host Marriott's weighted average shares outstanding adjusted for the
one-for-ten distribution ratio.
(3) Debt excludes $95,114,000 of hotel working capital notes payable to Host
Marriott as of January 1, 1999.
25
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Lack of Comparability Following the Distribution
The following is a discussion of the historical fiscal year 1998 and the
period from June 21, 1997 through January 2, 1998 operating results. However,
since the Company entered into hotel lease and sublease agreements subsequent
to 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. Accordingly, a comparison of the Company's pro
forma results of operations for fiscal year 1998 to fiscal year 1997 have been
included following the historical analysis.
Fiscal Year 1998 (Historical)
Revenues. Revenues represent gross property routine services and ancillary
revenues. Routine service revenues are generated from monthly charges for
independent and assisted living apartments and special care center rooms and
daily charges for healthcare 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 $241.3 million for 1998.
During 1998, average occupancy of the Communities was 92.2% and the average
daily rate for 1998 was $88.44. 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.
Operating Costs and Expenses. Operating costs and expenses principally
consist of property-level expenses, depreciation and amortization, management
fees, property taxes, insurance and certain other costs. The Company's
operating costs and expenses were $204.1 million (84.6% of revenues) for 1998.
The property-level operating costs and expenses were adversely impacted in
1998 by the low national unemployment as the Communities experienced a
significant increase in labor costs particularly in its nursing and food
service departments.
Operating Profit. The Company's operating profit was $37.2 million (15.4% of
revenues).
Corporate Expenses. Corporate expenses were $6.4 million (2.7% of revenues).
Interest Expense. Interest expense was $22.9 million.
Interest Income. Interest income was $2.0 million, primarily reflecting
interest earned on cash and certain escrow accounts.
Net Income. Net income was $5.9 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 $111.0 million. During the period from June
21, 1997 through January 2, 1998, average occupancy of the Communities was
91.7% and the average daily rate was $83.88. 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.
Operating Costs and Expenses. Operating costs and expenses were $95 million
(85.6% of revenues).
Operating Profit. Operating profit was $16.0 million (14.4% of revenues).
Corporate Expenses. Corporate expenses were $2.3 million (2.1% of revenues).
Interest Expense. Interest expense was $13.4 million.
Net Income. Net income was $0.4 million.
26
<PAGE>
Pro Forma Results of Operations
Because of the significant changes as a result of the Distribution and
related transactions, management believes that a discussion of the Company's
pro forma results of operations is more meaningful and relevant in
understanding the present and ongoing operations of the Company than a
discussion of the Company's historical results of operations. The pro forma
discussion below was prepared as if the Distribution and related transactions,
including the hotel leases and subleases, occurred at the beginning of the
period. See the consolidated financial statements included elsewhere herein
for a discussion of the Distribution and related transactions.
The unaudited pro forma condensed consolidated statements of operations of
the Company reflect the following transactions for 1998 and 1997 as if such
transactions had been completed at the beginning of each fiscal year:
. 1997 acquisition of Forum and one additional senior living community;
. 1998 acquisition of one senior living community;
. 1998 retirement of $26 million of debt through a capital contribution from
Host Marriott;
. 1998 repayment and forgiveness of $92 million of unsecured debt and a $15
million intercompany note treated as a capital contribution by Host
Marriott;
. 1998 acquisition of minority interests in certain consolidated subsidiaries
of the Company through contributions from Host Marriott;
. 1998 spin-off of the Company by Host Marriott and the concurrent lease of
120 full-service hotels and sublease of 71 limited-service hotels from Host
Marriott;
. The asset management fee to be charged to Host Marriott; and
. Adjustment to corporate expenses as if the Company were operated on a
stand-alone basis.
In 1997, Host Marriott 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 $15 million in
debt, increasing the Company's ownership to 99% of the partnership. In the
first quarter of 1999, the Company acquired the remaining one percent
interest.
In 1998, the Company acquired one senior living community for $21 million.
Also, during 1998, Host Marriott 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 Marriott with similar terms. The $92 million note and an additional
$15 million intercompany note were forgiven by Host Marriott and treated as a
capital contribution in 1998.
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 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.
27
<PAGE>
1998 Compared to 1997 (Pro Forma)
The following table presents the results of operations for fiscal years 1998
and 1997 on the pro forma basis discussed above:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(unaudited, in
thousands, except per
share amounts)
<S> <C> <C>
Hotel revenues........................................ $4,053,091 $3,743,341
Senior living community revenues...................... 241,445 222,789
Asset management revenues............................. 4,500 4,500
---------- ----------
Total revenues...................................... 4,299,036 3,970,630
---------- ----------
Hotel operating costs and lease expenses.............. 4,008,227 3,703,877
Senior living community operating costs and expenses.. 204,191 189,467
Asset management operating costs and expenses......... 4,500 4,500
---------- ----------
Total operating costs and expenses.................. 4,216,918 3,897,844
---------- ----------
Operating profit before corporate expenses and
interest............................................. 82,118 72,786
Corporate expenses.................................... (17,376) (16,500)
Interest expense...................................... (22,937) (22,696)
Interest income....................................... 2,601 1,501
---------- ----------
Income before income taxes............................ 44,406 35,091
Provision for income taxes............................ (18,206) (14,387)
---------- ----------
Net income............................................ $ 26,200 $ 20,704
========== ==========
Pro forma earnings per share.......................... $ 1.19 $ .95
========== ==========
</TABLE>
Revenues. Revenues primarily represent gross revenues from leased and
subleased hotels and owned senior living communities and asset management
fees. Revenues increased by $328 million, or 8.3%, to $4,299 million for 1998
from $3,971 million for 1997.
Hotel revenues increased $310 million, or 8.3%, to $4,053 million in 1998.
Improved results for the Company's leased full-service hotels were driven by
strong increases in REVPAR of 7.5% to $111.29 for 1998. Average room rates
increased 7.6%, while average occupancy decreased slightly to 77.5% for the
full-service properties. REVPAR for the Company's subleased Courtyard by
Marriott hotel properties increased 6.8% to $73.04 due to an increase in
average room rates of nearly 7.6%, while average occupancy decreased over one
half of a percentage point to 80.5%. REVPAR for the Company's subleased
Residence Inn properties increased 3.1% to $85.86 due to an increase in
average room rates of 2.2% and an increase in occupancy of almost one
percentage point to 84.1%.
Senior living community revenues increased by $18.7 million, or 8.4%, to
$241.4 million. For 1998, the average daily rate increased 5.3% to $88.44,
while average occupancy decreased slightly to 92.2%. The significant revenue
growth is partially due to the addition of 445 expansion units in 1997 and
1998, partially offset by the competitive pressures on the Company's assisted
living components which experienced a one-half percentage point decrease in
occupancy.
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 management fees,
depreciation, property taxes, ground rent, insurance and certain other costs.
Asset management operating costs and expenses principally consist of salary
and related costs and expenses. Operating costs and expenses increased $319
million, or 8.2%, to $4,217 million in 1998.
28
<PAGE>
Overall hotel operating costs and expenses increased $304 million, or 8.2%,
to $4,008 million. Hotel property-level operating costs and expenses increased
$162 million, or 7.0% to $2,488 million. Hotel management fees increased $23.2
million, or 8.9%, to $284 million, while lease expense increased $119 million,
or 10.6%, to $1,237 million.
Overall senior living operating costs and expenses increased $14.7 million,
or 7.8%, to $204.2 million for 1998. Senior living community property-level
operating costs and expenses increased $13.7 million, or 9.4%, to $159.5
million, while other operating costs and expenses increased $1.1 million to
$44.7 million for 1998. The property-level operating costs and expenses were
adversely impacted in 1998 by the low national unemployment as the Communities
experienced a significant increase in labor costs particularly in its nursing
and food service departments. Other operating costs and expenses were impacted
in 1998 by the payment of central administrative fees to Marriott
International in 1998 that were waived for the first year of operations.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $9.3
million, or 12.8%, to $82.1 million for 1998. Hotel operating profit increased
$5.4 million, or 13.7%, to $44.9 million for 1998 from $39.5 million for 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 1998. Properties in Florida
reported some temporary declines in operating results due to exceptionally
poor weather in 1998.
Senior living community operating profit increased $3.9 million, or 11.8%,
to $37.3 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 food service cost
and the central administrative service fees beginning in the third quarter of
1998. The Park Summit, the Forum at Deer Creek, Leisure Park and the Forum at
Memorial Woods senior living communities performed particularly well.
Corporate Expenses. Corporate expenses increased $.9 million to $17.4
million for 1998. As a percentage of total revenues, corporate expenses
remained unchanged at 0.4% for 1998 and 1997.
Interest Expense. Interest expense increased slightly to $22.9 million in
1998.
Interest Income. Interest income increased $1.1 million to $2.6 million for
1998.
Net Income. Net income for 1998 was $26.2 million, compared to $20.7 million
for 1997.
Liquidity and Capital Resources
In 1997, Host Marriott acquired all of the outstanding common stock of Forum
Group, Inc. ("Forum") from Marriott Senior Living Services, Inc. ("MSLS"), a
subsidiary of Marriott International. Host Marriott purchased Forum, which
consisted of a portfolio of 29 senior living communities, for approximately
$460 million, including approximately $270 million in assumed debt and
concurrently contributed all of the assets and liabilities of Forum to the
Company. In 1997, the Company also acquired 49% of the remaining 50% interest
in a partnership which owns the 418-unit Leisure Park senior living community
from Marriott International for approximately $23 million, including
approximately $15 million in assumed debt. In the first quarter of 1999, the
Company acquired the remaining one percent interest.
During the first quarter of 1998, the Company acquired the Gables at
Winchester in suburban Boston, a 125-unit senior living community, for $21
million and concurrently entered into a long-term operating agreement with
MSLS to operate the property. Also in the first quarter of 1998, the Company
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 second
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. Both of these communities will be
operated by MSLS under long-term operating agreements.
29
<PAGE>
In 1999, the Company intends to add 239 units at five Communities at a cost
of approximately $23 million, which will be the final phase of a four-year $88
million expansion program that will have ultimately resulted in the addition
of 861 units to 21 of the Company's Communities. The expansion plan has been
funded through a combination of operating cash flow and contributions by Host
Marriott. In the first quarter of 1999, 161 of the expansion units were
opened.
In the second quarter of 1999, the Company acquired a 74% limited
partnership interest in the Marriott Residence Inn USA Limited Partnership
(the "Partnership") from a private Japanese investor for $34.4 million. The
Partnership owns 11 Residence Inn properties managed by Marriott
International. The total consideration for the acquisition was $89 million,
including the consolidation of $54.6 million of debt. Host Marriott owns a 5%
general partner interest in the Partnership.
