<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 Commission File No. 1-14635
CRESTLINE CAPITAL CORPORATION
Maryland 52-2151967
(State of Incorporation) (I.R.S. Employer Identification Number)
6600 Rockledge Drive
Bethesda, Maryland 20817
(240) 694-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ---------------------------------------------- -----------------------------
Common Stock, $.01 par value (17,203,600 shares New York Stock Exchange
outstanding as of December 31, 1999)
The aggregate market value of shares of common stock held by non-affiliates
at March 1, 2000 was $283,045,000.
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 2000 Annual Meeting and Proxy Statement
================================================================================
<PAGE>
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; and
(vii) changes to the public pay systems for medical care and the need for
compliance with environmental, licensure and safety requirements. 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 operates in the lodging and senior living industries through
the management, ownership and leasing of hotels and the ownership of senior
living communities. The Company is engaged in third party hotel management and
currently manages or has agreements to manage 27 hotels and conference centers.
These hotels and conference centers are managed under management and lease
agreements with most of the managed hotels operated under franchise agreements.
The Company also owns a majority interest in a partnership that owns ten
limited-service hotels, which are operated by Marriott International, Inc.
("Marriott International") under a long-term management agreement. The Company
is also one of the largest leasing companies in the lodging industry and
currently leases 116 full-service hotels and subleases 71 limited-service hotels
from Host Marriott Corporation ("Host Marriott"). The Company's leased hotels
are generally 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 leased hotels managed by Marriott International. The Company is
also one of the largest owners of senior living communities and currently owns
31 communities with nearly 7,500 units located in 13 states. All of the
Company's senior living 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 converted into 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 common stock.
Because tax legislation existing at the time of the Distribution did not permit
REITs 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.
2
<PAGE>
Business of the Company
Lodging. In March 2000, the Company entered into the hotel management
business by acquiring the assets of two independent hotel management companies -
The Durbin Companies, Inc. ("Durbin") and Stormont Trice Management Corporation
("Stormont Trice"). As a result of these two acquisitions, the Company currently
manages 24 hotels and conference centers that total approximately 5,000 rooms
under management or lease agreements and has agreements to manage two additional
hotels and one conference center currently under construction that will total
over 450 rooms. The Company formed a new, wholly owned subsidiary, Crestline
Hotels & Resorts, Inc. ("Crestline Hotels & Resorts") to operate its hotel
management business. The Company's managed hotels compete in the upscale full-
service and the moderate-priced and extended-stay limited-service segments. The
hotels are generally operated under long-term franchise agreements under, among
others, the Marriott, Hilton, Renaissance, Courtyard by Marriott, Residence Inn,
Crowne Plaza and Holiday Inn brand names.
Under its management agreements, the Company earns a base management fee
generally equal to 2% to 5% of revenues plus, in some cases, an incentive
management fee generally equal to 10% to 25% of operating profit after a
priority to the owner. Under the lease agreements for its managed hotels, the
Company pays a fixed minimum rent plus a percentage of revenues and retains all
remaining cash flow. Under the franchise agreements, the Company pays a
franchise fee on behalf of the owner generally equal to 3% to 6% of certain
revenues.
During 1999, the Company acquired an 82% controlling interest in a
partnership that owned eleven Residence Inn limited-service hotels. In February
2000, the Company sold one of the Residence Inn hotels. The hotels are managed
by Marriott International under a long-term management agreement.
The Company also has a majority equity interest in one full-service hotel
and conference center currently under construction and has entered into an
agreement to acquire one limited-service hotel also currently under
construction. Both of these hotels will also be managed by Crestline Hotels &
Resorts.
The Company also leases 116 full-service hotels and subleases 71 limited-
service hotels from Host Marriott. The full-service leased hotel portfolio is
managed by Marriott International and other lodging managers under, among
others, the Marriott, Ritz-Carlton, Four Seasons, Hyatt and SwissHotel brand
names, and the limited-service hotels are managed by Marriott International
under the Courtyard by Marriott and Residence Inn brand names.
Under its hotel leases with Host Marriott, the Company participates
directly in the results of the operations of the leased hotels (and thus trends
in the hotel industry directly bear on the Company's economic performance). The
Company is obligated to pay to Host Marriott rent based upon the greater of a
fixed dollar amount of 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
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 operating expenses of the hotels, including costs incurred
by the managers on behalf of the Company or the owner. 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. 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
3
<PAGE>
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.
On December 17, 1999, President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effective January 1, 2001, will allow a REIT to lease hotels to a "taxable REIT
subsidiary" if the hotel is operated and managed on behalf of such subsidiary by
an independent third party. A taxable REIT subsidiary is a corporation that is
owned more than 35 percent by a REIT. This law will enable Host Marriott,
beginning in 2001, to lease its hotels to a taxable REIT subsidiary. Host
Marriott may, at its discretion, elect to terminate the Company's leases,
beginning in 2001, and pay termination fees determined according to formulas
specified in the leases. The termination fee or purchase price would equal the
fair market value of the Company's leasehold interest in the remaining term of
the leases. For the full-service hotel leases, the fair value is determined
using a discount rate of 12% and for the limited-service hotel subleases, a
discount rate of 5% is used. If Host Marriott elects to terminate the full-
service hotel leases, it would have to terminate all of the full-service hotel
leases. Similarly, if Host Marriott elects to terminate the subleases for the
limited-service hotels, it would have to terminate all of the limited-service
hotel subleases.
Senior Living. The Company owns a portfolio of 31 senior living
communities with nearly 7,500 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
Company's senior living 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. Typically, 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 for residents 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.
Business Strategy
The Company intends to grow its business primarily through opportunities in
the lodging industry through the management, ownership or leasing of hotels as
well as maximizing the value of its current portfolio of senior living
communities.
Lodging. As a result of its acquisition of the management business of
Durbin and Stormont Trice in March 2000, the Company currently manages 24 hotels
and conference centers that contain approximately 5,000 rooms and has agreements
to manage two additional hotels that total over 450 rooms and one conference
center currently under construction. The Company intends to capitalize on the
management expertise and infrastructure acquired in the Durbin and Stormont
Trice acquisitions to expand its managed hotel portfolio.
The Company will seek to grow its managed hotel portfolio by either
acquiring additional hotel management companies or entering into new hotel
management agreements. The Company will look to manage both full-service and
limited-service hotels with strong brand quality in the mid-priced to upscale
segments of the hospitality industry. The Company intends to grow its strong
relationship with Marriott International by pursuing franchise opportunities
under the Marriott, Renaissance, Courtyard by Marriott and Residence Inn brand
names. The Company will also expand its current relationships with other hotel
management companies by pursuing franchise opportunities to manage hotels under
other quality brands such as Hyatt, Hilton and Crowne Plaza. The Company will
also look to manage additional conference centers that are either adjacent to
managed hotels or that are stand alone facilities.
4
<PAGE>
The Company will also utilize its hotel management experience and expertise
to continue to improve the operating performance of the hotels and conference
centers under its management. The Company's hotel management team, with its
extensive industry experience, has successfully managed hotels in all segments
of the lodging industry. The Company's principal operating objectives are to
continue to analyze each hotel as a unique property in order to generate higher
room revenue per available room ("REVPAR") and increase net operating profits
while providing its guests with high quality service and value.
The Company will also pursue ownership interests in hotel properties. One
of the primary goals of acquiring an ownership interest in a hotel property will
be to secure a hotel management agreement. The Company will look to contribute
small amounts of equity in hotel projects in order to obtain long-term
management agreements. In 1999, the Company acquired an equity interest in a
full-service hotel and conference center currently under construction, and in
2000, entered into an agreement to acquire a limited-service hotel upon its
completion of construction. The Company will also manage both hotels pursuant
to long-term management agreements. The Company may also acquire an ownership
interest in hotel properties and engage other quality hotel managers, such as
Marriott International, to manage the hotel if the Company believes it can earn
a high return on its investment. During 1999, the Company acquired a majority
interest in a partnership that owned eleven Residence Inn hotels that are
managed by Marriott International under a long-term management agreement. One of
these Residence Inns was sold in February 2000.
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.
Although recent tax legislation will allow REITs to derive revenues directly
from the operation of hotels beginning January 1, 2001, the Company believes
that there may still be opportunities in the lodging industry, especially in
2000, to lease hotels directly from Host Marriott as well as other REITs and
hotel owners.
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 Seniors Housing Association in 1999. 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 1999, the
portfolio achieved an average occupancy of approximately 89.7% and an average
daily rate of $92.61. The Company's senior living communities focus on private
pay customers with only 10% of its senior living revenue in 1999 derived from
Medicare and Medicaid.
In 1999, the Company completed the final phase of a four-year $88 million
expansion program that ultimately resulted in the addition of 865 units to 21 of
the Company's senior living communities. The Company's objective in completing
the expansion program has been to further solidify the competitive position of
its senior living 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 a full continuum of
care.
The Company believes that there is an oversupply in many senior living
markets, including some of the markets in which the Company's communities are
located. These competitive pressures in the senior living industry have
resulted in depressed occupancies and operating margins making it difficult for
many senior living facilities to achieve their operating profit goals. The
Company does not believe these adverse factors have negatively impacted its
senior living community portfolio to the same extent it has affected other
senior living facilities in the industry. However, as a result of this
environment, the Company will focus its energies on maximizing the profitability
of its existing senior living communities and will pursue only new senior living
investments that are compelling.
The Company may also seek to monetize its portfolio of senior living
communities by further leveraging its portfolio through additional mortgage debt
financing. The Company would reinvest any proceeds from a senior living
monetization into its lodging business and for general corporate purposes.
5
<PAGE>
Hotel Lodging Industry
The lodging industry posted modest gains in 1999 as higher average daily
rates drove moderate increases in REVPAR despite declines in occupancy. During
the five year period from 1993 through 1997, the lodging industry benefitted
significantly from a favorable supply/demand imbalance, driven in part by low
construction levels combined with high gross domestic product ("GDP") growth.
In 1998 and 1999, however, supply has moderately outpaced demand, causing
slight declines in occupancy rates in the upscale and luxury full-service
segments.
These declines in occupancy, however, were more than offset by increases in
average daily rates which generated higher REVPAR. 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.
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. The Company believes that REVPAR
will continue to grow through 2000, but at a slower rate due to slower growth in
average daily rates and a continued decline in average occupancy. However, there
can be no assurance that growth in supply will remain moderate or that REVPAR
and operating profits will continue to improve.
Managed Hotel Properties
The Company's managed hotel portfolio represents quality properties in the
upscale and moderate-priced full-service, and the moderate-priced and extended-
stay limited-service segments. The conference centers under the Company's
management are generally adjacent to a managed hotel property. The hotels and
conference centers are managed under management and lease agreements. The
hotels are generally operated under the Marriott, Hilton, Renaissance, Courtyard
by Marriott, Residence Inn, Crowne Plaza and Holiday Inn brand names under
franchise agreements.
The following table sets forth, as of the date hereof, the location and
number of rooms relating to each of the Company's managed hotels and conference
centers.
<TABLE>
<CAPTION>
Location Rooms
- -------------------------------------------- -----
<S> <C>
Alabama
Marriott's Grand Hotel & Resort Club...... 306
Florida
Holiday Inn Beachside, Key West (1)....... 222
Jacksonville Marriott (2)................. 256
Jacksonville Courtyard.................... 137
Marriott's Bay Point Resort Village....... 355
Palm Beach Gardens Marriott (2)........... 279
Ramada Plaza Gateway, Orlando............. 500
Singer Island Hilton (2).................. 223
Georgia
Atlanta Buckhead-Lenox Residence Inn (1).. 150
Atlanta Gwinnett Place Residence Inn (1).. 132
Atlanta Marriott Gwinnett Place........... 426
Brasstown Valley Resort (3)............... 134
Emory Conference Center Hotel (3)......... 198
Emory Inn (3)............................. 107
Loudermilk Conference Center.............. -
Turner Conference Center.................. -
Maryland
Baltimore Inner Harbor Courtyard (4)...... 205
New Jersey
Princeton Courtyard....................... 153
North Carolina
Greenville Courtyard...................... 84
Pennsylvania
Harrisburg Crowne Plaza (5)............... 260
South Carolina
Greenville Airport Marriott............... 204
Virginia
Lynchburg Courtyard....................... 90
Norfolk Waterside Conference Center....... -
Norfolk Waterside Marriott (2)............ 404
Portsmouth Renaissance Hotel (6).......... 250
Portsmouth Waterfront Conference Center (6) -
Washington, D.C.