During 1998, the Company acquired additional limited partnership interests
at a cost of $10 million in Forum Retirement Partners, LP, a partnership that
owns nine Communities, increasing the Company's ownership percentage to 93%.
In March 1999, the Company acquired the remaining limited partnership
interests for $6 million. Also, in the first quarter of 1998, the Company
acquired the remaining 41% interest in the partnership that owns the Remington
Club II senior living community for $3 million. The purchases of these
minority interests in 1998 were paid for by Host Marriott and treated as
capital contributions to the Company. As of the date hereof, all of the
Company's 31 Communities are owned by wholly owned subsidiaries of the
Company.
Under the terms of its Communities' operating agreements, the Company is
generally required to contribute a specified amount of revenues to a FF&E
reserve account ("FF&E Reserve") which is used to fund certain replacements
and renewals to the Communities' property and improvements. The amount the
Company is required to contribute to the FF&E Reserves varies among the
individual Community operating agreements, but is generally 2.65% through
fiscal year 2002, 2.85% for fiscal years 2003 through 2007, and 3.5%
thereafter. The Company anticipates contributing approximately $7 million in
1999 to the FF&E Reserves. Also, the Company is required under the
Communities' operating agreements to fund separately the cost of certain
capital expenditures and replacements to the Communities which are considered
major or non-routine in nature.
As of January 1, 1999, the Company has cash and cash equivalents of $67
million and restricted cash of $15 million, which is included in other assets
on the accompanying consolidated financial statements. The Company's
restricted cash consists of funds transferred into segregated escrow accounts
for (i) debt service, fixed asset, real estate tax and insurance reserves
pursuant to the Company's secured debt agreements for certain of the
Communities, and (ii) fixed asset reserves pursuant to the Company's
Communities' operating agreements.
Cash from operations was $29 million for 1998 and $25 million for the period
from June 21, 1997 through January 2, 1998. Cash used in investing activities
was $30 million in 1998 and $33 million for the period June 21, 1997 through
January 2, 1998. The cash used in investing activities principally consists of
capital expenditures for renewals and replacements and expansions. Cash
provided by financing activities was $50 million for 1998 and $26 million for
the period from June 21, 1997 through January 2, 1998. The Company's cash from
financing activities consists primarily of contributions from Host Marriott
and issuances of debt related mostly to the expansions, less debt principal
repayments.
In the first quarter of 1999, the Company announced a plan to repurchase up
to 1.5 million shares of its common stock. Over an extended period of time,
the Company intends to purchase shares through open market transactions at
prices deemed advantageous to the Company. These purchases will be subject to
market conditions, applicable legal requirements and other factors, however
the Company has no commitment or obligation to purchase any particular amount
of common stock and the stock repurchase program could be suspended at any
time at the Company's discretion.
During the first quarter of 1998, Host Marriott prepaid $26 million in
mortgage debt which was treated as a capital contribution to the Company. In
the second quarter of 1998, Host Marriott prepaid $92 million of unsecured
debt provided by Marriott International. The $92 million unsecured note upon
repayment by Host Marriott became payable by the Company to Host Marriott.
During the third quarter of 1998, Host Marriott forgave the $92 million note
as well as a $15 million note due to Host Marriott, both of which were treated
as a capital contribution to the Company. As of January 1, 1999, the Company
has $197 million of debt outstanding, excluding the hotel working capital
notes payable to Host Marriott of approximately $95 million and debt premiums
of $16 million. Excluding these items, the weighted average interest rate is
9.6% and the average maturity is thirteen years. All of the Company's debt is
fixed rate.
30
<PAGE>
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 January 1, 1999, debt included the following:
FRP Financing Limited, L.P. FRP Financing Limited, L.P. ("FRP"), a
subsidiary of the Company, 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 was
approximately $51 million and it matures in January 2001. In January 2000, the
loan may be prepaid without premium or penalty. The loan bears interest at
9.93%. Consent of NACC is necessary for any (i) amendments to the management
agreements, (ii) replacement of the manager, (iii) sale of a community, (iv)
other financing or (v) transfer of partnership interests in FRP. As of January
1, 1999, the remaining balance of the loan, excluding debt premiums, was $45.5
million.
CCC Financing I Corporation and CCC Ohio Healthcare, Inc. CCC Financing I
Corporation ("Financing I") and CCC Ohio Healthcare, Inc. ("COH") are
subsidiaries of the Company that own seven Communities and one Community,
respectively. Both Financing I and COH are subject to a single loan agreement,
dated September 1, 1995, with NACC in the original amount of $124.7 million.
The loans are supported by two promissory notes for the amount of $104.4
million and $20.3 million, which mature in September 2020 and September 2018,
respectively. In September 2003, the loans may be prepaid without premium or
penalty. Beginning in September 2003, all excess cash flow from the
Communities must be applied to reduce the principal balance of the loans. The
loans bear interest at 10.008% through September 2003 and 5% plus the greater
of 10.008% or a treasury rate thereafter. The loan agreement contains cross-
default provisions so that a default by one subsidiary can result 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 Financing I and COH stock. As of January 1, 1999,
$120.9 million remains outstanding, excluding debt premiums.
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"). The Leisure Park Bonds
mature in December 2027 and bear interest at 5.875%. In connection with the
Distribution, Host Marriott agreed to remain the guarantor of the Leisure Park
Bonds.
Hotel Working Capital Notes. Upon the commencement of the hotel leases, the
Company purchased the working capital of the hotels from Host Marriott for $95
million with the purchase price evidenced by notes that bear interest at
5.12%. Interest on each note is due simultaneously with the rent payment of
each Hotel Lease. The principal amount of each note is due upon the
termination of each Hotel Lease. Upon termination of the Hotel Lease, the
Company will sell Host Marriott the existing working capital at its current
value and the notes will be repaid with the proceeds. To the extent the
working capital delivered to Host Marriott is less than the value of the note,
the Company will pay Host Marriott the difference in cash. However, to the
extent the working capital delivered to Host Marriott exceeds the value of the
note, Host Marriott will pay the Company the difference in cash.
EBITDA
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") on a historical
basis was $55.0 million in 1998 and $24.6 million for the period from June 21,
1997 through January 2, 1998.
31
<PAGE>
The following is a reconciliation of historical EBITDA to the Company's net
income:
<TABLE>
<CAPTION>
Period
from
June 21,
1997
Fiscal through
Year January 2,
1998 1998
-------- ----------
(in thousands)
<S> <C> <C>
EBITDA.................................................. $ 55,002 $ 24,638
Interest expense........................................ (22,861) (13,396)
Depreciation and amortization........................... (22,115) (10,635)
Income taxes............................................ (4,111) (249)
-------- --------
Net income............................................ $ 5,915 $ 358
======== ========
</TABLE>
The Company's interest coverage, defined as EBITDA divided by cash interest
expense, was 2.3 times for 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
1.4 to 1.0 for 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 million, or 11.6%, to $86.4
million in fiscal year 1998 as compared to fiscal year 1997.
The following is a reconciliation of pro forma EBITDA to the Company's pro
forma net income:
<TABLE>
<CAPTION>
Fiscal Year
------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
EBITDA................................................... $ 86,371 $ 77,360
Interest expense......................................... (22,937) (22,696)
Hotel working capital note interest expense.............. 4,864 4,864
Depreciation and amortization............................ (22,892) (23,437)
Income taxes............................................. (18,206) (14,387)
Other non-cash charges, net.............................. (1,000) (1,000)
-------- --------
Net income............................................. $ 26,200 $ 20,704
======== ========
</TABLE>
The Company's pro forma interest coverage was 4.4 times for fiscal year 1998
compared to 4.1 times for fiscal year 1997. The pro forma ratio of earnings to
fixed charges was 1.1 to 1.0 for fiscal year 1998 and 1.1 to 1.0 for fiscal
year 1997.
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.
Inflation
The Company's leased and subleased hotels 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
32
<PAGE>
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 generally
for one year, and thus may enable the Company to seek increases in monthly
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.
The Company's compliance program includes an assessment of its hardware and
software computer systems and embedded systems, as well as an assessment of
the Year 2000 issues relating to third parties with which the Company has a
material relationship or whose systems are material to the operations of the
Company's hotel or senior living properties. The Company'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. The Company has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are
intended to enable it to provide adequately for its information and reporting
needs and which are also Year 2000 compliant. Substantially all of the
Company's in-house systems have already been certified as Year 2000 compliant
through testing and other mechanisms. The Company will engage a third party to
review its Year 2000 in-house compliance during 1999.
Third-Party Systems. The Company 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, emergency call and other systems) and to provide it with financial
information. Based on discussions with the third parties that are critical to
the Company's business, including the managers and operators of its hotels and
senior living properties, the Company 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. To the extent these changes impact
hotel property-level systems, Host Marriott may be required to fund capital
expenditures for upgraded equipment and software. However, to the extent these
changes impact the owned senior living property-level systems, the Company may
be required to fund capital expenditures for upgraded equipment and software.
To the extent that these changes relate to a third party managers' centralized
systems (including reservations, accounting, purchasing, inventory, personnel
and other systems), the Company's management agreements generally provide for
these costs to be charged to the properties subject to annual limitations
which costs will be borne by the Company. The Company 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. The Company believes 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. The Company believes that in the event of
material Year 2000 non-compliance caused by a breach of the manager's duties,
the Company 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.
The Company will work with the third parties to ensure that appropriate
contingency plans will be developed. In particular, the Company has had
extensive discussions regarding the Year 2000 problem with
33
<PAGE>
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 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
affected 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 an internal 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, emergency call and HVAC equipment.
Marriott International is prioritizing its efforts based on how severe an
effect noncompliance would have on customer service, core business processes
or revenues, and whether there are viable, non-automated fallback procedures
("System Criticality").
Marriott International measures the completion of each phase based on
documented and quantified results, weighted for System Criticality. As of
January 1, 1999, the Awareness and Inventory phases were complete for IT
Applications and substantially complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning, Remediation/Replacement and Testing
phases were each over 95% complete, and Compliance Validation had been
completed for nearly half of key systems, with most of the remaining work in
its final stage. BIS and Building Systems, Assessment and Planning are nearly
complete. Remediation/Replacement and Testing is 20 percent complete for BIS
and Marriott International is on track for completion of initial Testing of
Building Systems by the end of the first quarter of 1999. Compliance
Validation is in progress for both BIS and Building Systems. Marriott
International remains on target for substantial completion of
Remediation/Replacement and Testing for System Critical BIS and Building
Systems by June 1999 and September 1999, respectively. Quality Assurance is in
progress for IT Applications.