Holiday Inn on the Hill (1)............... 342
-----
Total.................................. 5,417
=====
</TABLE>
- -----------
(1) Hotel is managed under a lease agreement.
(2) Hotel is also leased by the Company from Host Marriott.
(3) Hotel is not managed under a franchise agreement.
(4) Hotel is currently under construction and expected to open in November 2000.
The Company has entered into an agreement to acquire this hotel at
completion of construction.
(5) Hotel was previously operated as a Ramada Inn. The hotel is currently
closed and is scheduled to reopen in June 2000 as a Crowne Plaza hotel.
(6) Hotel and conference center are currently under construction and expected to
open in October 2000. The Company owns a majority equity interest in this
hotel and conference center.
6
<PAGE>
Owned Hotel Properties
The Company's owned hotel portfolio consists of ownership interests in ten
Residence Inn hotels (1,150 rooms) and the 250-room Portsmouth Renaissance Hotel
and Waterfront Conference Center. The Company also entered into an agreement to
acquire the 205-room Baltimore Inner Harbor Courtyard upon the completion of
construction.
The Company owns an 82% controlling interest in a partnership that owns ten
Residence Inn limited-service hotels that are managed by Marriott International
under a long-term management agreement. In February 2000, the Company sold an
eleventh hotel that was originally included in the partnership. The Residence
Inns owned 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 average age of the Company's owned Residence Inns is ten years. Seven of the
Residence Inns won quality awards from Marriott International and one of the
hotels won "Residence Inn of the Year" for 1999.
The table below sets forth 1999 information for the Residence Inns owned by
the Company since the acquisition on March 26, 1999:
<TABLE>
<CAPTION>
<S> <C>
Number of properties (1).... 11
Number of rooms............. 1,294
Average daily rate.......... $99.40
Occupancy percentage........ 85.1%
REVPAR (2).................. $84.63
</TABLE>
The table below sets forth comparable information for the Residence Inns owned
by the Company, including periods prior to the Company's ownership:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Number of properties (1).... 11 11 11
Number of rooms............. 1,294 1,294 1,294
Average daily rate.......... $98.49 $96.87 $93.15
Occupancy percentage........ 84.8% 85.1% 86.4%
REVPAR...................... $83.52 $82.48 $80.51
REVPAR % change............. 1.3% 2.4% -
</TABLE>
- -----------
(1) In February 2000, the Company sold one of the Residence Inns (144 rooms).
(2) 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.
For 1999, REVPAR increased 1.3% for the Company's owned Residence Inns, due
to an increase in room rates of 1.7%, while average occupancy decreased slightly
to 84.8%.
7
<PAGE>
The following table presents information for the Residence Inn properties
owned by the Company for fiscal year 1999, including periods prior to the
Company's ownership:
<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............... 2 110 82.5% $ 89.87 $74.13
Mid-Atlantic............ 1 144 73.6% 80.37 59.15
Midwest................. 1 118 85.9% 91.18 78.34
Northeast............... 2 118 90.0% 106.94 96.22
South Central........... 2 115 83.4% 98.47 82.12
Western................. 3 115 87.9% 106.49 93.64
Average all regions.. 11 118 84.8% 98.49 83.52
</TABLE>
In addition, the Company has a majority equity interest in the Portsmouth
Renaissance Hotel and Waterfront Conference Center currently under construction
that is scheduled to open in October 2000. The hotel will be managed by the
Company under a long-term management agreement and is adjacent to the conference
center that will also be managed by the Company. The hotel amenities include
meeting and banquet space, a variety of restaurants and lounges, a swimming
pool, health club, gift shop and parking facilities. The Company also entered
into an agreement to acquire the Baltimore Inner Harbor Courtyard upon the
completion of construction. The hotel is scheduled to open in November 2000.
The hotel will be situated on the Baltimore Inner Harbor as part of an office,
retail and entertainment development project. The Company will also manage the
Baltimore Inner Harbor Courtyard.
The following table sets forth, as of the date hereof, the location, number
of rooms and ownership interest in each of the Company's owned hotels.
<TABLE>
<CAPTION>
Ownership
Location Rooms Percentage
- --------------------------------------- ----- -----------
<S> <C> <C>
Alabama
Montgomery Residence Inn............. 94 82%
California
Bakersfield Residence Inn............ 114 82%
Concord-Pleasant Hill Residence Inn.. 126 82%
San Ramon Residence Inn.............. 106 82%
Connecticut
Meriden Residence Inn (1)............ 106 82%
Georgia
Atlanta Airport-Haperville
Residence Inn..................... 126 82%
Massachusetts
Boston Tewksbury Residence Inn....... 130 82%
Maryland
Baltimore Downtown
Courtyard (2)(3).................. 205 100%
Ohio
Cincinnati-Blue Ash Residence Inn.... 118 82%
Texas
Dallas-Las Colinas Residence Inn..... 120 82%
Houston-Clear Lake Residence Inn..... 110 82%
Virginia
Portsmouth Renaissance Hotel and
Waterfront Conf. Ctr. (1)(2)(4)... 250 67%
-----
Total............................. 1,605
=====
</TABLE>
- -----------
(1) The land on which the hotel is built is leased by the Company under a long-
term ground lease.
(2) The Company will manage the hotel under a long-term management contract.
(3) The Company will purchase the hotel upon the completion of construction.
The hotel is scheduled to open in November 2000.
(4) Hotel and conference center are currently under construction and scheduled
to open in October 2000. The hotel and conference center will be leased for
an initial period of 50 years plus options to renew the leases for up to an
additional 49 years.
8
<PAGE>
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, SwissHotel and Hilton 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 for fiscal years
1999, 1998 and 1997. Since the Company's hotel leases and subleases did not
commence until January 1, 1999, the information provided below for fiscal years
1998 and 1997 consists of historical information prior to the Company's
leasehold interest. The information for fiscal years 1998 and 1997 has been
provided for comparative information purposes.
<TABLE>
<CAPTION>
As of
December 31, 1999 Fiscal Year 1999
------------------------------ --------------------------------------------
Number Number Hotel Average
of Hotels of Rooms Revenues Occupancy Daily Rate REVPAR
----------- ---------------- ---------- ----------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Full-service...................... 116 55,413 $3,859,756 77.7% $149.55 $116.22
Limited-service (moderate-price).. 53 7,612 232,820 80.4 93.97 75.58
Limited-service (extended-stay)... 18 2,178 70,197 83.0 100.96 83.79
------ ---------- ----------
187 65,203 $4,162,773
====== ========== ==========
<CAPTION>
Fiscal Year 1998
--------------------------------------------
Number Number Hotel Average
of Hotels of Rooms Revenues Occupancy Daily Rate REVPAR
------------ --------------- ---------- ----------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Full-service...................... 121 56,230 $3,756,589 77.5% $143.59 $111.29
Limited-service (moderate-price).. 53 7,606 224,727 80.5 90.71 73.04
Limited-service (extended-stay)... 18 2,178 71,775 84.1 102.15 85.86
------ ---------- ----------
192 66,014 $4,053,091
====== ========== ==========
<CAPTION>
Fiscal Year 1997
--------------------------------------------
Number Number Hotel Average
of Hotels of Rooms Revenues Occupancy Daily Rate REVPAR
------------ --------------- ---------- ----------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Full-service...................... 121 56,230 $3,461,732 77.6% $133.39 $103.52
Limited-service (moderate-price).. 53 7,606 211,889 81.1 84.30 68.38
Limited-service (extended-stay)... 18 2,178 69,720 83.3 99.96 83.27
------ ---------- ----------
192 66,014 $3,743,341
====== ========== ==========
</TABLE>
Full-Service. The Company's leased full-service hotels average nearly 500
rooms. Thirteen of the hotels leased by the Company have more than 750 rooms.
The full-service hotels typically include convention 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 and 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 95 of the 116 full-service hotels leased by
the Company, and all but twelve are part of Marriott International's full-
service hotel system.
9
<PAGE>
The table below sets forth comparable performance information for the 116
full-service hotels leased by the Company as of December 31, 1999:
<TABLE>
<CAPTION>
Fiscal Year (1)
------------------
1999 1998
------- -------
<S> <C> <C>
Number of rooms....... 55,413 55,203
Average daily rate.... $149.27 $143.48
Occupancy percentage.. 77.7% 77.6%
REVPAR................ $115.94 $111.39
REVPAR % change....... 4.1% -
</TABLE>
- -----------
(1) Results exclude the five hotels sold by Host Marriott in 1999.
Revenues in 1999 for nearly all of the full-service hotels leased by the
Company from Host Marriott were improved or comparable to 1998. 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. Comparable REVPAR for the full-service hotel
properties increased 4.1% for fiscal year 1999 as comparable average room rates
increased 4.0% and average occupancy increased slightly to 77.7%. The relatively
high occupancy rates of the hotels allowed the managers of the hotels to
selectively raise room rates. Overall, this resulted in moderate revenue growth.
Revenues expanded at a 2.7% 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 Company and the hotel managers will continue to focus on cost control
in an attempt to ensure that hotel revenue 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.
The following table presents certain information for the full-service
hotels leased by the Company by geographic region for fiscal year 1999:
<TABLE>
<CAPTION>
Average
Number Average
Number of Guest Average Daily
Geographic Region of Hotels Rooms Occupancy Rate REVPAR
- ------------------------------- --------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Atlanta................... 11 487 74.7% $148.78 $111.12
Florida................... 12 503 77.4% 144.54 111.81
Mid-Atlantic.............. 17 365 75.8% 132.80 100.69
Midwest................... 16 372 75.6% 128.01 96.81
New York.................. 12 651 83.4% 198.49 165.50
Northeast................. 10 382 77.7% 147.08 114.34
South Central............. 17 511 76.9% 123.92 95.35
Western................... 26 505 78.1% 155.81 121.70
Average all regions.. 121 471 77.7% 149.55 116.22
</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.
10
<PAGE>
The table below sets forth comparable performance information for the
Courtyard by Marriott hotels subleased by the Company:
<TABLE>
<CAPTION>
Fiscal Year
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Number of properties.. 53 53 53
Number of rooms....... 7,612 7,606 7,606
Average daily rate.... $93.97 $90.71 $84.30
Occupancy percentage.. 80.4% 80.5% 81.1%
REVPAR................ $75.58 $73.04 $68.38
REVPAR % change....... 3.5% 6.8% -
</TABLE>
The Courtyard by Marriott hotels subleased by the Company benefited in 1999
from REVPAR growth of 3.5% due to increases in room rates of 3.6%, although
occupancy decreased slightly. Revenues in 1999 increased 3.6%, while house
profit margins increased slightly.
The following table presents information for the Courtyard by Marriott
properties subleased by the Company by geographic region for fiscal year 1999:
<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 79.4% $ 81.88 $65.01
Mid-Atlantic.............. 11 144 80.4% 97.60 78.48
Mid-west.................. 6 142 77.8% 84.62 65.87
Northeast................. 15 142 82.4% 101.86 83.93
South Central............. 3 153 75.4% 78.74 59.33
Western................... 9 144 81.8% 99.01 80.99
Average all regions.. 53 144 80.4% 93.97 75.58
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Year
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Number of properties.. 18 18 18
Number of rooms....... 2,178 2,178 2,178
Average daily rate.... $100.96 $102.15 $99.96
Occupancy percentage.. 83.0% 84.1% 83.3%
REVPAR................ $ 83.79 $ 85.86 $83.27
REVPAR % change....... (2.4)% 3.1% -
</TABLE>
For 1999, REVPAR decreased 2.4% for the Residence Inns subleased by the
Company due to a decrease in room rates of 1.2% and a decrease in occupancy of
slightly over one percentage point. Revenues in 1999 decreased 2.2% and house
profit margins decreased by over two percentage points from the prior year
reflecting the additional supply that has entered the extended-stay market.
11
<PAGE>
The following table presents information for Residence Inn extended-stay
properties subleased by the Company by geographic region for fiscal year 1999:
<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 79.9% $ 88.93 $ 71.09
Mid-Atlantic.............. 2 112 81.1% 94.87 76.90
Midwest................... 3 153 86.9% 117.24 101.83
Northeast................. 3 110 84.9% 101.70 86.32
South Central............. 3 119 84.5% 87.03 73.54
Western................... 5 119 79.9% 102.33 81.75
Average all regions.. 18 121 83.0% 100.96 83.79
</TABLE>
12
<PAGE>
The following table sets forth, as of the date hereof, the location and
number of rooms relating to each of the Company's leased or subleased hotels.