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 connections most critical to its customer service, core business processes
and revenues, including those third parties that support the most critical
enterprise-wide IT Applications, franchisees generating the most revenues,
suppliers of the most widely used Building Systems and BIS, the top 100
suppliers, by dollar 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 guidance 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 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
34
<PAGE>
business and its financial condition since the Company is responsible for
interfacing with third parties in addressing Year 2000 issues at the hotels
leased or subleased by the Company and the Communities owned 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 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 Marriott 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 Marriott in implementing 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.
The Company estimates the capital expenditure costs to be incurred by the
Company to be Year 2000 compliant will be less than $1 million, consisting
primarily of expenditures for its Communities.
Impact of Financial Accounting Standards
During 1998, the Company adopted Statements of Financial Accounting
Standards ("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 charges 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.
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The adoption of SFAS No. 131 did
not have a material effect on the Company's consolidated financial statements
for fiscal year 1998 and for the period from June 21, 1997 (inception) through
January 2, 1998, since the Company had only one operating segment, the senior
living ownership segment. For fiscal year 1999, the Company expects to have
two operating segments, the senior living ownership and hotel leasing
segments, and therefore will make the required disclosure of SFAS No. 131 in
fiscal year 1999.
During 1998, the Company adopted SFAS No. 132, "Employer's Disclosure About
Pensions and Other Post-retirement Benefits." The adoption of SFAS No. 132 did
not have a material effect on the Company's consolidated financial statements.
The Company will adopt SFAS No. 133, "Accounting For Derivatives Instruments
and Hedging Activities" in 1999 and does not expect it to have a material
effect on the Company's consolidated financial statements.
On November 20, 1997, the Emerging Issues Task Force ("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 determined that EITF 97-2 requires the Company to include property-
level revenues and operating expenses of its leased and subleased hotels and
owned senior living communities in its statements of operations. The Company
adopted EITF 97-2 in the fourth quarter of 1998, with retroactive effect in
prior periods to conform to the new presentation. The adoption of EITF 97-2
increased both revenues and operating costs and expenses for fiscal year 1998
and the period from June 21, 1997 (inception) through January 2, 1998 by
$159.4 million and $74.1 million, respectively, and had no impact on operating
profit or net income.
35
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have significant market risk with respect to interest
rates, foreign currency exchanges or other market rate or price risks, and the
Company does not hold any financial instruments for trading purposes. All of
the Company's debt is fixed rate.
In conjunction with the acquisition of Forum on June 21, 1997, the Company
recorded the debt assumed at its fair value, which exceeded the face value by
approximately $19 million. The Company is amortizing this adjustment to
interest expense over the remaining life of the related debt. As of January 1,
1999, the Company has $197 million of debt outstanding, excluding the hotel
working capital notes payable to Host Marriott of approximately $95 million
and debt premiums of $16 million. Excluding these items, the weighted average
interest rate is 9.6% and the average maturity is thirteen years.
36
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following financial information is included on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Crestline Capital Corporation and Subsidiaries
Report of Independent Public Accountants................................. 38
Consolidated Balance Sheets as of January 1, 1999 and January 2, 1998.... 39
Consolidated Statements of Operations for the Fiscal Year Ended January
1, 1999 and the Period from June 21, 1997 (inception) through January 2,
1998.................................................................... 40
Consolidated Statements of Shareholders' Equity for the Fiscal Year Ended
January 1, 1999 and the Period from June 21, 1997 (inception) through
January 2, 1998......................................................... 41
Consolidated Statements of Cash Flows for the Fiscal Year Ended January
1, 1999 and the Period from June 21, 1997 (inception) through January 2,
1998.................................................................... 42
Notes to Consolidated Financial Statements............................... 43
Forum Group, Inc. and Subsidiaries, as Partitioned for Sale to Host
Marriott Corporation
Report of Independent Public Accountants................................. 60
Consolidated Balance Sheet as of January 3, 1997......................... 61
Consolidated Statements of Operations for the Twenty-four Week Period
Ended June 20, 1997 and the Forty-week Period Ended January 3, 1997..... 62
Consolidated Statements of Cash Flows for the Twenty-four Week Period
Ended June 20, 1997 and the Forty-week Period Ended January 3, 1997..... 63
Notes to Consolidated Financial Statements............................... 64
</TABLE>
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Crestline Capital Corporation:
We have audited the accompanying consolidated balance sheets of Crestline
Capital Corporation and subsidiaries (a Delaware Corporation), as of January
1, 1999 and January 2, 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the fiscal year ended
January 1, 1999 and for the period from June 21, 1997 (inception) through
January 2, 1998. These consolidated financial statements and the schedule
referred to below are the responsibility of Crestline Capital Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits 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 Crestline
Capital Corporation and its subsidiaries as of January 1, 1999 and January 2,
1998 and the results of their operations and their cash flows for the fiscal
year ended January 1, 1999 and the period from June 21, 1997 (inception)
through January 2, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, Crestline
Capital Corporation and subsidiaries have given retroactive effect to the
change to include property-level revenues and operating expenses of its senior
living communities in the consolidated statement of operations.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at
Item 14(a)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
March 5, 1999
38
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 1999 and January 2, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net.................................. $655,745 $633,840
Hotel working capital........................................ 95,114 --
Due from Marriott International, net......................... 8,884 --
Other assets................................................. 32,231 12,018
Cash and cash equivalents.................................... 66,779 17,644
-------- --------
$858,753 $663,502
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Mortgage debt.............................................. $183,059 $213,469
Other debt................................................. 30,017 136,465
-------- --------
213,076 349,934
Hotel working capital notes payable to Host Marriott....... 95,114 --
-------- --------
Total debt............................................... 308,190 349,934
Accounts payable and accrued expenses........................ 6,438 5,038
Due to Marriott International, net........................... -- 3,172
Other liabilities............................................ 23,518 17,438
Due to Host Marriott......................................... -- 2,151
Deferred income taxes........................................ 61,353 58,705
-------- --------
Total liabilities........................................ 399,499 436,438
-------- --------
Shareholders' equity:
Common stock, 75 million shares authorized, 21.9 million
shares issued and outstanding, $.01 par value............. 219 --
Additional paid-in capital................................. 452,762 226,706
Retained earnings.......................................... 6,273 358
-------- --------
Total shareholders' equity............................... 459,254 227,064
-------- --------
$858,753 $663,502
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended January 1, 1999 and
for the period from June 21, 1997 (inception) through January 2, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
June 21, 1997
(inception)
through
1998 January 2, 1998
-------- ---------------
<S> <C> <C>
REVENUES
Routine........................................... $213,378 $98,531
Ancillary......................................... 27,899 12,438
-------- -------
Total revenues.................................. 241,277 110,969
-------- -------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
Routine........................................... 138,099 63,814
Ancillary......................................... 21,317 10,255
Other operating costs and expenses
Depreciation and amortization..................... 22,115 10,635
Management fees paid to Marriott International.... 13,973 6,481
Property taxes and other.......................... 8,554 3,813
-------- -------
Total operating costs and expenses.............. 204,058 94,998
-------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND
INTEREST........................................... 37,219 15,971
Corporate expenses.................................. (6,360) (2,304)
Interest expense.................................... (22,861) (13,396)
Interest income..................................... 2,028 336
-------- -------
INCOME BEFORE INCOME TAXES.......................... 10,026 607
Provision for income taxes.......................... (4,111) (249)
-------- -------
NET INCOME.......................................... $ 5,915 $ 358
======== =======
BASIC EARNINGS PER COMMON SHARE..................... $ .27 $ .02
======== =======
DILUTED EARNINGS PER COMMON SHARE................... $ .27 $ .02
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Year Ended January 1, 1999 and
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............................... $-- $ -- $ --
Capital contributions by Host Marriott............. -- 226,706 --
Net income......................................... -- -- 358
---- -------- ------
Balance, January 2, 1998............................. -- 226,706 358
Capital contributions by Host Marriott............. -- 226,275 --
Distribution of the Company........................ 219 (219) --
Net income......................................... -- -- 5,915
---- -------- ------
Balance, January 1, 1999............................. $219 $452,762 $6,273
==== ======== ======
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended January 1, 1999 and
for the period from June 21, 1997 (inception) through January 2, 1998
(in thousands)
<TABLE>
<CAPTION>
Period from
June 21, 1997 (inception)
1998 through January 2, 1998
-------- -------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 5,915 $ 358
Adjustments to reconcile net income to
cash from operations:
Depreciation and amortization........... 22,115 10,635
Amortization of debt premiums........... (1,550) (834)
Income taxes............................ 4,111 249
Change in amounts due to Marriott
International.......................... (10,934) 10,073
Change in amounts due to Host Marriott.. -- 2,151
Other................................... -- (997)
Change in other operating accounts...... 9,330 3,741
-------- --------
Cash from operations...................... 28,987 25,376
-------- --------
INVESTING ACTIVITIES
Acquisitions............................. (11,926) --
Expansions............................... (8,653) (30,782)
Capital expenditures..................... (7,087) (2,563)
Increase in capital improvement reserve.. (2,432) (67)
-------- --------
Cash used in investing activities......... (30,098) (33,412)
-------- --------
FINANCING ACTIVITIES
Contribution of cash from Host Marriott.. 52,250 7,319
Repayments of debt....................... (3,608) (2,142)
Issuances of debt........................ 1,700 20,407
Change in financing reserves............. (96) 96
-------- --------
Cash provided by financing activities..... 50,246 25,680
-------- --------
Increase in cash and cash equivalents..... 49,135 17,644
Cash and cash equivalents, beginning of
period................................... 17,644 --
-------- --------
Cash and cash equivalents, end of period.. $ 66,779 $ 17,644
======== ========
SUPPLEMENTAL INFORMATION--NON-CASH
ACTIVITY:
Contributions from Host Marriott:
Property and equipment.................. $ 20,959 $601,033
Acquisition of minority interests paid
by Host Marriott....................... 12,963 --
Debt assumed............................ -- (331,669)
Debt forgiveness........................ 106,995 --
Debt prepayment paid by Host Marriott... 26,405 --
Other................................... 6,647 (1,641)
Deferred income taxes................... -- (58,435)
Expansion costs paid by Host Marriott... 56 10,099
Notes issued in exchange for purchase of
working capital.......................... 95,114 --
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
On December 29, 1998 (the "Distribution Date"), Crestline Capital
Corporation (the "Company," formerly known as HMC Senior Communities, Inc.)
became a publicly traded company when Host Marriott Corporation ("Host
Marriott") completed its plan of reorganizing its business operations by
spinning-off the Company to the shareholders of Host Marriott (the
"Distribution"), as part of a series of transactions pursuant to which Host
Marriott elected to be considered a real estate investment trust ("REIT"), see
Note 2. On December 31, 1998, the Company entered into lease and sublease
agreements to lease substantially all of Host Marriott's hotels with the
existing management agreements of the leased and subleased hotels assigned to
the Company. As of January 1, 1999, the Company leased or subleased 121 full-
service and 71 limited-service hotels and owned 31 senior living communities
(the "Communities").