Leased Full-Service:
<TABLE>
<CAPTION>
Location Rooms
- -------------------------------------------- ------
<S> <C>
Arizona
Mountain Shadows Marriott Resort.......... 337
Scottsdale Marriott Suites................ 251
The Ritz-Carlton, Phoenix................. 281
California
Coronado Island Marriott Resort........... 300
Cost Mesa Marriott Suites................. 253
Desert Springs Marriott Resort and Spa.... 884
Fullerton Marriott........................ 224
Hyatt Regency, Burlingame................. 793
Manhattan Beach Marriott.................. 385
Marina Beach Marriott..................... 371
Newport Beach Marriott Hotel & Tennis Club 578
Newport Beach Marriott Suites............. 250
Ontario Airport Marriott (2).............. 299
San Diego Marriott Hotel and Marina....... 1,354
San Francisco Airport Marriott............ 684
San Francisco Marriott Fisherman's Wharf (2) 285
San Francisco Marriott.................... 1,500
San Ramon Marriott........................ 368
Santa Clara Marriott...................... 754
The Ritz-Carlton, Marina del Rey.......... 306
The Ritz-Carlton, San Francisco........... 336
Torrance Marriott......................... 487
Colorado
Denver Marriott Southeast................. 596
Denver Marriott Tech Center............... 628
Denver Marriott West...................... 307
Vail Marriott Mountain Resort............. 349
Connecticut
Hartford Marriott Farmington.............. 381
Hartford Marriott Rocky Hill.............. 251
Florida
Biscayne Bay Marriott Hotel and Marina.... 599
Fort Lauderdale Marina Marriott........... 580
Jacksonville Marriott (1)(2).............. 256
Miami Airport Marriott.................... 772
Orlando World Center Marriott Resort...... 1,501
Palm Beach Gardens Marriott (1)(2)........ 279
Singer Island Hilton (1)(2)............... 223
Tampa Airport Marriott.................... 296
Tampa Marriott Westshore.................. 310
The Ritz-Carlton, Amelia Island........... 449
The Ritz-Carlton, Naples.................. 463
Georgia
Atlanta Marriott Marquis.................. 1,675
Atlanta Marriott Suites Midtown........... 254
Atlanta Marriott Norcross................. 222
Atlanta Marriott Northwest................ 400
Atlanta Marriott Perimeter Center......... 400
Grand Hyatt, Atlanta...................... 437
JW Marriott Hotel at Lenox................ 371
The Four Seasons, Atlanta................. 244
The Ritz-Carlton, Atlanta................. 441
The Ritz-Carlton, Buckhead................ 553
SwissHotel, Atlanta....................... 365
Illinois
Chicago Marriott Suites Deerfield......... 248
Chicago Marriott Suites Downers Grove..... 254
Chicago Downtown Courtyard................ 334
Chicago Marriott O'Hare................... 681
Chicago Marriott O'Hare Suites............ 256
SwissHotel, Chicago....................... 632
Indiana
South Bend Marriott....................... 298
Louisiana
New Orleans Marriott...................... 1,290
Maryland
Bethesda Marriott......................... 407
Gaithersburg Marriott Washingtonian Center 284
Massachusetts
Boston Marriott Newton.................... 430
Hyatt Regency, Cambridge.................. 469
SwissHotel, Boston........................ 500
Michigan
Detroit Marriott Livonia.................. 224
Detroit Marriott Romulus.................. 246
Detroit Marriott Southfield............... 226
The Ritz-Carlton, Dearborn................ 308
Minnesota
Minneapolis Marriott City Center.......... 583
Missouri
Kansas City Airport Marriott.............. 382
New Hampshire
Nashua Marriott........................... 241
New Jersey
Hanover Marriott.......................... 353
Newark Airport Marriott................... 591
Park Ridge Marriott....................... 289
New Mexico
Albuquerque Marriott...................... 411
New York
New York Marriott Financial Center........ 504
New York Marriott Marquis................. 1,946
New York Marriott World Trade Center...... 818
The Drake (SwissHotel), New York.......... 495
North Carolina
Charlotte Marriott Executive Park (2)..... 297
Greensboro-High Point Marriott Airport.... 299
Raleigh Marriott Crabtree Valley.......... 375
Marriott at Research Triangle Park........ 224
Ohio
Dayton Marriott........................... 399
Oklahoma
Oklahoma City Marriott.................... 354
Oklahoma City Waterford (2)............... 197
Oregon
Portland Marriott Downtown................ 503
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Location
- -------------------------------------------- -----
<S> <C>
Pennsylvania
Four Seasons, Philadelphia................ 365
Philadelphia Marriott..................... 1,410
Philadelphia Airport Marriott............. 419
Pittsburgh Marriott City Center (2)....... 401
Tennessee
Memphis Marriott.......................... 400
Texas
Dallas/Fort Worth Airport Marriott........ 491
Dallas Marriott Quorum by the Galleria.... 548
Houston Airport Marriott.................. 566
Houston Marriott Medical Center........... 386
JW Marriott Houston....................... 514
Plaza San Antonio, a Marriott Hotel (2).. 252
San Antonio Marriott Rivercenter.......... 999
San Antonio Marriott Riverwalk............ 511
Utah
Salt Lake City Marriott................... 509
Virginia
Fairview Park Marriott.................... 395
Hyatt Regency, Reston..................... 517
Key Bridge Marriott....................... 588
Norfolk Waterside Marriott (1)(2)......... 404
Pentagon City Residence Inn............... 299
The Ritz-Carlton, Tysons Corner........... 398
Washington Dulles Airport Marriott........ 367
Washington Dulles Marriott Suites......... 253
Westfields Marriott....................... 340
Williamsburg Marriott..................... 295
Washington
Seattle Marriott SeaTac Airport........... 459
Washington, D.C.
Marriott at Metro Center.................. 456
Canada
Calgary Marriott.......................... 384
Toronto Airport Marriott.................. 424
Toronto Marriott Eaton Centre............. 459
Toronto Delta Meadowvale (2).............. 374
------
Total.................................. 55,413
======
</TABLE>
Subleased Limited-Service -- Courtyard by
Marriott:
<TABLE>
<CAPTION>
Location Rooms
- -------------------------------------------- ------
<S> <C>
Arizona
Phoenix Camelback......................... 155
Scottsdale Mayo Clinic.................... 124
California
Camarillo................................. 130
Fountain Valley........................... 150
Los Angeles Airport....................... 146
Laguna Hills.............................. 136
San Jose Airport.......................... 151
Torrance South Bay........................ 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 Boulevard............ 122
Atlanta Midtown........................... 168
Macon..................................... 108
Illinois
Chicago Arlington Heights North........... 152
Indiana
Indianapolis Carmel....................... 149
Iowa
Quad Cities............................... 108
Maryland
Columbia.................................. 152
Greenbelt................................. 152
Massachusetts
Boston Danvers............................ 122
Boston Foxborough......................... 149
Boston Lowell............................. 120
Boston Milford............................ 152
Boston Norwood............................ 148
Boston Stoughton.......................... 152
Boston Woburn............................. 121
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.................... 152
Pennsylvania
Philadelphia Airport...................... 152
Pittsburgh Airport........................ 148
Willow Grove.............................. 149
Rhode Island
Newport................................... 148
South Carolina
Spartanburg............................... 108
Tennessee
Chattanooga............................... 109
Texas
Dallas Northpark.......................... 160
Virginia
Arlington/Rosslyn......................... 162
Dulles Airport............................ 149
Williamsburg.............................. 151
Washington
Bellevue.................................. 152
Wisconsin
Brookfield................................ 147
------
Total.................................. 7,612
======
</TABLE>
14
<PAGE>
Subleased Limited-Service -- Residence Inns:
<TABLE>
<CAPTION>
Location Rooms
- ------------------------ -----
<S> <C>
Arizona
Flagstaff............. 102
Scottsdale............ 122
Tempe................. 126
California
Fountain Valley....... 122
Rancho Bernardo....... 123
Georgia
Atlanta Alpharetta.... 103
Illinois
Chicago Downtown...... 221
Maryland
Annapolis............. 102
Massachusetts
Westborough........... 109
Michigan
Warren................ 133
New Mexico
Albuquerque........... 112
New York
Syracuse.............. 102
North Carolina
Durham................ 122
Ohio
Columbus Dublin....... 106
Pennsylvania
Willow Grove.......... 118
Tennessee
Nashville Brentwood... 110
Texas
Dallas Northpark...... 103
Dallas Market Center.. 142
-----
Total.............. 2,178
=====
</TABLE>
- -----------
(1) Hotel is also managed by the Company.
(2) Property is operated under a franchise agreement.
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 has caused 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 facilities are located could cause the Company's assisted living
facilities 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 nearly 7,500 units. The senior living
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 senior living communities provide a residential atmosphere in a campus
environment that offers 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.
15
<PAGE>
Independent living, which represents 55% of the Company's senior living
units, generally consists of large apartments or villas that vary in size from
studios to two-bedrooms which are designed to offer the resident a residential
and independent environment.
Assisted living, which represents 20% of the Company's senior living units,
offers 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 centers, 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 facilities, 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, speech and learning therapy at an additional cost to the
residents.
In most cases, each resident of independent living is entitled to priority
admission in assisted living, special care or healthcare. The Company's senior
living communities focus on private pay customers. Revenues from Medicare and
Medicaid accounted for 10% of the Company's total senior living community
revenue in 1999. The average age of the senior living communities is 15 years.
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Average Average
Daily Average Daily Average
Units Rate Occupancy Units Rate Occupancy
----- ------- ---------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Independent living.. 4,079 $ 80.59 93.9% 4,012 $ 77.15 94.8%
Assisted living..... 1,524 90.86 80.8 1,430 83.86 87.1
Special care........ 256 122.96 80.3 178 128.38 84.8
Healthcare.......... 1,638 121.74 88.9 1,634 116.80 91.4
----- ------- ---- ------ ------- ----
Combined............ 7,497 $ 92.61 89.7% 7,254 $ 88.44 92.2%
===== ======= ==== ====== ======= ====
</TABLE>
During 1999, the average occupancy at the senior living communities was
approximately 89.7% and the average daily rate was $92.61. Overall occupancies
for 1999 and 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 renovation expenditures for the senior living communities
totaled approximately $9 million in 1999, $7 million in 1998 and $3 million for
the period from June 21, 1997 through January 2, 1998.
16
<PAGE>
The following table sets forth certain information as of the date hereof,
relating to each of the senior living communities. The Company holds the fee
interest in each of the senior living communities, except as otherwise
indicated. All of the properties are encumbered by secured debt, unless
otherwise indicated. All of the senior living communities are operated by MSLS.
<TABLE>
<CAPTION>
Location Units
- ------------------------------------- -----
<S> <C>
Arizona
The Forum at Desert Harbor......... 290
The Forum at Pueblo Norte.......... 296
The Forum at Tucson................ 327
California
The Remington Club I............... 205
The Remington Club II.............. 200
Delaware
Forwood Manor...................... 242
Foulk Manor North.................. 161
Foulk Manor South.................. 108
Millcroft.......................... 198
Shipley Manor...................... 159
Florida
Coral Oaks......................... 317
The Forum at Deer Creek............ 292
Fountainview....................... 337
Park Summit........................ 281
Springwood Court................... 85
Tiffany House...................... 109
Indiana
The Forum at the Crossing.......... 221
Kansas
The Forum at Overland Park......... 205
Kentucky
The Forum at Brookside............. 324
The Lafayette at Country Place(1).. 149
The Lexington at Country Place(1).. 133
Massachusetts
Gables at Winchester............... 125
New Jersey
Leisure Park(2).................... 418
New Mexico
The Montebello on Academy.......... 209
Ohio
The Forum at Knightsbridge(1)...... 315
South Carolina
Myrtle Beach Manor................. 164
Texas
The Forum at Lincoln Heights....... 269
The Forum at Memorial Woods........ 423
The Montevista at Coronado......... 261
The Forum at Park Lane............. 318
The Forum at the Woodlands(2)...... 356
-----
Total........................... 7,497
=====
</TABLE>
- -----------
(1) The land on which the community is built is leased by the Company under a
long-term ground lease agreement.
(2) Property is not encumbered by secured debt.
Marketing
Affiliation with a national or regional brand is prevalent in the lodging
industry with a majority of domestic hotels affiliated with a brand either
through management contracts or franchise agreements. A substantial majority of
the Company's hotels are managed under the various brand names of Marriott
International including the Marriott, Ritz-Carlton, Renaissance, Courtyard by
Marriott and Residence Inn brand names. The Company believes that these
Marriott International-branded 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 International hotel system is enhanced by the Marriott Rewards and
Marriott Miles programs. Marriott Rewards membership includes more than 10
million members.
The Marriott reservation system provides Marriott International 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 the Marriott International brand name hotels. In
addition, software at Marriott International's centralized reservations centers
enables agents to immediately identify the nearest Marriott International 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
17
<PAGE>
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 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 Company's 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 hotels will compare favorably to
their competitive set in the markets in which they operate on the basis of these
factors. The following table presents key participants in segments of the
lodging industry in which the Company competes:
<TABLE>
<CAPTION>
Segment Representative Participants
- ------- ---------------------------
<S> <C>
Luxury Full-Service Ritz-Carlton; Four Seasons
Upscale Full-Service Marriott Hotels, Resorts and Suites; Crowne Plaza;
Doubletree; Hyatt; Hilton; Radisson; Renaissance;
Sheraton; SwissHotel; Westin; Wyndham
Moderate-priced Courtyard by Marriott; AmeriSuites; Hampton Inn
and Suites; Hilton Garden Inn; Holiday Inn; Ramada
Inn; Sheraton Four Points; Wyndham Garden
Extended-stay Residence Inn; Hawthorne Suites; Homewood Suites
by Hilton; Summerfield Suites
</TABLE>
Senior Living. The Company's senior living communities compete with
facilities of varying similarity in the respective geographical market areas in
which the senior living 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 senior living 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 Company's senior living communities
compete with other assisted living and healthcare communities.
Significant competitive factors for attracting residents to the independent
living facilities of the senior living 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
senior living 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 SwissHotel 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 five 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.
18
<PAGE>
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 1999, Host
Marriott sold five of the leased full-service hotels, resulting in the
termination of the applicable Hotel Lease. Each Hotel Lease has a fixed term
generally ranging from seven to ten years. The Hotel Leases have four seven-
year renewal options at the option of the Company, however, Host Marriott may
terminate any unexercised renewal options. 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 50% of the increase 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 rent during any renewal periods will be negotiated at fair market value at
the time the renewal option is exercised.
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, equipment rent, 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 generally have to purchase the Company's
interest in the Hotel Lease with the purchase price 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, in lieu of
payment of the purchase price. In addition, Host Marriott also has the right to
terminate up to twelve Hotel Leases in connection with the sale of a leased
hotel without having to pay a termination fee. During 1999, Host Marriott
exercised its right to terminate three Hotel Leases without paying a termination
fee for three leased hotels that were sold during 1999. Conversely, the Company
may terminate up to twelve Hotel Leases without penalty upon 180 days notice to
Host Marriott. During 1999, the Company exercised its right to terminate five
Hotel Leases. The Company may renegotiate the terms of these Hotel Leases with
Host Marriott. If these five Hotel Leases are not renegotiated, they will
terminate in fiscal year 2000, 180 days after each respective notification date.
The other two hotels sold by Host Marriott in 1999 did not have termination fee
provisions due to the pending sale of the hotels at the time the leases were
entered into.
As a result of the new tax legislation, Host Marriott may purchase all, but
not less than all, of the Company's interest in the Hotel Leases beginning
January 1, 2001 with the purchase price calculated as discussed above. The
purchase price 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.
19
<PAGE>
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 the existing
working capital to Host Marriott 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. As of December
31, 1999, the outstanding balance of the hotel working capital notes was $90
million.
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.
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 plus (ii) 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.
As a result of the new tax legislation, Host Marriott may terminate all,
but not less than all of the Subleases beginning January 1, 2001 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 and Subleases, 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 SwissHotel 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
20
<PAGE>
Company's interest in SwissHotel 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 senior living communities.
Asset Management Agreement. In connection with the Distribution, the
Company entered into an asset management agreement (the "Asset Management
Agreement") 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 include:
(i) monitoring property/brand performance; (ii) pursuing expansion and
repositioning opportunities; (iii) overseeing capital expenditure budgets and
forecasts; (iv) assessing return on investment expenditure opportunities; and
(v) analyzing competitive supply conditions in each market. In 1999, the Company
was paid an aggregate fixed annual fee of $4.5 million for services rendered
under these contracts. In the first quarter of 2000, the Company and Host
Marriott and its affiliates, renegotiated the Asset Management Agreement
pursuant to a restructuring of the Company's asset management department. Under
the amended Asset Management Agreement, the Company will be paid an aggregate
annual fee of $3.5 million in fiscal year 2000.
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 date of the
Distribution Date, and the Company will be responsible for filing returns and
paying taxes for subsequent periods.
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.
Relationship with Marriott International
Marriott International serves as the manager for 95 of the 116 full-service
hotels currently leased by the Company under the Marriott and Ritz-Carlton
brands and all of the limited-service hotels currently subleased by the Company
under long-term management agreements between Host Marriott and Marriott
International. In connection with entering into the hotel leases and subleases,
the Company, Host Marriott and Marriott International entered into agreements
whereby the existing hotel management agreements with Marriott International
were assigned as delegated to the Company for the term of the corresponding
hotel leases or subleases. For the leased 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. Marriott International is the manager of the ten limited-
service hotels owned by the Company under a long-term management agreement. The
Company also manages or has agreements to manage 15 hotels under long-term
franchise agreements with Marriott International under the Marriott,
Renaissance, Courtyard by Marriott and Residence Inn brand names. In addition,
Marriott International is the manager for all 31 senior living communities under
long-term operating agreements.
The Company is bound by a non-competition agreement with Marriott
International pursuant to which the Company is generally prohibited prior to
October 8, 2000, subject to limited exceptions, from entering into or acquiring
any business that competes with the hotel management business of Marriott
International. Certain activities are permitted however, including: (1) the
operation of an unlimited number of limited-service hotel properties as long as
the Company does not operate more than ten such properties under a common name;
(2) contracting with a third party manager for operation of an unlimited number
of limited-service hotel properties, so long as the number of properties under
such third party management is not more than the greater of (a) ten such
properties operated under a common name or (b) 25% of the system operated by
such third party manager under a common name; (3) contracting with a third
21
<PAGE>
party manager for operation for an unlimited number of full-service hotels
having the same brand name as one of Host Marriott's hotels, so long as the
number of properties under such third party management is not more than the
greater of (a) five such properties operated under a common name or (b) 12.5%
of the system operated by such third party under a common name; and
(iv) franchising of an unlimited number of limited service hotel properties so
long as the Company is not franchisor for more than ten such properties under a
common name.
The Company is also bound by a non-competition agreement with Marriott
International which, in general, limits the Company's activities in the senior
living area to owning, having equity interests in or lending money or otherwise
financing senior living communities. Under the agreement, the Company is
generally prohibited from engaging in the business of operating, managing or
franchising senior living communities and from entering into a transaction or a
series of transactions whereby ten or more of the Company's senior living
communities or a controlling interest therein would be transferred to another
party unless such party agreed to be bound by the non-competition agreement.
The Company is bound by this non-competition agreement until June 17, 2010.
Staffing and Labor Costs
The Company, as well as 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 senior living communities. A shortage of
such personnel or general inflationary pressure may require the Company,
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 senior living communities, which could adversely affect the
Company's net income attributable to the hotels and the senior living
communities.
Regulation of the Healthcare Industry
The long-term care segment of the healthcare industry is highly regulated.
Various aspects of the Company's senior living community ownership business are
subject to regulation by the federal government and the states in which the
Company's senior living communities are located. The Company's long-term
healthcare and assisted living facilities operated as part of the Company's
senior living communities are subject to annual licensure and other regulatory
requirements.
The Company's healthcare facilities are subject to federal, state and local
laws relating to the delivery and adequacy of medical care, distribution of
pharmaceuticals, equipment, personnel, operating policies, fire prevention,
rate-setting 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. The failure of the operator of the
Company's senior living communities to obtain or maintain any required
regulatory approvals or licenses could prevent the Company 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 1999,
Medicare/Medicaid reimbursements accounted for approximately 10% of the
Company's total senior living community revenues.
Although not currently regulated at the federal level, assisted living
communities are generally subject to 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; services provided to the residents, including administration of
medication, assistance with self-administration of medication and limited
nursing services; monitoring of resident 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. Like other healthcare facilities, assisted living
communities are subject to periodic inspection by government authorities. In
most states, assisted living communities,
22
<PAGE>
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 operators of the Company's senior living
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
operators of the Company's senior living communities to comply with such
requirements could have a material adverse effect on the Company's financial
condition and results of operations.
Many states have adopted certificate of need or similar laws for skilled
nursing and healthcare facilities which generally require that the appropriate
state agency approve certain acquisitions and the need 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.
Several states also have certificate of need or similar laws for assisted living
facilities. The Company's inability to obtain such certificate of need approvals
could limit its ability to acquire additional senior living communities or
expand its current communities.
Operators of senior living 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 the Company's healthcare facilities) and others
(including the Company's assisted living facilities) 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). 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. 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 switched Medicare's retrospective cost-
based reimbursement system to a prospective payment system (PPS). The
retrospective cost-based reimbursement system allowed providers to be reimbursed
for reasonable costs, up to certain limits, incurred in providing services.
Under PPS, providers are paid based on a fixed federal payment rate for specific
covered services regardless of their actual costs. The implementation of PPS
began for senior living 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 senior
23
<PAGE>
living communities will not be affected by the condition of land or operations
in the vicinity of the hotels or the senior living communities (such as the
presence of underground storage tanks) or by third parties unrelated to the
Company.
Employees
As of December 31, 1999, the Company had 84 corporate employees. As a
result of the acquisition of Durbin and Stormont Trice in March 2000, the
Company added approximately 2,650 hotel-level employees.
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.
24
<PAGE>
PART II
Item 5. Market for Company's Common Stock and Related Stockholder Matters
The Company's 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. Furthermore, the
Company is prohibited under its line of credit from paying dividends on its
common stock. As of December 31, 1999, there were approximately 48,300 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............................................ 15 9 13/16
2nd Quarter............................................ 17 3/8 13
3rd Quarter............................................ 20 7/8 16 3/8
4th Quarter............................................ 24 1/8 18 3/4
2000....................................................
1st Quarter (through March 24, 2000)................... 20 3/8 15 7/8
</TABLE>
25
<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 years ended December 31, 1999 and January 1, 1999 and for the period
from June 21, 1997 through January 2, 1998. For fiscal year 1998 and prior
periods, the historical data reflects only operations of the senior living
communities. 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 the results for fiscal year 1998 and prior
periods. 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 Marriott International Forum
---------------------------------------- -------------------------- -----------
Period
from June Twenty-four
21, 1997 Week Period Forty-Week
through Ended Period Ended Year Ended
Fiscal Year Fiscal Year January 2, June 20, January 3, March 31,
1999 1998 1998 1997 1997 1996
----------- ----------- ----------- ----------- ------------ ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................ $4,447,125 $241,277 $110,969 $ 95,403 $ 150,782 $179,926
Operating costs and
expenses....................... 4,336,285 204,058 94,998 77,428 115,441 141,173
Operating profit................ 110,840 37,219 15,971 17,975 35,341 38,753
Corporate expenses.............. 16,469 6,360 2,304 4,519 6,380 915
Interest expense................ 27,711 22,861 13,396 9,141 14,283 29,119
Interest income................. 2,269 2,028 336 598 1,111 2,321
Net income (1).................. 39,885 5,915 358 2,628 9,334 5,717
Basic earnings per share (2).... 1.95 .27 .02 - - -
Diluted earnings per share (2).. 1.91 .27 .02 - - -
Other Data:
Depreciation and amortization... $ 25,304 $ 22,115 $ 10,635 $ 6,698 $ 8,494 $ 10,172
Cash from (used in) operations.. 104,132 28,987 25,376 (479) 26,870 26,327
Cash used in investing
activities..................... (69,706) (30,098) (33,412) (16,407) (159,586) (43,253)
Cash provided by (used in)
financing activities........... (64,431) 50,246 25,680 12,673 132,650 5,896
Balance Sheet Data:
Total assets.................... $ 964,868 $858,753 $663,502 $ - $ 565,094 $417,436
Total debt (3).................. 306,217 213,076 349,934 - 244,318 325,756
Total shareholders' equity...... 400,748 459,254 227,064 - 284,665 49,496
</TABLE>
- -----------
(1) Net income for the fiscal year ended March 31, 1996 includes $2,078,000 from
an extraordinary loss on the extinguishment of debt and a $666,000 gain from
the cumulative effect of an accounting change.