On June 21, 1997, Host Marriott acquired all of the outstanding stock of
Forum Group Inc. ("Forum") 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, including 29 of the
Communities, and liabilities of Forum to the Company. In connection with the
acquisition, the Company assigned to Marriott International its interest as
manager under long-term operating agreements (see Note 7). The acquisition of
Forum was accounted for under the purchase method of accounting.
Through the Distribution Date, the Company operated as a wholly owned
subsidiary of Host Marriott utilizing Host Marriott's employees, insurance and
administrative services since the Company had no employees. Periodically,
certain operating expenses, capital expenditures and other cash requirements
of the Company were paid by Host Marriott and charged directly or allocated to
the Company. Certain general and administrative costs of Host Marriott were
allocated to the Company 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.
The consolidated financial statements present the financial position,
results of operations and cash flows of the Company for the fiscal year ended
January 1, 1999 and for the period beginning on June 21, 1997 (the date Host
Marriott acquired the stock of Forum) through January 2, 1998. Host Marriott's
basis in the assets and liabilities of the Company has been carried over to
these financial statements. All material intercompany transactions and
balances between the Company and its subsidiaries have been eliminated.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in affiliates
owned 20 percent or more and over which the Company has the ability to
exercise significant influence, but does not control, are accounted for using
the equity method. Investments in affiliates less than 20 percent owned by the
Company, and for which the Company does not exercise significant influence,
are accounted for using the cost method. To the extent the purchase price of
investments in affiliates exceeds the net book value, the Company amortizes
the difference over 40 years. All material intercompany transactions and
balances have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31.
43
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues
Revenues represent community operating revenues consisting of routine and
ancillary revenues. Routine revenues consist of resident fees and health care
service revenues, which are generated primarily from monthly charges for
independent and assisted living apartments and special care center rooms and
daily charges for healthcare 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.
Revenues include amounts estimated by management to be reimbursable through
Medicare, Medicaid and other third party payor agreements. Medicare and
Medicaid represented 10% and 2%, respectively, of revenues for fiscal year
1998 and 11% and 3%, respectively, of revenues 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, revenues are charged or credited when the adjustments become
final. 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.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per common share is computed by dividing net income by the weighted
average number of common stock outstanding plus other dilutive securities. The
weighted average number of outstanding common shares is based on Host
Marriott's weighted average number of outstanding common shares, adjusted for
the one-for-ten distribution ratio (see Note 2.)
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
Period from
June 21, 1997 (inception)
1998 through January 2, 1998
------ -------------------------
(in thousands)
<S> <C> <C>
Weighted average number of common shares
outstanding.............................. 21,626 21,536
Assuming distribution of common shares
granted under comprehensive stock plan,
less shares assumed purchased at average
market price............................. 30 --
------ ------
Shares utilized for the calculation of
diluted earnings per share............... 21,656 21,536
====== ======
</TABLE>
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
date of purchase are considered cash equivalents. Cash and cash equivalents
include $10,828,000 and $11,289,000 at January 1, 1999 and January 2, 1998,
respectively, of cash related to certain consolidated partnerships, the use of
which is restricted generally for partnership purposes to the extent its is
not distributed to the partners.
44
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment is recorded at cost. 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, the
Company 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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of cash and cash equivalents.
The Company maintains cash and cash equivalents with various high credit-
quality financial institutions and limits the amount of credit exposure with
any institution.
Senior Living Community Working Capital
Pursuant to the terms of the Company's Operating Agreements (see Note 7),
the Company 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 the Company 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 the Company. 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 sheets.
Hotel Working Capital
Pursuant to the terms of the Hotel Management Agreements (see Note 6), the
Company is required to provide the hotel manager with the working capital and
supplies to meet the operating needs of the leased and subleased hotels. The
hotel manager converts the cash advanced into other forms of working capital
consisting primarily of operating cash, inventories, trade receivables and
payables which are maintained and controlled by the hotel manager. Upon the
commencement of a typical hotel lease or sublease, the Company typically
purchases from the hotel owner the existing working capital controlled by the
hotel manager evidenced by a note payable to the hotel owner. Upon the
termination of the hotel lease or sublease, the Company is required to sell
the existing working capital to the hotel owner at its current market value.
To the extent the working capital delivered to the hotel owner is less than
the value of the loan, the Company will pay the difference in cash. However,
to the extent the working capital delivered to the hotel owner exceeds the
value of the loan, the hotel owner will pay the Company the difference in
cash. If the hotel management agreement is terminated, the hotel manager is
required to convert working capital and supplies into cash and return it to
the Company. As a result of these conditions, the individual components of
working capital and supplies controlled by the hotel manager are not reflected
in the accompanying consolidated balance sheets. However, the total amount of
working capital purchased from the hotel owner and advanced to the hotel
manager and the corresponding working capital note payable to the owner is
reflected on the accompanying consolidated balance sheets.
45
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Senior Living Community Deferred Revenue
Monthly fees deferred for the non-refundable portion of the entry fees are
recorded as deferred revenue and included in other liabilities in the
accompanying consolidated balance sheets. These amounts are recognized as
revenue as 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.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
New Statements of Financial Accounting Standards
During 1998, the Company adopted Statements of Financial Accounting
Standards ("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.
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The adoption of SFAS No. 131 did
not have a material effect on the Company's consolidated financial statements
for fiscal year 1998 and for the period from June 21, 1997 (inception) through
January 2, 1998, since the Company had only one operating segment, the senior
living ownership segment. For fiscal year 1999, the Company expects to have
two operating segments, the senior living ownership and hotel leasing
segments, and therefore will make the required disclosure of SFAS No. 131 in
fiscal year 1999.
During 1998, the Company adopted SFAS No. 132, "Employer's Disclosure About
Pensions and Other Post-retirement Benefits." The adoption of SFAS No. 132 did
not have a material effect on the Company's consolidated financial statements.
The Company will adopt SFAS No. 133, "Accounting For Derivative Instruments
and Hedging Activities" in 1999 and does not expect it to have a material
effect on the Company's consolidated financial statements.
On November 20, 1997, the Emerging Issues Task Force ("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 determined that EITF 97-2 requires the Company to include property-
level revenues and operating expenses of its leased and subleased hotels and
owned senior living communities in its consolidated statements of operations.
The Company adopted EITF 97-2 in the fourth quarter of 1998, with retroactive
effect in prior periods to conform to the new presentation. The adoption of
EITF 97-2 increased both revenues and operating costs and expenses for fiscal
year 1998 and the period from June 21, 1997 (inception) through January 2,
1998 by $159.4 million and $74.1 million, respectively, and had no impact on
operating profit or net income.
46
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. The Distribution
On the Distribution Date, Host Marriott completed its plan of reorganizing
its business by spinning-off the Company to the shareholders of Host Marriott
as part of a series of transactions pursuant to which Host Marriott elected to
be considered a REIT. As part of the Distribution, Host Marriott distributed
20.5 million, or 94%, of the outstanding shares of common stock of the Company
to the Host Marriott shareholders. The remaining 1.4 million, or six percent,
of the outstanding shares were used by Host Marriott as part of the
consideration paid on December 30, 1998 for Host Marriott's acquisition of
certain hotel properties from The Blackstone Group and a series of funds
controlled by Blackstone Real Estate Partners (the "Blackstone Acquisition").
The shares were distributed on the basis of one share of the Company's common
stock for every ten shares of Host Marriott common stock.
On December 31, 1998, the Company and Host Marriott entered into agreements
to lease 121 of the full-service hotels owned by Host Marriott and agreements
to sublease 71 limited-service hotels leased by Host Marriott (see Note 5). In
February 1999, Host Marriott sold one of the leased full-service hotels, and
the Company and Host Marriott agreed to terminate the lease reducing the
number of hotels leased from Host Marriott to 120 full-service hotels. Upon
the commencement of the hotel leases and subleases, the Company purchased the
working capital of the hotels from Host Marriott for $95 million with the
purchase price evidenced by notes that bear interest at 5.12%. The existing
management agreements for all of the leased hotels were assigned to the
Company (see Note 6).
In connection with the Blackstone Acquisition, a 25 percent interest in
Swissotel Management (USA) LLC, a management company that manages five hotels
in the United States, was transferred to the Company from Host Marriott for
$4.5 million. Also, in connection with the Distribution, the Company acquired
a five percent interest in a joint venture with Host Marriott that owns a $129
million first mortgage secured by eight hotel properties owned by Host
Marriott for $6.4 million.
In connection with the Distribution, the Company entered into asset
management agreements (the "Asset Management Agreements") with Host Marriott
and its affiliates pursuant to which the Company will provide Host Marriott
management advisory services on the operation of Host Marriott's hotels. The
terms of the Asset Management Agreements are for two years with an automatic
one-year renewal, with the Company receiving a fee of $4.5 million annually
for its services.
As part of the Distribution, the Company and Host Marriott entered into a
non-competition agreement that limits the respective parties' future business
opportunities. The Company is generally precluded until the earlier of
December 31, 2008 or the date when the Company no longer leases at least 25%
of the original hotels leased from Host Marriott at the time of the
Distribution, from owning or acquiring any full-service hotels not leased from
Host Marriott. The Company is also subject to certain restrictions relating to
leasing, operating and managing full-service hotels under its agreement with
Host Marriott.
For purposes of governing certain of the ongoing relationships between the
Company and Host Marriott, the Company and Host Marriott entered into various
agreements including a distribution agreement, an employee benefits allocation
agreement, a tax sharing agreement and a transitional services agreement.
These agreements provide, among other things, for the allocation of assets and
liabilities between the Company and Host Marriott, a guarantee by Host
Marriott of certain Company debt obligations, and provide that the Company and
Host Marriott will receive from each other corporate services, such as
accounting and computer systems support.
47
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarized unaudited pro forma data for the fiscal years ended
January 1, 1999 and January 2, 1998 assume all of the following transactions
occurred at the beginning of each fiscal year:
. the Distribution and related transactions discussed above including the
lease of 120 full-service hotels and sublease of 71 limited-service
hotels;
. the 1997 acquisition of Forum and one additional senior living community
and the 1998 acquisition of one senior living community;
. the 1998 repayment and forgiveness of certain debt (see Note 9); and
. the 1998 acquisition of minority interests in certain consolidated
subsidiaries.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(in thousands, except
per share data)
(unaudited)
<S> <C> <C>
Revenues............................................. $4,299,036 $3,970,630
Operating profit before corporate expenses and
interest............................................ 82,118 72,786
Net income........................................... 26,200 20,704
Earnings per common share............................ 1.19 .95
</TABLE>
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Land and land improvements............................... $113,802 $102,714
Buildings and leasehold improvements..................... 542,201 518,056
Furniture and equipment.................................. 32,492 23,705
-------- --------
688,495 644,475
Less accumulated depreciation and amortization........... (32,750) (10,635)
-------- --------
$655,745 $633,840
======== ========
</TABLE>
In the first quarter of 1998, the Company acquired the Gables at Winchester
in suburban Boston, a 125-unit upscale senior living community, for $21
million and concurrently entered into a long-term operating agreement with
Marriott International to operate the property. Also in the first quarter of
1998, the Company 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 second quarter of 1999, the Company has the option to
acquire these two 160-unit properties located in Denver and Colorado Springs,
Colorado, for approximately $35 million, if they achieve certain operating
performance criteria. Both of these communities will be operated by Marriott
International under long-term operating agreements.
4. Restricted Cash
Restricted cash, which is included in other assets on the accompanying
consolidated balance sheets, consists of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Debt service reserves....................................... $ 1,624 $ 1,528
Fixed asset reserves........................................ 6,732 4,300
Real estate tax reserves.................................... 4,032 3,590
Insurance reserves.......................................... 2,503 1,268
------- -------
$14,891 $10,686
======= =======
</TABLE>
48
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The debt service, fixed asset, real estate tax and insurance reserves
consist of cash transferred into segregated escrow accounts out of revenues
generated by the Communities, pursuant to the Company's secured debt
agreements. Funds from these reserves 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
addition, the fixed asset reserves also include cash transferred into
segregated escrow accounts pursuant to the Company's Community Operating
Agreements to fund certain capital expenditures at the Communities (see Note
7). In some cases, to ensure prompt payment, the Company 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.
5. Leases
The Company is the lessee under capital and operating leases. Future minimum
annual rental commitments for all non-cancelable leases as of January 1, 1999
are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ----------
(in thousands)
<S> <C> <C>
1999.................................................... $ 1,295 $ 767,191
2000.................................................... 1,309 765,960
2001.................................................... 1,328 765,403
2002.................................................... 1,347 758,843
2003.................................................... 1,565 758,843
Thereafter.............................................. 12,203 2,998,142
------- ----------
Total minimum lease payments............................ 19,047 $6,814,382
==========
Less amount representing interest....................... (8,379)
-------
Present value of minimum lease payments................. $10,668
=======
</TABLE>
Hotel Leases
In connection with the Distribution, wholly-owned subsidiaries of the
Company entered into leases (the "Hotel Leases") with Host Marriott effective
January 1, 1999 for 121 full-service hotels. Each Hotel Lease has a fixed term
generally ranging from seven to ten years. The Company is required to pay the
greater of (i) a minimum rent specified in each Hotel Lease or (ii) a
percentage rent based upon a specified percentage of aggregate revenues from
the hotel, including room revenues, food and beverage revenues, and other
income, in excess of specified thresholds. The amount of minimum rent will be
increased each year based upon any increases in CPI during the previous twelve
months. Percentage rent thresholds will be increased each year based on a
blend of any increases in CPI and the Employment Cost Index during the
previous twelve months. The Hotel Leases will generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures.
The Company is responsible for paying all of the expenses of operating the
hotels, including all personnel costs, utility costs, and general repair and
maintenance of the hotels. In addition, the Company is responsible for all
fees payable to the hotel manager, including base and incentive management
fees, chain services payments and franchise or system fees. Host Marriott is
responsible for real estate and personal property taxes, property casualty
insurance, ground lease rent, maintaining a reserve fund for FF&E replacements
and capital expenditures.
49
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the event that Host Marriott disposes of a hotel free and clear of the
Hotel Lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the Hotel Lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the Hotel Lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve leases without having to
pay a termination fee. Conversely, the Company may terminate up to twelve
full-service hotel leases without penalty upon 180 days notice to Host
Marriott.
Also, in the event that changes in the federal income tax laws allow Host
Marriott or its subsidiaries to directly operate the hotels without
jeopardizing its REIT status, Host Marriott may terminate all of the Hotel
Leases upon payment of the termination fee. The payment of the termination fee
will be payable in cash or, subject to certain conditions, shares of Host
Marriott common stock at the election of Host Marriott.
For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Company's subsidiaries that are party to the Hotel Leases.
As part of the Distribution, the Company and Host Marriott entered into
guaranty and pooling agreements by which the Company and certain of its
subsidiaries guarantee the Hotel Lease obligations. All of the Hotel Leases
were placed into four different pools with all of the Hotel Leases having
similar terms placed into the same pool. The parent subsidiary of each pool
(the "Pool Parent") has a full guarantee obligation of the Hotel Leases in its
respective pool. However, for each pool, the cumulative limit of the Company's
guaranty obligation will be the greater of ten percent of the aggregate rent
payable for the immediately preceding fiscal year under all Hotel Leases in
the pool or ten percent of the aggregate rent payable under all Hotel Leases
in the pool for 1999. In the event that the Company's obligation under a
guaranty agreement for a pool is reduced to zero, the Company can terminate
its guaranty and pooling agreement for that pool and Host Marriott can
terminate the Hotel Leases in the pool without penalty.
FF&E Leases
In connection with the Distribution, if the average tax basis of a hotel's
FF&E and other personal property exceeded 15% of the aggregate average tax
basis of the hotel's real and personal property (the "Excess FF&E"),
subsidiaries of the Company and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the FF&E Leases
is a fixed amount. The Company will have the option at the expiration of the
FF&E Lease term to either (i) renew the FF&E Leases for consecutive one-year
renewal terms at a fair market rental rate, or (ii) purchase the Excess FF&E
for a price equal to its fair market value. If the Company does not exercise
its purchase or renewal option, the Company is required to pay a termination
fee equal to approximately one month's rent.
Limited-Service Hotel Subleases
Host Marriott leases 71 limited-service hotels under the "Residence Inn" and
"Courtyard by Marriott" brands (the "HPT Leases") from Hospitality Properties
Trust, Inc. ("HPT"). The HPT Leases have initial terms expiring through 2012
for the Courtyard properties and 2010 for the Residence Inn properties, and
are renewable at the option of Host Marriott. In connection with the
Distribution, subsidiaries of the Company entered into sublease agreements
with Host Marriott for these limited-service hotels (the "Subleases"). The
terms of the Subleases will expire simultaneously with the expiration of the
initial term of the HPT Leases. If Host Marriott elects to renew the HPT
Leases, the Company can elect to also renew the Subleases for the
corresponding renewal term.
50
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Each Sublease provides that generally all of the terms in the HPT Leases
will apply to the Subleases. The HPT Leases require the lessee to pay rent
equal to (i) a fixed minimum rent, less the cost of any repairs, maintenance,
renovations or replacements of the hotel, (ii) plus an additional rent based
upon a specified percentage of revenues to the extent they exceed revenues
from a base year. In addition, the HPT Leases require the lessee to pay all
repair and maintenance costs, impositions, utility charges, insurance premiums
and all fees payable under the hotel management agreements. Pursuant to the
Subleases, subsidiaries of the Company are required to pay rent to Host
Marriott equal to the minimum rent due under the HPT Leases and an additional
rent based on a percentage of revenues. To the extent the reserves for FF&E
replacements are insufficient to meet the hotel's capital expenditure
requirements, HPT is required to fund the shortfall.
The rent payable under the Subleases is guaranteed by the Company up to a
maximum of $30 million. The Company's wholly owned subsidiaries that are party
to the Subleases were capitalized with $30 million in notes from the Company
payable upon demand.
In the event that changes in the federal income tax laws allow Host Marriott
or its subsidiaries to directly operate the hotels without jeopardizing its
REIT status, Host Marriott may terminate all of the Subleases upon payment of
the termination fee equal to the fair market value of the Company's leasehold
interests in the remaining term of the Subleases using a discount rate of five
percent.
Senior Living Leases
The Company leases two communities under capital leases expiring in 2016.
Upon the expiration of the lease or anytime prior to lease expiration, the
Company 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 the Company fails to exercise its Option, then the
lessor may proceed with the sale of the leased property and all assets
therein.
The Company 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 fiscal year 1998 and the period from June 21, 1997
(inception) through January 2, 1998 was $279,000 and $141,000, respectively.
6. Hotel Management Agreements
All of the Company's leased and subleased hotels are operated by independent
hotel management companies under long-term hotel management agreements (the
"Hotel Management Agreements") between Host Marriott and independent hotel
management companies.
Assignment of Hotel Management Agreements
The existing Hotel Management Agreements were assigned to the Company upon
the execution of the Hotel Leases for the term of each corresponding Hotel
Lease. The Company is obligated to perform all of the obligations of Host
Marriott under the Hotel Management Agreements including payment of fees due
under the Hotel Management Agreements other than certain obligations including
payment of property taxes, property casualty insurance and ground rent,
maintaining a reserve fund for FF&E replacements and capital expenditures, for
which Host Marriott retains responsibility.
Marriott International Hotel Management Agreements
Marriott International manages 89 of the 121 leased full-service hotels and
all of the 71 subleased limited-service hotels under long-term Hotel
Management Agreements assigned to the Company, generally for an initial
51
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
term of 15 to 20 years with renewal terms at the option of Marriott
International of up to an additional 16 to 30 years. The Hotel Agreements
generally provide for payment of base management fees equal to one to four
percent of revenues and incentive management fees generally equal to 20% to
50% of Operating Profit (as defined in the Hotel Management Agreements) over a
priority return (as defined) to the Company, with total incentive management
fees not to exceed 20% of cumulative Operating Profit, or 20% of current year
Operating Profit.