(2) For fiscal year 1998 and the period from June 21, 1997 through January 2,
1998, the weighted average shares outstanding used to calculate earnings per
share is based on Host Marriott's weighted average shares outstanding
adjusted for the one-for-ten distribution ratio.
(3) Debt excludes $89,650,000 and $95,114,000 of hotel working capital notes
payable to Host Marriott as of December 31, 1999 and January 1, 1999,
respectively.
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 1999 compared
to historical fiscal year 1998 and a discussion of the historical 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 senior living communities acquired since the
Company's inception in June 1997, the Company does not believe that the
historical results of operations will be
26
<PAGE>
comparable to its results of operations following the Distribution. Accordingly,
a comparison of the Company's historical results of operations for fiscal year
1999 compared to the pro forma results of operations for fiscal year 1998 and a
comparison of the pro forma results of operations for fiscal year 1998 to the
pro forma results of operations for fiscal year 1997 have been included
following the historical analysis.
Historical Fiscal Year 1999 Compared to Historical Fiscal Year 1998
Revenues. Revenues primarily represent property-level revenues from owned,
leased and subleased hotels and owned senior living communities and asset
management fees. The Company's total revenues were over $4.4 billion in 1999
and $241 million in 1998.
Hotel revenues for 1999 were nearly $4.2 billion. The Company's leased
hotels contributed almost $4.2 billion of revenues in 1999, while its owned
hotels contributed $32.2 million of revenues since their acquisition in the
second quarter of 1999. The Company's leased full-service hotels reported an
average daily rate of $149.55 and an average occupancy of 77.7% resulting in
REVPAR of $116.22 in 1999. REVPAR for the Company's subleased Courtyard hotels
was $75.58 in 1999 as a result of an average daily rate of $93.97 and an average
occupancy of 80.4%. In 1999, the Company's subleased Residence Inn hotels had an
average daily rate of $100.96 and an average occupancy of 83.0% resulting in
REVPAR of $83.79. Since their acquisition in the second quarter of 1999, the
Company's owned Residence Inn hotels reported REVPAR of $84.63 due to an average
daily rate of $99.40 and average occupancy of 85.1%.
Senior living community revenues increased by $5.1 million, or 2.1%, to
$246 million in 1999. The average daily rate increased 4.7% to $92.61, while
average occupancy decreased two and one-half percentage points to 89.7% due
mostly to the impact of the fill-up period for the expansions added in late 1998
and 1999 and additional supply in certain markets. On a comparable basis
(excluding communities which added units during 1998 or 1999), the average
occupancy decreased by over one percentage point to 90.7% in 1999. The revenue
growth is due to the addition of 317 expansion units in 1998 and 1999 and the
growth in the average daily rate. These factors driving revenue growth were
partially offset by a significant decrease in ancillary revenues due to a
reduction in therapy services in response to a change in the Medicare billing
process.
Operating Costs and Expenses. Hotel operating costs and expenses for the
Company's leased and subleased hotels principally consist of hotel property-
level operating costs and expenses plus hotel management fees and lease
expenses. Hotel operating costs and expenses for the Company's owned hotels
principally consist of hotel property-level operating costs and expenses plus
management fees, depreciation, property taxes, ground rent, insurance and
certain other costs. 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. Other operating costs and
expenses principally consist of asset management salary and related costs and
expenses and an impairment loss on one senior living community. The total
operating costs and expenses were $4.3 billion in 1999 and $204 million in 1998.
Hotel operating costs and expenses for 1999 were over $4.1 billion.
Operating costs and expenses for the Company's leased and subleased hotels were
nearly $4.1 billion in 1999, while owned hotel operating costs and expenses in
1999 were $22.6 million. Total hotel property-level operating costs and
expenses were $2.6 billion in 1999. Hotel management fees were $250 million,
while lease expense was almost $1.3 billion in 1999.
Senior living operating costs and expenses increased $2.3 million, or 1.1%,
to $206 million in 1999. Senior living community property-level operating costs
and expenses increased $1.8 million, or 1.1%, to $161 million in 1999. Other
operating costs and expenses increased $0.5 million, or 1.1%, to $45.1 million
in 1999. Other operating costs and expenses were impacted in 1999 by the
payment of central administrative fees to Marriott International in 1999 that
were waived through the second quarter of 1998. Excluding the payment of these
central administrative service fees through the second quarter of 1999, other
operating costs and expenses decreased by $0.8 million, or 1.7%, in 1999.
27
<PAGE>
Other operating costs and expenses were $9.9 million for 1999. Other
operating costs and expenses include a $3.5 million loss on impairment on one of
the Company's senior living communities.
Operating Profit. The Company's total operating profit for 1999 was $111
million compared to $37.2 million for 1998.
Hotel operating profit for 1999 was $74.9 million. Leased hotel operating
profit was $65.3 million, while the owned hotels contributed $9.6 million of
operating profit in 1999.
Senior living community operating profit increased $2.9 million, or 7.9%,
to $40.2 million in 1999. The increase in operating profit is primarily due to
the increases in revenues and improved operating margins of the communities,
partially offset by payment of central administrative service fees to Marriott
International in 1999, which were waived through the second quarter of 1998.
Excluding the impact of these central administrative service fees, operating
profit increased 11.3% in 1999. The Forum at Brookside, The Forum at Memorial
Woods and The Remington Club senior living communities performed particularly
well. The Company's independent living components posted strong results while
the assisted living and healthcare components did not perform as well due
mostly to the over-supply in the assisted living market.
Minority Interest Expense. Minority interest expense was $1.3 million in
1999, which is attributable to the minority interest in the Company's owned
hotels.
Corporate Expenses. Corporate expenses were $16.5 million in 1999 and $6.4
million in 1998.
Interest Expense. Interest expense was $27.7 million in 1999 and $22.9
million in 1998. Interest expense in 1999 includes $4.9 million related to
interest on the hotel working capital notes payable to Host Marriott.
Interest Income. Interest income was $2.3 million in 1999 and $2.0 million
in 1998.
Net Income. Net income in 1999 was $39.9 million, or $1.91 per diluted
share, compared to $5.9 million, or $.27 per diluted share in 1998.
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 million. During the period from June
21, 1997 through January 2, 1998, average occupancy of the senior living
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 senior
living 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.
Interest Expense. Interest expense was $13.4 million.
Net Income. Net income was $0.4 million.
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 for fiscal years 1998 and 1997 is more meaningful
and relevant in understanding the present and ongoing operations of the Company
than a discussion of the Company's
28
<PAGE>
historical results of operations for those periods. 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 fiscal year 1997:
. 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 121 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.
29
<PAGE>
The following table presents the results of operations for fiscal year 1999
on a historical basis and the results of operations for fiscal year 1998 and
fiscal year 1997 on the pro forma basis discussed above:
<TABLE>
<CAPTION>
Historical Pro Forma
------------- ----------------------------
1999 1998 1997
------------- ------------- -------------
(unaudited) (unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C>
Leased hotel revenues........................ $4,162,773 $4,053,091 $3,743,341
Owned hotel revenues......................... 32,217 - -
Senior living community revenues............. 246,498 241,445 222,789
Other revenues............................... 5,637 4,500 4,500
---------- ---------- ----------
Total revenues.......................... 4,447,125 4,299,036 3,970,630
---------- ---------- ----------
Leased hotel operating costs and expenses.... 4,097,477 4,008,227 3,703,877
Owned hotel operating costs and expenses..... 22,619 - -
Senior living community operating costs and
expenses................................... 206,330 204,191 189,467
Other operating costs and expenses........... 9,859 4,500 4,500
---------- ---------- ----------
Total operating costs and expenses...... 4,336,285 4,216,918 3,897,844
---------- ---------- ----------
Operating profit before minority interest,
corporate expenses and interest............ 110,840 82,118 72,786
Minority interest expense.................... (1,327) - -
Corporate expenses........................... (16,469) (17,376) (16,500)
Interest expense............................. (27,711) (22,937) (22,696)
Interest income.............................. 2,269 2,601 1,501
---------- ---------- ----------
Income before income taxes................... 67,602 44,406 35,091
Provision for income taxes................... (27,717) (18,206) (14,387)
---------- ---------- ----------
Net income................................... $ 39,885 $ 26,200 $ 20,704
========== ========== ==========
Basic earnings per share..................... $1.95 $1.19 $.95
========== ========== ==========
Diluted earnings per share................... $1.91 $1.19 $.95
========== ========== ==========
</TABLE>
Historical 1999 Compared to Pro Forma 1998
Revenues. Revenues primarily represent property-level revenues from owned,
leased and subleased hotels and owned senior living communities and asset
management fees. Revenues increased by $148 million, or 3.4%, to over $4.4
billion for 1999 from $4.3 billion in 1998.
Hotel revenues increased $142 million, or 3.5%, to almost $4.2 billion in
1999. The increase in hotel revenues is primarily due to the full-service hotel
room REVPAR growth and the incremental revenues from the acquisition of 11
limited-service hotels in the beginning of the second quarter of 1999, which
contributed $32.2 million of revenues in 1999. The leased hotel revenues
increased $110 million, or 2.7%, to nearly $4.2 billion in 1999. Improved
results for the Company's leased full-service hotels were driven by increases in
comparable REVPAR of 4.1% to $115.94 in 1999. Comparable average room rates for
the full-service properties increased 4.0%, while average occupancy increased
slightly to 77.7% in 1999. REVPAR for the Company's subleased Courtyard by
Marriott hotel properties increased 3.5% to $75.58 in 1999. The growth in
REVPAR is due to an increase in average room rates of 3.6%, although average
occupancy decreased slightly to 80.4% in 1999. REVPAR for the Company's
subleased Residence Inn properties decreased 2.4% to $83.79 in 1999, reflecting
the additional supply that has entered into the market. The decline in REVPAR
is due to a decrease in average occupancy of slightly over one percentage point
to 83.0% and a decrease in the average room rates of 1.2%. REVPAR for the
Company's owned Residence Inn properties was $84.63 as a result of an average
room rate of $99.40 and an average occupancy of 85.1%.
30
<PAGE>
Senior living community revenues increased by $5.1 million, or 2.1%, to
$246 million in 1999. The average daily rate increased 4.7% to $92.61, while
average occupancy decreased two and one-half percentage points to 89.7% due
mostly to the impact of the fill-up period for the expansions added in late 1998
and 1999 and additional supply in certain markets. On a comparable basis
(excluding communities which added units during 1998 or 1999), the average
occupancy decreased by over one percentage point to 90.7% in 1999. The revenue
growth is due to the addition of 317 expansion units in 1998 and 1999 and the
growth in the average daily rate. These factors driving revenue growth were
partially offset by a significant decrease in ancillary revenues due to a
reduction in therapy services in response to a change in Medicare
reimbursements.
Operating Costs and Expenses. Hotel operating costs and expenses for the
Company's leased and subleased hotels principally consist of hotel property-
level operating costs and expenses plus hotel management fees and lease
expenses. Hotel operating costs and expenses for the Company's owned hotels
principally consist of hotel property-level operating costs and expenses plus
management fees, depreciation, property taxes, ground rent, insurance and
certain other costs. 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. Other operating costs and
expenses principally consist of asset management salaries and related costs and
expenses and an impairment write-down of one senior living community. Total
operating costs and expenses increased $119 million, or 2.8%, to $4.3 billion in
1999.
Hotel operating costs and expenses increased $112 million, or 2.8%, to $4.1
billion in 1999. Leased hotel operating costs and expenses increased $89.3
million, or 2.2%, to $4.1 billion in 1999. Owned hotel operating costs and
expenses were $22.6 million in 1999. Hotel property-level operating costs and
expenses increased $74.1 million, or 2.9%, to $2.6 billion in 1999. Hotel
management fees increased $7.0 million, or 2.9%, to $250 million, while lease
expense increased $27.9 million, or 2.2%, to $1.3 billion in 1999.