Pursuant to the terms of the Hotel Management Agreements, Marriott
International is required to furnish the hotels with certain services ("Chain
Services") which are generally provided on a central or regional basis to all
hotels in the Marriott International hotel system. Chain Services include
central training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.
Ritz-Carlton Hotel Management Agreements
The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of
Marriott International, manages ten of the leased hotels under long-term Hotel
Management Agreements assigned to the Company. These agreements have an
initial term of 15 to 25 years with renewal terms at the option of Ritz-
Carlton of up to an additional 10 to 40 years. Base Management fees vary from
two to four percent of revenues and incentive management fees are generally
equal to 20% of available cash flow or operating profit, as defined in the
agreements.
Other Hotel Management Agreements
The Company's remaining 22 leased hotels are managed by other independent
hotel management companies. Four of the leased hotels are managed by the
Swissotel Management (USA) LLC, four are managed by Hyatt Corporation, and two
are managed by Four Seasons Hotel Limited. The remaining twelve hotels are
managed by other independent hotel management companies under the "Marriott"
and other brands pursuant to franchise agreements. The managers of the hotels
provide similar services as Marriott International under its Hotel Management
Agreements and receive base management fees, generally calculated as a
percentage of revenues, and in most cases, incentive management fees, which
are generally calculated as a percentage of operating profits.
The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with respect to a single
lodging facility is cross-collateralized or cross-defaulted to any other
agreement and a single agreement may be canceled under certain conditions,
although such cancellation will not trigger the cancellation of any other
agreement.
Franchise Agreements
Ten of the Company's leased hotels are managed under franchise agreements
between Host Marriott and Marriott International for terms ranging from 15 to
30 years. In connection with the assignment of the corresponding Hotel
Management Agreement, the Company assumed the franchise agreements for these
ten hotels and will be the franchisee for the term of the corresponding Hotel
Lease. Pursuant to the franchise agreements, the Company generally pays a
franchise fee based on a percentage of room revenues and food and beverage
revenues as well as certain other fees for advertising and reservations.
Franchise fees for room revenues vary from four to six percent, while fees for
food and beverage revenues vary from two to three percent of revenues.
52
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Senior Living 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 revenues and incentive management fees generally equal to
zero to 20% of Operating Profit (as defined in the Operating Agreements) over
a priority return ("Owner's Priority") to the Company. 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. The Company 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 the
Company or Marriott International, although such termination will not trigger
the cancellation of any other Operating Agreement.
Most of the Communities are also subject to pooling agreements whereby for
the limited purpose of calculating management fees and exercising certain
termination rights under the Operating Agreements, the management fees and
rights are considered in the aggregate for the Communities in each pool.
The Operating Agreements require Marriott International to furnish certain
services ("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, Marriott International is paid an amount equal to 2% of
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 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.
Marriott International is required under the Operating Agreements to deduct
an amount from revenues 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 revenues) 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 fiscal year 1998 and the period June
21, 1997 (inception) through January 2, 1998 was $6,291,000 and $2,025,000,
respectively. The Operating Agreements provide that the Company 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.
53
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Due from (to) Marriott International
The components of the amounts due from (to) Marriott International, net, are
as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Community operating expenses payable to Marriott
International.......................................... $(8,783) $(7,648)
Management fees payable to Marriott International....... (1,529) (1,262)
Community working capital due to the Company............ 5,955 6,093
Owner's distributions due to Company.................... 11,673 --
Other, net.............................................. 1,568 (355)
------- -------
Total................................................. $ 8,884 $(3,172)
======= =======
</TABLE>
9. Debt
Debt consists of the following as of January 1, 1999 and January 2, 1998:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Mortgage debt:
Secured by eight Communities with $221 million of
assets, with an interest rate of 10.008%, maturing
through 2020 (balance includes debt premium of $14.8
million)............................................... $135,719 $137,713
Secured by nine Communities with $96 million of assets,
with an interest rate of 9.93%, maturing through 2001
(balance includes debt premium of $1.7 million)........ 47,340 49,353
Other................................................... -- 26,403
-------- --------
Total mortgage debt................................... 183,059 213,469
-------- --------
Other debt:
Revenue bonds with an interest rate of 5.875%, due
2027................................................... 14,700 14,700
Note payable to Marriott International.................. -- 92,195
Capital lease obligations............................... 10,668 10,627
Other notes, with an average rate of 7.0%, maturing
through December 2001.................................. 4,649 18,943
-------- --------
Total other debt...................................... 30,017 136,465
-------- --------
213,076 349,934
-------- --------
Hotel working capital notes payable to Host Marriott, with
an interest rate of 5.12%, maturing through December
2009..................................................... 95,114 --
-------- --------
Total debt............................................ $308,190 $349,934
======== ========
</TABLE>
54
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debt maturities at January 1, 1999, excluding the unamortized debt premiums
of approximately $16.5 million resulting from recording the mortgages at their
fair value on June 21, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................ $ 5,906
2000................................................................ 4,638
2001................................................................ 47,553
2002................................................................ 2,504
2003................................................................ 5,977
Thereafter.......................................................... 225,037
--------
$291,615
========
</TABLE>
In conjunction with the acquisition of Forum, the Company recorded the debt
assumed at its fair value, which exceeded the face value by approximately $19
million. The Company is amortizing this adjustment to interest expense over
the remaining life of the related debt. The amortization for fiscal year 1998
and the period from June 21, 1997 (inception) through January 2, 1998 totaled
$1,550,000 and $834,000, respectively. Cash paid for interest for fiscal year
1998 and the period from June 21, 1997 (inception) through January 2, 1998
totaled $19,825,000 and $8,183,000, respectively.
In conjunction with the June 21, 1997 acquisition of Forum, the Company
assumed $270 million of debt and issued $72 million in notes payable to
Marriott International. Subsequent to the acquisition, the Company issued
additional notes payable to Marriott International for additional expansion
units totaling approximately $20 million. In the second quarter of 1998, Host
Marriott repaid the $92 million in notes payable to Marriott International.
Host Marriott's prepayment of the debt was recorded as a capital contribution
to the Company.
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 the Company.
In December 1997, in connection with the acquisition of an additional 49%
interest in the Leisure Park Venture Limited Partnership the Company assumed
$14.7 million of revenue bonds and Marriott International provided $3.9
million of debt financing. In connection with the Distribution, Host Marriott
has provided a guarantee on the revenue bonds.
Upon the commencement of the hotel leases, the Company purchased the working
capital of the hotels from Host Marriott for $95 million with the purchase
price evidenced by notes that bear interest at 5.12%. Interest on each note is
due simultaneously with the rent payment of each Hotel Lease. The principal
amount of each note is due upon the termination of each Hotel Lease. Upon
termination of the Hotel Lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note
Host Marriott will pay the Company the difference in cash.
The net assets of 17 of the Communities are subject to mortgage debt which
places restrictions on their assets. The net assets of these Communities
totaled approximately $161 million at January 1, 1999. The indentures
governing these mortgages contain restrictive covenants that, among other
things, (i) require maintenance of segregated cash collection of all rents;
(ii) require separate cash reserves for debt service, property improvements,
real estate taxes and insurance; and (iii) limit the ability to incur
additional indebtedness, issue stock or admit additional partners, enter into
or cancel leases, enter into certain transactions with affiliates or sell
certain assets.
55
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Income Taxes
Total deferred tax assets and liabilities as of January 1, 1999 and January
2, 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets..................................... $ 15,677 $ 15,125
Deferred tax liabilities................................ (77,030) (73,830)
-------- --------
Net deferred income tax liability..................... $(61,353) $(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 was
as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Property and equipment.................................. $(72,993) $(68,687)
Debt adjustment to fair value at acquisition............ 6,662 7,591
Other, net.............................................. 4,978 2,391
-------- --------
Net deferred income tax liability..................... $(61,353) $(58,705)
======== ========
</TABLE>
The provision for income taxes for fiscal year 1998 and for the period from
June 21, 1997 (inception) through January 2, 1998 consists of the following:
<TABLE>
<CAPTION>
Period from
June 21, 1997 (inception)
through
1998 January 2, 1998
------ -------------------------
(in thousands)
<S> <C> <C>
Current--Federal........................... $2,447 $ (25)
--State................................. 420 (5)
------ -----
2,867 (30)
------ -----
Deferred--Federal.......................... 1,062 238
--State................................. 182 41
------ -----
1,244 279
------ -----
$4,111 $ 249
====== =====
</TABLE>
A reconciliation of the statutory Federal tax rate to the Company's effective
income tax rate for fiscal year 1998 and for the period from June 21, 1997
(inception) through January 2, 1998 follows:
<TABLE>
<CAPTION>
Period from
June 21, 1997 (inception)
through
1998 January 2, 1998
---- -------------------------
<S> <C> <C>
Statutory federal tax rate................. 35.0% 35.0%
State income taxes, net of federal tax
benefit................................... 6.0 6.0
---- ----
41.0% 41.0%
==== ====
</TABLE>
56
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company was 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 and for the period from January 3,
1998 through the Distribution Date. Tax expense was allocated to the Company
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 the Company had filed separate tax returns. In
connection with the Distribution, the amounts due to Host Marriott as of the
Distribution Date for its allocable share of current income taxes payable were
forgiven and treated as a capital contribution. Pursuant to the tax sharing
agreement between the Company and Host Marriott, generally Host Marriott will
be responsible for paying taxes for periods through the Distribution Date and
the Company will be responsible for paying taxes for subsequent periods.
For income tax purposes, the Company has net operating loss carry forwards
of $11 million which expire through 2006.
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 the Company's subsidiary partnerships, Forum Retirement Partners, LP
("FRP") 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, Host
Marriott and the Company 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. The Company held 79% of the
outstanding limited partner units in the partnership at that time. Host
Marriott and the Company also agreed to pay as much as an additional $.75 per
unit (the "Additional Payment") to the settling limited partners (the
"Settling Partners"), under certain conditions, in the event that the Company
within three years following the date of settlement initiates a tender offer
for the purchase of units not presently held by the Company or the Settling
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, the Company acquired 2,141,795
limited partner units in 1998 for approximately $9,638,000. 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, the Company's
ownership interest in FRP was increased to approximately 93%.
On February 12, 1999, FRP delivered a consent solicitation to the remaining
partnership unit holders requesting their consent to a merger agreement
whereby the partnership unit holders would receive $5.75 per limited
partnership unit from the Company. Consummation of the transaction is assured
since the Company owns approximately 93% of the outstanding limited partner
units. The Company expects the transaction to be completed by the end of the
first quarter of 1999 at a cost of $6.2 million at which time the Company
would be owner of all of the limited partner units. Also, the Company will be
required to pay the Settling Partners an Additional Payment of approximately
$550,000, which will vary depending upon the date the transaction is
consummated.