Senior living operating costs and expenses increased $2.1 million, or 1.0%,
to $206 million in 1999. Senior living community property-level operating costs
and expenses increased $1.7 million, or 1.1% to $161 million in 1999. Other
operating costs and expenses increased $0.5 million, or 1.1%, to $45.1 million
in 1999. Other operating costs and expenses were impacted in 1999 by the payment
of central administrative fees to Marriott International in 1999 that were
waived through the second quarter of 1998. Excluding the payment of these
central administrative service fees through the second quarter of 1999, the
other operating costs and expenses decreased by $0.8 million, or 1.8%, in 1999.
Other operating costs and expenses increased $5.4 million to $9.9 million
in 1999. The increase is primarily attributable to a $3.5 million charge for
the impairment of one of the Company's senior living communities.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, the Company's total operating profit
increased $28.7 million, or 35%, to $111 million in 1999.
Total hotel operating profit increased $30.0 million, or 67%, to $74.9
million in 1999. Leased hotel operating profit increased $20.4 million, or 46%,
to $65.3 million in 1999. The significant increase in leased hotel operating
profit is attributable mostly to cost controls implemented by the managers of
our hotel properties. Leased hotels in the New York and Los Angeles markets
generally reported significant improvements in operating profit for 1999. Hotel
operating profit for the Company's owned limited-service hotels was $9.6 million
in 1999.
Senior living community operating profit increased $2.9 million, or 7.8%,
to $40.2 million in 1999. The increase in operating profit is primarily due to
the increases in the revenues and improved operating margins of the communities,
partially offset by payment of central administrative service fees to Marriott
International in 1999, which were waived through the second quarter of 1998. The
Forum at Brookside, Forum at Memorial Woods and The Remington Club senior living
communities performed particularly well. The Company's independent living
components posted strong results while the assisted living and healthcare
components did not perform as well due mostly to the over-supply in the assisted
living market.
31
<PAGE>
Total operating profit was negatively impacted in 1999 from the $3.5
million loss on impairment from one of the senior living communities. Excluding
the impairment loss, total operating profit increased by 39% in 1999.
Minority Interest Expense. Minority interest expense was $1.3 million
in 1999, which is attributable to the minority interest in the Company's owned
hotels.
Corporate Expenses. Corporate expenses decreased $0.9 million, or 5.2%, to
$16.5 million. As a percentage of total revenues, corporate expenses were 0.4%
in both 1999 and 1998.
Interest Expense. Interest expense increased $4.8 million to $27.7 million
in 1999 due primarily to the interest on mortgage debt assumed in conjunction
with the acquisition of a controlling interest in 11 limited-service hotels in
the second quarter of 1999 and draws on the Company's line of credit in 1999.
Interest expense includes $4.9 million in both 1999 and 1998 related to interest
on the hotel working capital notes payable to Host Marriott.
Interest Income. Interest income decreased $0.3 million to $2.3 million in
1999.
Net Income. Net income for 1999 was $39.9 million, or $1.91 per diluted
share, compared to $26.2 million, or $1.19 per diluted share, for 1998. The 61%
increase in diluted earnings per share in 1999 was due to the strong growth of
operating profit as discussed above as well as a reduction of the Company's
common stock outstanding due to the stock repurchases during 1999.
Pro Forma 1998 Compared to Pro Forma 1997
Revenues. Revenues primarily represent property-level revenues from leased
and subleased hotels and owned senior living communities and asset management
fees. Revenues increased by $328 million, or 8.3%, to $4.3 billion for 1998 from
nearly $4.0 billion for 1997.
Hotel revenues increased $310 million, or 8.3%, to almost $4.1 billion 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 million. For 1998, 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 over $4.2 billion in 1998.
Overall hotel operating costs and expenses increased $304 million, or
8.2%, to $4.0 billion. Hotel property-level operating costs and expenses
increased $190 million, or 8.2% to $2.5 billion. Hotel management fees
increased $18.6 million, or 8.3%, to $243 million, while lease expense increased
$95.7 million, or 8.3%, to over $1.2 billion.
Overall senior living operating costs and expenses increased $14.7 million,
or 7.8%, to $204 million for 1998. Senior living community property-level
operating costs and expenses increased $13.7 million, or 9.4%, to $159 million,
32
<PAGE>
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 senior living
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 senior living 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, Forum at Deer Creek, Leisure Park and 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, or $1.19 per diluted
share, compared to $20.7 million, or $.95 per diluted share, for 1997.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash on hand, cash flow
from operations and borrowings under its secured, three year $100 million line
of credit (the "Line of Credit"). As of December 31, 1999, the Company had cash
and cash equivalents of $36.8 million.
Cash Flows. Cash from operations was $104 million for fiscal year 1999.
In addition to the cash flow generated by the operations of the Company's hotels
and senior living communities, a significant amount of the cash from operations
is a result of the timing between the cash received from the hotel managers for
the leased hotel operating results and the lease payment to the hotel owner. As
of December 31, 1999, the lease payable to the hotel owner exceeded the
receivable from the hotel managers by $27.9 million.
Cash used in investing activities was $69.7 million in fiscal year 1999.
The cash used in investing activities principally consisted of capital
expenditures for renewals and replacements of the Company's senior living
communities and owned hotels, expansions for its senior living communities, the
acquisition of a controlling interest in a partnership that owned eleven
limited-service hotels, and the purchase of the remaining limited partnership
interest in subsidiaries that own some of the Company's senior living
communities.
Cash used in financing activities was $64.4 million for fiscal year 1999.
The Company's cash used in financing activities consists primarily of
repurchases of the Company's common stock and debt principal payments, partially
offset by draws on the Line of Credit.
Investments. On March 29, 1999, the Company acquired a 74% limited partner
interest in the Marriott Residence Inn USA Limited Partnership ("Residence Inn
USA") from a private investor for $34.4 million in cash and
33
<PAGE>
the consolidation of $54.5 million of debt for a total consideration of $89
million. In subsequent separate transactions, the Company acquired an additional
3% limited partner interest in Residence Inn USA in the second quarter of 1999
for $1.6 million in cash and the 5% general partner interest in Residence Inn
USA from Host Marriott in the third quarter of 1999 for $2.7 million in cash
increasing the Company's ownership to an 82% interest. Residence Inn USA owns
eleven Residence Inn limited-service hotels that are managed by Marriott
International under a long-term management agreement. In February 2000, the
Company sold one of the Residence Inns for a net sales price of $6.2 million.
In 1999, the Company entered into a joint venture ("Portsmouth Hotel
Associates LLC" or "PHA") with Stormont Trice Development Corporation ("STDC"),
an affiliate of Stormont Trice, to acquire the 250-room Portsmouth Renaissance
Hotel and Waterfront Conference Center in Portsmouth, Virginia upon its
completion of construction. The hotel and conference center are scheduled to
open in October 2000. The Company owns a majority interest in PHA. PHA entered
into a development agreement with STDC to develop the hotel and conference
center; in lieu of a development fee for the hotel, STDC received an equity
interest in PHA. The total cost of the project is expected to be approximately
$48 million financed through a $32.7 million grant from the city of Portsmouth
and $15.6 million from PHA, consisting of a $12.6 million mortgage loan, a $2
million equity contribution from the Company and a $1 million equity
contribution from STDC in the form of the forgiven hotel development fee. PHA
will lease the hotel and conference center from the city of Portsmouth for a
period of 50 years plus four 10-year renewal periods and one nine-year renewal
period. The Company will manage the hotel and conference center under a long-
term management agreement with PHA pursuant to a franchise agreement with
Marriott International.
In February 2000, the Company also entered into an agreement to acquire the
205-room Courtyard by Marriott in the Inner Harbor of Baltimore, Maryland for
$20.8 million upon the completion of construction. The hotel is scheduled to
open in November 2000. The Company will manage the hotel pursuant to a
franchise agreement with Marriott International.
In March 2000, the Company also purchased the hotel management business of
Stormont Trice for $9.7 million plus a contingent purchase price of up to an
additional $4.5 million if certain performance criteria are met. Pursuant to
the acquisition, the existing management contracts for nine hotels and four
conference centers (including the Portsmouth Renaissance Hotel and Waterfront
Conference Center and Baltimore Inner Harbor Courtyard currently under
construction) and lease agreements for two hotels were assigned to the Company.
The terms, including renewal periods, of the management and lease agreements
range from three to 26 years with an average remaining life of 16 years. Under
the management and lease agreements, the Company earns a base management fee
generally equal to 2% to 5% of revenues plus in some cases, an incentive
management fee generally equal to 10% to 25% of operating profit after a
priority to the owner. Under the lease agreements, the Company pays a fixed
minimum rent plus a percentage of revenues and retains all cash flow after rent.
The hotels are generally managed under franchise agreements that were assigned
to the Company and are operated under the Marriott, Renaissance, Courtyard by
Marriott and Residence Inn brand names. Under the franchise agreements, the
Company pays a franchise fee generally equal to 3% to 6% of certain revenues.
Also, in March 2000, the Company purchased the hotel management business of
Durbin for $4.4 million, plus a contingent purchase price of $500,000 if one of
the leases is renewed under certain conditions, pursuant to which the existing
management contracts for ten hotels and lease agreements for two hotels were
assigned to the Company. The terms, including renewal periods, of the
management and lease agreements range from three to 47 years with an average
remaining life of 15 years. Under its management agreements, the Company earns
a base management fee generally equal to 2% to 4% of revenues plus, in some
cases, an incentive management fee generally equal to 10% to 20% of operating
profit after a priority to the owner. Under its lease agreements, the Company
pays a fixed minimum rent plus a percentage of revenues and retains all cash
flow after rent. All of the hotels are managed under franchise agreements that
were assigned to the Company and are operated under the Marriott, Hilton,
Courtyard by Marriott, Crowne Plaza, Holiday Inn and Ramada brand names. Under
the franchise agreements, the Company pays a franchise fee generally equal to 3%
to 6% of certain revenues.
In 1999, the Company opened 241 units at five senior living communities at
a cost of approximately $23 million, which was the final phase of a four-year
$88 million expansion program that ultimately resulted in the addition of 865
units to 21 of the Company's senior living communities. Payments totaling $5
million for one of the senior living expansions that opened in 1999 and other
construction holdbacks were made in early 2000.
34
<PAGE>
During 1998, the Company acquired additional limited partnership interests
at a cost of $9.6 million in CCC Retirement Partners, LP, a partnership that
owns nine senior living communities, which increased the Company's ownership
percentage to 93%. In 1999, the Company acquired the remaining 7% limited
partnership interests for $6.7 million.
In 1998, the Company entered into conditional purchase agreements to
acquire two senior living communities in Denver and Colorado Springs, Colorado
for $35 million. The two communities opened in the third quarter of 1999. The
Company has the option to purchase the communities one year after the opening
dates and may terminate the purchase agreements without penalty. The Company
provided a $3.5 million loan to the developer to partially finance the
construction of one of the communities, which is secured by a second mortgage on
that community. Both communities are managed by MSLS under long-term operating
agreements.
Under the terms of its owned hotel and senior living community management
and 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 routine repairs and maintenance which are normally
capitalized and replacements and renewals to the owned hotels' and senior living
communities' property and improvements. The amount the Company is required to
contribute to the owned hotel FF&E Reserves is 5% of revenues. The amount the
Company is required to contribute to the senior living community FF&E Reserves
varies among the individual senior living 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
$9 million in 2000 to the FF&E Reserves. Also, the Company is required under
the owned hotels' and senior living communities' management and operating
agreements to separately fund the cost of certain repairs, alterations,
improvements, renewals and replacements to the owned hotel and senior living
communities which are considered major or non-routine in nature.
In 1999, Host Marriott sold five full-service hotels. Pursuant to the
lease agreements with Host Marriott for these full-service hotels, the leases
were terminated reducing the Company's full-service hotel lease portfolio to 116
leases.
In 1999, the Company exercised its right to terminate the full-service
hotel leases on five hotels. The existing leases will terminate in fiscal year
2000, 180 days after each respective termination notification date, unless the
existing leases are modified as a result of negotiations between the Company and
Host Marriott.
Stock Repurchases. In 1999, the Company's Board of Directors authorized
the Company to repurchase shares of the Company's common stock. During 1999,
the Company repurchased 5.3 million shares of its common stock for $100 million.
As of December 31, 1999, the Company had authorization from its Board of
Directors to purchase an additional 353,000 shares of its common stock.
In the third quarter of 1999, the Company initiated a stock purchase loan
program whereby certain Company executives could purchase Company common stock
at market prices through loans from the Company. During 1999, certain
executives purchased approximately 149,000 shares of common stock for $2.6
million. The loans are secured by the common stock purchased and are recourse
to the executives.
Debt. On April 15, 1999, Crestline Ventures LLC ("Ventures"), a subsidiary
of the Company, entered into the Line of Credit for funding future investments
in the lodging and senior living industries and for general corporate purposes.
The Line of Credit bears interest at a Eurodollar rate plus 2.75%. An annual fee
of .25% is charged on the unused portion of the commitment. The Line of Credit
is secured by substantially all of the assets of Ventures and its subsidiaries,
consisting of eight senior living communities, and is also guaranteed by the
Company and certain subsidiaries of the Company. As of December 31, 1999, the
Company had $45 million outstanding under the Line of Credit at interest rates
varying from 8.81% to 8.94%.
35
<PAGE>
In connection with the Company's acquisition of Residence Inn USA in 1999,
the Company consolidated the debt of the partnership totaling $54.5 million at
the date of acquisition. The debt was secured by mortgages on ten of the
hotels, bore interest at 330 basis points over the 90-day Eurodollar rate and
matured on December 29, 1999. On December 29, 1999, the Company entered into a
new loan agreement to provide $55.6 million of fixed rate, non-recourse debt
financing with the proceeds from the issuance used to repay the existing
indebtedness and refinancing costs. The new loan is also secured by mortgages
on ten of the hotels. The new loan bears interest at 8.08% and has a scheduled
maturity of January 1, 2010.
A subsidiary of the Company owns nine senior living communities which are
subject to mortgages that mature in January 2001. In January 2000, the loan was
prepayable without premium or penalty. The loan bears interest at 9.93%.
Consent of the lender is necessary for any (i) amendments to the operating
agreements, (ii) replacement of the manager, (iii) sale of a community or (iv)
other financing. As of December 31, 1999, $44.2 million remains outstanding,
excluding debt premiums. The Company intends to refinance this debt in the
second quarter of 2000.
Two subsidiaries of the Company own a total of eight senior living
communities that are subject to mortgages. The loan is supported by two
promissory notes in the amounts 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 senior living 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 the lender is necessary for any (i) amendments to the
operating agreements, (ii) replacement of the manager, (iii) sale of a senior
living community, (iv) other financing or (v) changes to existing ground leases.
As of December 31, 1999, $119.4 million remains outstanding, excluding debt
premiums.
A subsidiary of the Company that owns one senior living community has
outstanding $14.7 million in tax free bonds held by outside bondholders (the
"Bonds"). The 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 Bonds.
Upon the commencement of the hotel leases, the Company purchased the
working capital of the hotels from Host Marriott 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. As of
December 31, 1999, the outstanding balance under the working capital notes was
$89.7 million.
EBITDA
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") on a historical
basis was $121.4 million in 1999, $55.0 million in 1998 and $24.6 million for
the period from June 21, 1997 through January 2, 1998.
36
<PAGE>
The following is a reconciliation of historical EBITDA to the Company's net
income:
<TABLE>
<CAPTION>
Period from
June 21, 1997
Fiscal Year through
--------------------- January 2,
1999 1998 1998
-------- -------- -------------
(in thousands)
<S> <C> <C> <C>
EBITDA....................................... $121,428 $ 55,002 $ 24,638
Interest expense............................. (27,711) (22,861) (13,396)
Hotel working capital note interest expense.. 4,856 - -
Depreciation and amortization................ (25,304) (22,115) (10,635)
Income taxes................................. (27,717) (4,111) (249)
Other non-cash charges, net.................. (5,667) - -
-------- -------- --------
Net income.................................. $ 39,885 $ 5,915 $ 358
======== ======== ========
</TABLE>
The Company's interest coverage was 5.1 times for 1999, 2.3 times for 1998
and 1.7 times for the period from June 21, 1997 through January 2, 1998.
Interest coverage is calculated as EBITDA divided by cash interest expense,
which is defined as GAAP interest expense less amortization of deferred
financing costs, amortization of debt premiums and the interest on the hotel
working capital notes. The ratio of earnings to fixed charges was 1.1 to 1.0
for 1999, 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 historical fiscal year 1999 EBITDA increased $35.1 million,
or 40.6%, to $121.4 million compared to pro forma fiscal year 1998. The
Company's pro forma EBITDA increased $9.0 million, or 11.6%, to $86.4 million in
fiscal year 1998 as compared to fiscal year 1997.
The following is a reconciliation of historical and pro forma EBITDA to the
Company's historical and pro forma net income:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------
Historical Pro Forma
----------- ---------------------
1999 1998 1997
----------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
EBITDA....................................... $121,428 $ 86,371 $ 77,360
Interest expense............................. (27,711) (22,937) (22,696)
Hotel working capital note interest expense.. 4,856 4,864 4,864
Depreciation and amortization................ (25,304) (22,892) (23,437)
Income taxes................................. (27,717) (18,206) (14,387)
Other non-cash charges, net.................. (5,667) (1,000) (1,000)
-------- -------- --------
Net income.............................. $ 39,885 $ 26,200 $ 20,704
======== ======== ========
</TABLE>
The Company's interest coverage was 5.1 times for fiscal year 1999, 4.4
times for pro forma fiscal year 1998 and 4.1 times for pro forma fiscal year
1997. The pro forma ratio of earnings to fixed charges was 1.1 to 1.0 for
fiscal year 1999, 1.1 to 1.0 for pro forma fiscal year 1998 and 1.1 to 1.0 for
pro forma 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 and is used
in the Company's Line of Credit as part of the tests determining its ability to
incur debt and to meet certain covenants. 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.
37
<PAGE>
Inflation
The Company's hotels and senior living communities are impacted by
inflation through its effect on increasing costs and on the managers' ability to
increase rates. Unlike other real estate, the Company believes that hotels have
the ability to change room rates on a daily basis, so the impact of higher
inflation generally can be passed on to customers. The rates charged for the
delivery of services at the Company's senior living communities are highly
dependent upon local market conditions and the competitive environment in which
the senior living 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.
Impact of Financial Accounting Standards
During 1999, the Company adopted Statements of Financial Accounting
Standards ("SFAS") No. 133, "Accounting For Derivatives Instruments and Hedging
Activities". The adoption of SFAS No. 133 did not have a material effect on the
Company's consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have significant market risk with respect to foreign
currency exchanges or other market rate or price risks, and the Company does not
hold any financial instruments for trading purposes. The table below provides
information about our debt obligations that are sensitive to changes in interest
rates.
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------- Fair
2000 2001 2002 2003 2004 Thereafter Total Value
- ------------------------------- ------- ------- ------- ------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate debt obligations (1)
Line of Credit................. $ - $ - $45,000 $ - $ - $ - $45,000 $45,000
Interest rate (2).............. - - 8.75% - - -
</TABLE>
- -----------
(1) The Company's fixed rate debt, excluding debt premiums and the hotel working
capital notes, totaled $246 million at December 31, 1999 with an average
interest rate of 9.26% and an average maturity of 12 years.
(2) Interest rate is equal to a Eurodollar rate plus 275 basis points with any
outstanding amount due on April 15, 2002. The 3-month Eurodollar rate at
December 31, 1999 was 6.0%.
38
<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.................................................. 40
Consolidated Balance Sheets as of December 31, 1999 and January 1, 1999................... 41
Consolidated Statements of Operations for the Fiscal Years Ended December 31, 1999 and
January 1, 1999 and the Period from June 21, 1997 (inception) through January 2, 1998... 42
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
December 31, 1999 and January 1, 1999 and the Period from June 21, 1997 (inception)
through January 2, 1998................................................................. 43
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 1999 and
January 1, 1999 and the Period from June 21, 1997 (inception) through January 2, 1998... 44
Notes to Consolidated Financial Statements................................................ 45
Forum Group, Inc. and Subsidiaries, as Partitioned for Sale to Host Marriott Corporation
Report of Independent Public Accountants.................................................. 65
Consolidated Statement of Operations for the Twenty-four Week Period Ended June 20, 1997.. 66
Consolidated Statement of Cash Flows for the Twenty-four Week Period Ended June 20, 1997.. 67
Notes to Consolidated Financial Statements................................................ 68
</TABLE>
39
<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 Maryland corporation) as of December 31,
1999 and January 1, 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for the fiscal years ended December 31, 1999
and January 1, 1999 and for the period from June 21, 1997 (inception) through
January 2, 1998. These consolidated financial statements and 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Crestline
Capital Corporation and its subsidiaries as of December 31, 1999 and January 1,
1999 and the results of their operations and their cash flows for the fiscal
years ended December 31, 1999 and January 1, 1999 and for the period from June
21, 1997 (inception) through January 2, 1998, in conformity with accounting
principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index at Item 14(a)(2) is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated 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
Vienna, Virginia
February 24, 2000
40
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and January 1, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net.................... $745,615 $655,745
Hotel working capital.......................... 89,650 95,114
Due from hotel managers........................ 42,259 -
Due from Marriott Senior Living Services, net.. 5,729 8,884
Other assets................................... 44,841 32,231
Cash and cash equivalents...................... 36,774 66,779
-------- --------
$964,868 $858,753
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Mortgage debt................................. $279,271 $183,059
Other debt.................................... 26,946 30,017
-------- --------
306,217 213,076
Hotel working capital notes payable to
Host Marriott................................ 89,650 95,114
-------- --------
Total debt................................... 395,867 308,190
Accounts payable and accrued expenses.......... 16,912 6,438
Lease payable to Host Marriott................. 61,315 -
Deferred income taxes.......................... 63,940 61,353
Other liabilities.............................. 26,086 23,518
-------- --------
Total liabilities........................... 564,120 399,499
-------- --------
Shareholders' equity:
Common stock, 75.0 million shares authorized,
22.3 million and 21.9 million shares issued,
respectively, $.01 par value................ 223 219
Additional paid-in capital................... 451,639 452,762
Retained earnings............................ 46,158 6,273
Treasury stock, 5.1 million shares........... (97,272) -
-------- --------
Total shareholders' equity.................. 400,748 459,254
-------- --------
$964,868 $858,753
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended December 31, 1999 and 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
January 2,
1999 1998 1998
---------- ---------- ------------
<S> <C> <C> <C>
REVENUES
Hotels
Rooms.................................................... $2,687,437 $ - $ -
Food and beverage........................................ 1,206,391 - -
Other.................................................... 301,162 - -
---------- ---------- ----------
Total hotel revenues.................................... 4,194,990 - -
---------- ---------- ----------
Senior living
Routine.................................................. 223,794 213,378 98,531
Ancillary................................................ 22,704 27,899 12,438
---------- ---------- ----------
Total senior living revenues............................ 246,498 241,277 110,969
---------- ---------- ----------
Other revenues............................................ 4,770 - -
Equity in earnings of affiliates.......................... 867 - -
---------- ---------- ----------
Total revenues........................................... 4,447,125 241,277 110,969
---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level operating costs and expenses
Rooms................................................... 633,771 - -
Food and beverage....................................... 891,670 - -
Other................................................... 1,061,249 - -
Other operating costs and expenses
Lease expense paid to Host Marriott..................... 1,280,321 - -
Management fees......................................... 250,151 - -
Depreciation and amortization........................... 2,934 - -
---------- ---------- ----------
Total hotel operating costs and
expenses.............................................. 4,120,096 - -
---------- ---------- ----------
Senior living
Property-level operating costs and expenses
Routine................................................. 145,778 138,099 63,814
Ancillary............................................... 15,414 21,317 10,255
Other operating costs and expenses
Depreciation and amortization........................... 21,624 22,115 10,635
Management fees paid to Marriott International.......... 14,965 13,973 6,481
Property taxes and other................................ 8,549 8,554 3,813
---------- ---------- ----------
Total senior living operating costs and expenses....... 206,330 204,058 94,998
---------- ---------- ----------
Other operating costs and expenses........................ 9,859 - -
---------- ---------- ----------
Total operating costs and expenses...................... 4,336,285 204,058 94,998
---------- ---------- ----------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST..................................... 110,840 37,219 15,971
Minority interest expense.................................. (1,327) - -
Corporate expenses......................................... (16,469) (6,360) (2,304)
Interest expense........................................... (27,711) (22,861) (13,396)
Interest income............................................ 2,269 2,028 336
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................ 67,602 10,026 607
Provision for income taxes................................ (27,717) (4,111) (249)
---------- ---------- ----------
NET INCOME................................................ $ 39,885 $ 5,915 $ 358
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE........................... $ 1.95 $ .27 $ .02
========== ========= =========
DILUTED EARNINGS PER COMMON SHARE......................... $ 1.91 $ .27 $ .02
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended December 31, 1999 and January 1, 1999 and
for the period from June 21, 1997 (inception) through January 2, 1998
(in thousands)
<TABLE>
<CAPTION>
Shares
- ------------------------ Additional
Common Treasury Common Paid-in Retained Treasury
Stock Stock Stock Capital Earnings Stock
- ----------- -------- ------- ---------- -------- ----------