57
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Fair Value of Financial Instruments
The fair values of certain financial liabilities are shown below:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Debt, net of capital leases............. $297,522 $294,769 $339,307 $339,307
</TABLE>
Valuations for secured debt are determined based on the expected future
payments discounted at risk-adjusted rates. The fair values of other notes are
estimated to be equal to their carrying value. Certain debt was adjusted to
its fair value in conjunction with the Company's acquisition of Forum on June
21, 1997.
13. Employee Stock Plans
In conjunction with the Distribution, the Company adopted two stock-based
compensation plans which are described below. Under the comprehensive stock
plan (the "Comprehensive Plan"), the Company may award to participating
employees (i) options to purchase the Company's common stock, (ii) deferred
shares of the Company's common stock and (iii) restricted shares of the
Company's common stock. In addition, the Company has an employee stock
purchase plan (the "Employee Stock Purchase Plan"). The principal terms and
conditions of the two plans are summarized below.
Total shares of common stock reserved and available for issuance under
employee stock plans at January 1, 1999 are:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Comprehensive Plan............................................ 4,000
Employee Stock Purchase Plan.................................. 430
-----
4,430
=====
</TABLE>
Employees of the Company as of January 1, 1999 were employed by Host
Marriott through the Distribution Date (the "Company Employees"). In
connection with the Distribution, unexercised options for Host Marriott stock
and Host Marriott deferred stock awards held by Company Employees as of the
Distribution Date were redenominated and converted into options for Company
stock and Company deferred stock awards.
Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. The options generally expire up to 15 years after the date of
grant. Most options vest ratably over each of the first four years following
the date of the grant.
58
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at January 1, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Shares Weighted Average Shares
Outstanding Remaining Weighted Average Exercisable Weighted Average
at Contractual Exercise at Exercise
Range of Exercise Prices January 1, 1999 Life Price January 1, 1999 Price
- ------------------------ --------------- ---------------- ---------------- --------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$1-$4.................. 14 8 $ 3 14 $ 3
5- 9.................. 63 10 8 63 8
10-14.................. 46 12 13 23 13
15-19.................. 25 14 18 6 18
20-21.................. 34 14 21 9 21
--- ---
182 115
=== ===
</TABLE>
Deferred stock incentive plan shares granted to officers and key employees
generally vest over 10 years in annual installments commencing one year after
the date of grant. Certain employees may elect to defer payments until
termination or retirement. The Company accrues compensation expense for the
fair market value of the shares on the date of grant, less estimated
forfeitures.
On January 21, 1999, the Company issued 365,000 shares of restricted stock
under the Comprehensive Plan to officers and key employees that will vest
ratably over the next five years. The Company recognizes compensation expense
over the restriction period equal to the fair market value of the shares on
the date of issuance, adjusted for forfeitures.
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at the lower of market value
at the beginning or end of the plan year.
14. Profit Sharing and Postemployment Benefit Plans
In connection with the Distribution, the Company established profit sharing
and other defined contribution plans for the benefit of employees meeting
certain eligibility requirements and electing participation in the plans. The
amount to be matched by the Company is determined annually by the Board of
Directors.
59
<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 audits 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.
As discussed in Note 2 to the consolidated financial statements, the Company
has given retroactive effect to the change to include property-level revenues
and operating expense of its senior living communities in the statement of
operations.
Arthur Andersen LLP
Washington, D.C.
September 28, 1998 (except with respect to the matter discussed in Note 11,
as to which the date is December 29, 1998.)
60
<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.
61
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORORATION
CONSOLIDATED STATEMENTS 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
Routine...................................... $84,646 $136,910
Ancillary.................................... 10,757 13,872
------- --------
95,403 150,782
------- --------
OPERATING COSTS AND EXPENSES
Property-level operations costs and expenses
Routine.................................... 53,059 82,779
Ancillary.................................. 8,774 12,016
Other operating costs and expenses
Depreciation and amortization.............. 6,698 8,494
Base management fees....................... 5,586 7,935
Property taxes and other................... 3,311 4,217
------- --------
Total operating costs and expenses....... 77,428 115,441
------- --------
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.
62
<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 period 40-week period
Ended 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.
63
<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.
64
<PAGE>
FORUM GROUP, INC. AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Partitioned Business receives certain services and participates in
certain centralized MI activities, the allocated costs of which are included
in these financial statements.
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.
65
<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 represent gross community operating revenues consisting of routine
and ancillary revenues. Routine revenues are generated from monthly charges
for independent living apartments 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 revenues are generated on a "fee
for service" basis for supplementary items required by residents and are
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. 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 has
given retroactive effect to the adoption of EITF 97-2 of EITF 97-2 in the
accompanying consolidated statement of operations. The adoption of EITF 97-2
increased both revenues and operating costs and expenses by $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 had 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.
66
<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>
67
<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. 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 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>
68
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
8. 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 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.
9. 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.
10. 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
69
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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%.
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.
11. Subsequent Event
On the December 29, 1998, Host Marriott completed its plan of reorganizing
its business by spinning-off Crestline Capital Corporation ("Crestline
Capital," formerly known as HMCSC) to the shareholders of Host Marriott as
part of a series of transactions pursuant to which Host Marriott elected to be
considered a REIT. As part of the Distribution, Host Marriott distributed 20.5
million, or 94%, of the outstanding shares of common stock of Crestline
Capital to the Host Marriott shareholders. The remaining 1.4 million, or six
percent, of the outstanding shares were used by Host Marriott as part of the
consideration paid on December 30, 1998 for Host Marriott's acquisition of
certain hotel properties from The Blackstone Group and a series of funds
controlled by Blackstone Real Estate Partners (the "Blackstone Acquisition").
The shares were distributed on the basis of one share of Crestline Capital's
common stock for every ten shares of Host Marriott common stock.
70
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The information called for by Items 10-13 is incorporated by reference from
the Crestline Capital Corporation 1999 Annual Meeting of the Shareholders--
Notice and Proxy Statement--(to be filed pursuant to Regulation 14A not later
than 120 days after the close of fiscal year).
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under Item 8 of
this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the pages
indicated.
Financial Schedules:
III. Real Estate and Accumulated Depreciation S-1 to S-2
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1* Articles of Incorporation
3.2* Bylaws
3.3* Form of Articles of Amendment and Restatement of Articles of
Incorporation
3.4* Agreement and Articles of Merger between Crestline-Delaware and CCC
Merger Corporation
4.1* Specimen Stock Certificate
#10.1* Form of Hotel Lease Agreement between the Company and Host Marriott
for Full-Service Hotels Managed by Marriott International
#10.2* Form of Hotel Lease Agreement between a Subsidiary of Host Marriott
and HPT for Limited-Service Hotels
#10.4* Form of Full-Service Hotel Management Agreement between the Company
and Marriott International
#10.5* Form of Owner's Agreement between the Company, Host Marriott and
Marriott International
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
#10.6* Form of Limited-Service Hotel Management Agreement between the Company
and Marriott International
#10.7* Form of Communities Operating Agreement between the Company and
Marriott International
10.8* Form of First Amendment to Communities Operating Agreement
10.9* Noncompetition Agreement dated as of December 28, 1998 by and among
Host Marriott Corporation, Host Marriott, L.P., the Company, Fernwood
Hotel Assets, Inc. and Rockledge Hotel Properties, Inc.
10.10* Form of Amended and Restated Communities Non-Competition Agreement
10.11* Restated Hotel Non-Competition Agreement between Host Marriott and
Marriott International
10.12* Form of First Amendment to Restated Hotel Non-Competition Agreement
10.13* Form of Working Capital Note and Agreement
10.14* Form of Tax Sharing Agreement between the Company and Host Marriott
10.15* Form of FF&E Lease between the Company and Non-Controlled Subsidiaries
of Host Marriott
10.16* Form of Guaranty Agreement between the Company, the Lessees and Host
Marriott
10.17* Form of Pooling Agreement between the Company and Host Marriott
10.18* Form of Employee Benefits and Other Employment Matters Allocation
Agreement between the Company and Host Marriott
10.19* Form of Asset Management Agreement between the Company and Host
Marriott
10.20* Form of Asset Management Agreement between the Company and Non-
Controlled Subsidiary of Host Marriott
10.21* Registration Rights Agreement between the Company and Blackstone
10.22* Tax Matters Agreement dated June 21, 1997 among the Company, Host
Marriott, Forum, Marriott International and MSLS
10.23* Indemnity Agreement dated June 21, 1997 among the Company, Host
Marriott, Marriott International and MSLS
10.24* Distribution Agreement dated as of December 28, 1998 by and among Host
Marriott Corporation, Host Marriott, L.P., the Company, Fernwood Hotel
Assets, Inc. And Rockledge Hotel Properties, Inc.
21 Subsidiaries of Crestline Capital Corporation
24.1* Powers of attorney from officers and directors of the Company signing
by an attorney in fact (included on Signature Page)
27.1 Financial Data Schedule
</TABLE>
- --------
*Previously filed.
#Agreement filed is illustrative of numerous other agreements to which the
Company will be a party.
(b) Reports On Form 8-K
. December 29, 1998--Report of the completion of the spin-off by Host
Marriott of Crestline Capital Corporation.
. February 11, 1999--Report of the Board of Directors' approval of changes
to the Company's executive compensation and director compensation plans.
72
<PAGE>
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Bethesda, State of
Maryland, on March 29, 1999.
Crestline Capital Corporation
/s/ James L. Francis.
By: _________________________________
James L. Francis
Executive Vice President,
Chief Financial Officer and
Treasurer
POWER OF ATTORNEY
Pursuant to the requirements of of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bruce D. Wardinski Chairman of the Board of March 29, 1999
______________________________________ Directors, President and
Bruce D. Wardinski Chief Executive Officer
(Principal Executive
Officer)
/s/ James L. Francis Executive Vice President, March 29, 1999
______________________________________ Chief Financial Officer
James L. Francis and Treasurer (Principal
Financial Officer)
/s/ Larry K. Harvey Senior Vice President and March 29, 1999
______________________________________ Corporate Controller
Larry K. Harvey (Principal Accounting
Officer)
/s/ Adam M. Aron Director March 29, 1999
______________________________________
Adam M. Aron
/s/ Louise M. Cromwell Director March 29, 1999
______________________________________
Louise M. Cromwell
/s/ Kelvin L. Davis Director March 29, 1999
______________________________________
Kelvin L. Davis
/s/ John W. Marriott III Director March 29, 1999
______________________________________
John W. Marriott III
/s/ John B. Morse, Jr. Director March 29, 1999
______________________________________
John B. Morse, Jr.
/s/ Christopher J. Nassetta Director March 29, 1999
______________________________________
Christopher J. Nassetta
/s/ Michael A. Wildish Director March 29, 1999
_____________________________________
Michael A. Wildish
</TABLE>
73
<PAGE>
SCHEDULE III
Page 1 of 2
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
January 1, 1999
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at
Initial Costs January 1, 1999
------------------ Subse- --------------------------- Date of
Buildings quent Buildings Accumu- Comple-
& Costs & lated tion of Depre-
Improve- Capital- Improve- Depre- Construc- Date ciation
Description Debt Land ments ized Land ments Total ciation tion Acquired Life
----------- -------- -------- --------- -------- -------- --------- -------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Forum at
Memorial Woods
Houston, TX..... $ 23,912 $ 7,417 $ 30,688 $ 9,367 $ 7,417 $ 40,055 $ 47,472 $ (1,485) N/A 1997 40
The Forum at Park
Lane
Dallas, TX...... 24,542 5,472 30,261 46 5,472 30,307 35,779 (937) N/A 1997 40
The Forum at
Knightsbridge
Columbus, OH.... 21,901 -- 30,970 9,083 -- 40,053 40,053 (1,521) N/A 1997 40
The Remington
Club I
San Diego, CA... -- 4,225 32,060 47 4,225 32,107 36,332 (1,181) N/A 1997 40
The Remington
Club II
San Diego, CA... -- 4,089 31,454 514 4,089 31,968 36,057 (1,830) N/A 1997 40
Forwood Manor
Wilmington, DE.. -- 4,710 24,291 4,922 4,710 29,213 33,923 (951) N/A 1997 40
Other properties,
each less than
5% of total..... 112,704 77,658 281,539 67,190 87,889 338,498 426,387 (17,455) N/A Various Various
-------- -------- -------- ------- -------- -------- -------- --------
Total........... $183,059 $103,571 $461,263 $91,169 $113,802 $542,201 $656,003 $(25,360)
======== ======== ======== ======= ======== ======== ======== ========
</TABLE>
S-1
<PAGE>
SCHEDULE III
Page 2 of 2
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
January 1, 1999
(in thousands)
Notes:
(A) The change in total cost of properties for the fiscal year ended January
1, 1999 and the period from June 21, 1997 (inception) through January 2, 1998
is as follows:
<TABLE>
<S> <C>
Balance as of June 21, 1997......................................... $546,056
Additions:
Contributions from Host Marriott................................ 43,931(1)
Capital expenditures............................................ 30,783
--------
Balance as of January 2, 1998....................................... 620,770
Additions:
Contributions from Host Marriott................................ 7,801(1)
Acquisitions.................................................... 18,779
Capital expenditures............................................ 8,653
--------
Balance as of January 1, 1999....................................... $656,003
========
</TABLE>
(B) The change in accumulated depreciation and amortization of real estate
assets for the fiscal year ended January 1, 1999 and the period from June 21,
1997 (inception) through January 2, 1998 is as follows:
<TABLE>
<S> <C>
Balance as of June 21, 1997.......................................... $ --
Depreciation and amortization...................................... (8,696)
--------
Balance as of January 2, 1998........................................ (8,696)
Depreciation and amortization...................................... (16,664)
--------
Balance as of January 1, 1999........................................ $(25,360)
========
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $515,000,000 at January 1, 1999.
(D) The total cost of properties excludes construction-in-progress
properties.
- ----------------
(1) During fiscal year 1998 and the period from June 21, 1997 (inception)
through January 2, 1998, Host Marriott contributed buildings and
improvements of $43,931,000 and 7,801,000, respectively, to the Company.
S-2
<PAGE>
EXHIBIT 21
Page 1 of 3
CREST LINE CAPITAL CORPORATION
SUBSIDIARIES
<TABLE>
<C> <S>
1) CCC Alpha Investment, Inc.
2) CCC Boynton Beach, Inc.
3) CCC Delaware, Inc.
4) CCC Facilities Corporation
5) CCC Financing I Corporation
6) CCC Investments I, LLC
7) CCC Leisure Park Corporation
8) CCC of Kentucky, Inc.
9) CCC Ohio Healthcare, Inc.
10) CCC Pueblo Norte, Inc.
11) CCC Retirement Communities I, L.P.
12) CCC Retirement Communities II, L.P.
13) CCFS Atlanta LLC
14) CCFS Philadelphia LLC
15) CCH Meadowvale Corporation
16) CCHH Atlanta LLC
17) CCHH Burlingame LLC
18) CCHH Cambridge LLC
19) CCHH Reston LLC
20) CCHI Singer Island LLC
21) CCHP I Corporation
22) CCHP II Corporation
23) CCHP III Corporation
24) CCHP IV Corporation
25) CCMH Atlanta Marquis Corporation
26) CCMH Atlanta Marquis LLC
27) CCMH Atlanta NW LLC
28) CCMH Atlanta Suites LLC
29) CCMH Bethesda LLC
30) CCMH Bloomington AP LLC
31) CCMH Calgary Corporation
32) CCMH Charlotte LLC
33) CCMH Chicago Courtyard LLC
34) CCMH Coronado LLC
35) CCMH Costa Mesa Suites LLC
36) CCMH Courtyard I LLC
37) CCMH Dallas/Fort Worth LLC
38) CCMH Deerfield Suites LLC
39) CCMH Denver SE LLC
40) CCMH Denver Tech LLC
41) CCMH Denver West LLC
42) CCMH Desert Springs Corporation
43) CCMH Desert Springs LLC
44) CCMH Diversified LLC
45) CCMH Downers Grove Suites LLC
46) CCMH Dulles AP LLC
47) CCMH Dulles Suites LLC
48) CCMH El Paso LLC
49) CCMH Farmington LLC
50) CCMH Fin Center LLC
</TABLE>
E-1
<PAGE>
EXHIBIT 21
Page 2 of 3
HOST MARRIOTT CORPORATION
SUBSIDIARIES
<TABLE>
<C> <S>
51) CCMH Fisherman's Wharf LLC
52) CCMH Fort Lauderdale LLC
53) CCMH Gaithersburg LLC
54) CCMH Hanover LLC
55) CCMH Harbor Beach LLC
56) CCMH Houston AP LLC
57) CCMH Houston Galleria LP
58) CCMH Jacksonville LLC
59) CCMH Kansas City AP LLC
60) CCMH Key Bridge LLC
61) CCMH Lenox LLC
62) CCMH Manhattan Beach LLC
63) CCMH Marina LLC
64) CCMH Memphis LLC
65) CCMH Metro Center LLC
66) CCMH Miami AP LLC
67) CCMH Minneapolis LLC
68) CCMH Moscone LLC
69) CCMH Nashua LLC
70) CCMH Newark LLC
71) CCMH Newport Beach LLC
72) CCMH Newport Beach Suites LLC
73) CCMH Newton LLC
74) CCMH Norcross LLC
75) CCMH Norfolk LLC
76) CCMH O'Hare AP LLC
77) CCMH O'Hare Suites LLC
78) CCMH Oklahoma City LLC
79) CCMH Ontario AP LLC
80) CCMH Orlando LLC
81) CCMH Palm Beach LLC
82) CCMH Park Ridge LLC
83) CCMH Pentagon RI LLC
84) CCMH Perimeter LLC
85) CCMH Philadelphia AP LLC
86) CCMH Philadelphia Mkt. LLC
87) CCMH Pittsburgh LLC
88) CCMH Plaza San Antonio LLC
89) CCMH Point Clear LLC
90) CCMH Portland LLC
91) CCMH Potomac LLC
92) CCMH Properties II Corporation
93) CCMH Properties II LLC
94) CCMH Quorum LLC
95) CCMH Raleigh LLC
96) CCMH Residence Inn LLC
97) CCMH Riverwalk LLC
98) CCMH Rocky Hill LLC
99) CCMH Romulus LLC
100) CCMH Saddle Brook LLC
</TABLE>
E-2
<PAGE>
EXHIBIT 21
Page 3 of 3
HOST MARRIOTT CORPORATION
SUBSIDIARIES
<TABLE>
<C> <S>
101) CCMH Salt Lake LLC
102) CCMH San Diego LLC
103) CCMH San Fran AP LLC
104) CCMH Santa Clara Corporation
105) CCMH Santa Clara LLC
106) CCMH Scottsdale Suites LLC
107) CCMH South Bend LLC
108) CCMH Tampa AP LLC
109) CCMH Tampa Westshore LLC
110) CCMH Times Square LLC
111) CCMH Toronto AP Corporation
112) CCMH Toronto EC Corporation
113) CCMH Torrance LLC
114) CCMH Vail LLC
115) CCMH Waterford LLC
116) CCMH Westfields LLC
117) CCMH Williamsburg LLC
118) CCMH World Trade Center LLC
119) CCRC Amelia Island LLC
120) CCRC Atlanta LLC
121) CCRC Boston LLC
122) CCRC Buckhead/Naples LLC
123) CCRC Dearborn LLC
124) CCRC Marina LLC
125) CCRC Phoenix LLC
126) CCRC San Francisco LLC
127) CCRC Tysons LLC
128) CCSH Atlanta LLC
129) CCSH Boston LLC
130) CCSH Chicago LLC
131) CCSH New York LLC
132) Forum A/H, Inc.
133) Forum Group, Inc.
134) Forum Retirement, Inc.
135) LTJ Senior Communities Corporation
136) Panther General Partner, Inc.
137) SDM Hotel Corporation
</TABLE>
E-3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CRESTLINE CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF
OPERATIONS AS OF THE FISCAL YEAR ENDED JANUARY 1, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JAN-01-1999
<CASH> 66,779
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 688,495
<DEPRECIATION> 32,750
<TOTAL-ASSETS> 858,753
<CURRENT-LIABILITIES> 0
<BONDS> 308,190
0
0
<COMMON> 219
<OTHER-SE> 459,035
<TOTAL-LIABILITY-AND-EQUITY> 858,753
<SALES> 241,277
<TOTAL-REVENUES> 241,277
<CGS> 204,058
<TOTAL-COSTS> 204,058
<OTHER-EXPENSES> 6,360
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,861
<INCOME-PRETAX> 10,026
<INCOME-TAX> 4,111
<INCOME-CONTINUING> 5,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,915
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