<C> <C> <S> <C> <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 -- --
21,926 -- Distribution of the Company............. 219 (219) -- --
-- -- Net income.............................. -- -- 5,915 --
-------- -------- ------- -------- ------- --------
21,926 -- Balance, January 1, 1999................. 219 452,762 6,273 --
-- 5,260 Repurchase of common stock.............. -- -- -- (99,917)
Common stock issued for the
389 (149) comprehensive stock plan............... 4 (1,123) -- 2,645
-- -- Net income.............................. -- -- 39,885 --
-------- -------- ------- -------- ------- --------
22,315 5,111 Balance, December 31, 1999............... $223 $451,639 $46,158 $(97,272)
======== ======== ======= ======== ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 31, 1999 and 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)
through
January 2,
1999 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income..................................................... $ 39,885 $ 5,915 $ 358
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization................................ 25,304 22,115 10,635
Loss on impairment of asset.................................. 3,522 - -
Amortization of debt premiums and deferred financing costs... (822) (1,550) (834)
Income taxes................................................. 2,816 4,111 249
Change in amounts due from Marriott Senior Living Services... 2,156 (10,934) 10,073
Change in amounts due from hotel managers, net............... (32,359) - -
Change in lease payable to Host Marriott..................... 61,315 - -
Other........................................................ (3,228) - (997)
Change in other operating accounts........................... 5,543 9,330 5,892
-------- -------- ---------
Cash from operations........................................... 104,132 28,987 25,376
-------- -------- ---------
INVESTING ACTIVITIES
Acquisition of hotel properties, net of cash acquired......... (30,147) - -
Expansions of senior living communities....................... (18,451) (8,653) (30,782)
Purchase of minority interests in senior living partnerships.. (7,010) - -
Purchase of investments in affiliates......................... - (10,926) -
Other capital expenditures.................................... (11,630) (7,087) (2,563)
Increase in capital improvement reserve....................... (529) (2,432) (67)
Other......................................................... (1,939) (1,000) -
-------- -------- ---------
Cash used in investing activities.............................. (69,706) (30,098) (33,412)
-------- -------- ---------
FINANCING ACTIVITIES
Repurchases of common stock................................... (99,917) - -
Repayments of debt............................................ (60,375) (3,608) (2,142)
Issuances of debt............................................. 55,588 1,700 20,407
Draws on line of credit....................................... 45,000 - -
Contribution of cash from Host Marriott....................... - 52,250 7,319
Other......................................................... (4,727) (96) 96
-------- -------- ---------
Cash provided by (used in) financing activities................ (64,431) 50,246 25,680
-------- -------- ---------
Increase (decrease) in cash and cash equivalents............... (30,005) 49,135 17,644
Cash and cash equivalents, beginning of period................. 66,779 17,644 --
-------- -------- ---------
Cash and cash equivalents, end of period....................... $ 36,774 $ 66,779 $ 17,644
======== ======== =========
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Assumption of mortgage debt from the purchase of a
controlling interest in hotel properties..................... $ 54,478 $ - $ -
Hotel working capital notes issued in exchange for
hotel working capital........................................ - 95,114 -
Sale of common stock to executives through loans.............. 2,645 - -
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
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE>
1. Summary of Significant Accounting Policies
Basis of Presentation and Organization
On December 29, 1998 (the "Distribution Date"), Crestline Capital
Corporation (the "Company," formerly known as HMC Senior Communities, Inc.), a
Maryland corporation, 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 converted into 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
December 31, 1999, the Company leased or subleased 116 full-service and 71
limited-service hotels, owned a controlling interest in 11 limited-service
hotels and owned 31 senior living 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 senior
living 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. 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.
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
25 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.
45
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues
Hotel revenues for the Company's owned and leased hotels consist of the
property-level revenues generated by the hotels.
Senior living revenues represent community operating 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. Ancillary revenue 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 was 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.
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 1997 and there were no material audit adjustments.
Medicare and Medicaid represented 7% and 3%, respectively, of senior living
revenues for fiscal year 1999, 10% and 2%, respectively, of senior living
revenues for fiscal year 1998 and 11% and 3%, respectively, of senior living
revenues for the period from June 21, 1997 (inception) through January 2, 1998.
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. For fiscal
year 1998 and the period from June 21, 1997 (inception) through January 2, 1998,
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)
through January 2,
1999 1998 1998
------ ------ ------------------
(in thousands)
<S> <C> <C> <C>
Weighted average number of common shares outstanding..... 20,423 21,626 21,536
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed
purchased at average market price...................... 417 30 -
------ ------ ------
Shares utilized for the calculation of diluted earnings
per share............................................. 20,840 21,656 21,536
====== ====== ======
</TABLE>
46
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $2,357,000 and $10,828,000 at December 31, 1999 and January 1, 1999,
respectively, of cash related to certain consolidated partnerships, the use of
which is restricted generally for partnership purposes to the extent it is not
distributed to the partners.
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 property, 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 property. Otherwise, impairment is assessed based on whether it
is probable that undiscounted future cash flows from each property will be less
than its net book value. If a property 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 senior living 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,
however, the net working capital advanced is included in due from Marriott
Senior Living Services on 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 its 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
47
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Deferred Charges
Financing costs related to long-term debt are deferred and amortized over
the remaining life of the debt.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Statements of Financial Accounting Standards
During 1999, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting For Derivative Instruments and Hedging
Activities." The adoption of SFAS No. 133 did not have a material effect on the
Company's consolidated financial statements.
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 converted into
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
1999, Host Marriott sold five of the leased full-service hotels, and the Company
and Host Marriott agreed to terminate the leases reducing the number of hotels
leased from Host Marriott to 116 full-service hotels. Upon the commencement of
the hotel leases and subleases, the Company purchased the working capital of the
hotels from Host
48
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
SwissHotel 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 five hotel properties owned by Host Marriott for $6.4
million.
In connection with the Distribution, the Company entered into an asset
management agreement (the "Asset Management Agreement") 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
term of the Asset Management Agreement is for two years with an automatic one-
year renewal.
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 non-competition agreement with Host
Marriott.
In connection with the Distribution, the Company is also bound by a non-
competition agreement with Marriott International pursuant to which the Company
is generally prohibited prior to October 8, 2000, subject to limited exceptions,
from entering into or acquiring any business that competes with the hotel
management business of Marriott International. Certain activities are permitted
however, including: (1) the operation of an unlimited number of limited-service
hotel properties as long as the Company does not operate more than ten such
properties under a common name; (2) contracting with a third party manager for
operation of an unlimited number of limited-service hotel properties, so long as
the number of properties under such third party management is no more than the
greater of (a) ten such properties operated under a common name or (b) 25% of
the system operated by such third party manager under a common name; (3)
contracting with a third party manager for operation of an unlimited number of
full-service hotels having the same brand name as one of Host Marriott's hotels,
so long as the number of properties under such third party management is not
more than the greater of (a) five such properties operated under a common name
or (b) 12.5% of the system operated by such third party manager under a common
name; and (4) franchising of an unlimited number of limited-service hotel
properties so long as the Company is not franchisor for more than ten such
properties under a common name.
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 and a tax sharing agreement. These agreements provide, among other
things, for the allocation of assets and liabilities between the Company and
Host Marriott and a guarantee by Host Marriott of certain Company debt
obligations.
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 121 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 8); and
. the 1998 acquisition of minority interests in certain consolidated
subsidiaries.
49
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Land........................................................ $121,706 $113,802
Buildings and leasehold improvements........................ 622,019 542,201
Furniture and equipment..................................... 59,959 32,492
---------- ----------
803,684 688,495
Less accumulated depreciation and amortization.............. (58,069) (32,750)
---------- ----------
$745,615 $655,745
========== ==========
</TABLE>
In 1999, the Company determined that one of its senior living communities
was impaired as a result of a deterioration of the community's operating results
due to its size and age and the new supply in its market. The Company recorded
a $3,522,000 pre-tax charge, which is included in other operating costs and
expenses on the accompanying consolidated statements of operations, to reduce
the net book value of the property to its fair value.
4. Restricted Cash
Restricted cash, which is included in other assets on the accompanying
consolidated balance sheets, consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Debt service reserves......................................... $ 2,602 $1,624
Fixed asset reserves.......................................... 7,866 6,732
Real estate tax reserves...................................... 4,711 4,032
Insurance reserves............................................ 3,364 2,503
Other......................................................... 4,519 -
-------- -------
$23,062 $14,891
======== =======
</TABLE>
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 Company's owned hotel and senior living 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 owned hotel and senior
living community management and operating agreements to fund certain capital
expenditures at the owned hotels and senior living 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.
50
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Leases
The Company is the lessee under capital and operating leases. Future
minimum annual rental commitments for all non-cancelable leases as of December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
(in thousands)
<S> <C> <C>
2000.......................................... $ 1,220 $ 753,252
2001.......................................... 1,240 744,039
2002.......................................... 1,258 742,287
2003.......................................... 1,477 742,311
2004.......................................... 1,384 727,320
Thereafter.................................... 9,776 2,216,311
------- ----------
Total minimum lease payments.................. 16,355 $5,925,520
======= ==========
Less amount representing interest............. (6,078)
-------
Present value of minimum lease payments....... $10,277
=======
</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. In 1999, Host Marriott sold five
of the leased hotels, resulting in the termination of the applicable Hotel
Lease. Each Hotel Lease has an initial term generally ranging from seven to ten
years. The Hotel Leases have four seven-year renewal options at the option of
the Company, however, Host Marriott may terminate any unexercised renewal
options. 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 is increased each year based upon 50% of the increase in
CPI during the previous twelve months. Percentage rent thresholds are be
increased each year based on a blend of the 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 rent during any renewal periods
will be negotiated at fair market value at the time the renewal option is
exercised.
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, equipment rent, 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 generally have to purchase the Company's
interest in the Hotel Lease with the purchase price 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, in lieu of
payment of the purchase price. In addition, Host Marriott also has the right to
terminate up to twelve Hotel Leases in connection with the sale of a leased
hotel without having to pay a termination fee. During 1999, Host Marriott
exercised its right to terminate three Hotel Leases without paying a termination
fee for
51
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
full-service hotels that were sold during 1999. The other two hotels sold by
Host Marriott in 1999 did not have termination fee provisions due to the pending
sale of the hotels at the inception of the leases. Conversely, the Company may
terminate up to twelve full-service Hotel Leases without penalty upon 180 days
notice to Host Marriott. During 1999, the Company exercised its right to
terminate five Hotel Leases. The Company may renegotiate the terms of these
Hotel Leases with Host Marriott. If these five Hotel Leases are not
renegotiated, they will terminate in fiscal year 2000, 180 days after each
respective notification date.
As a result of the recent tax legislation discussed below, Host Marriott
may purchase all, but not less than all, of the Hotel Leases beginning January
1, 2001 with the purchase price calculated as discussed above. 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.
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 plus (ii) an additional rent based upon a
specified
52
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
As a result of the recent tax legislation discussed below, Host Marriott
may terminate all, but not less than all, of the Subleases beginning January 1,
2001 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.
Recent Tax Legislation
On December 17, 1999, President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effective January 1, 2001, will allow a REIT to lease hotels to a "taxable REIT
subsidiary" if the hotel is operated and managed on behalf of such subsidiary by
an independent third party. A taxable REIT subsidiary is a corporation that is
owned more than 35 percent by a REIT. This law will enable Host Marriott,
beginning in 2001, to lease its hotels to a taxable REIT subsidiary. Host
Marriott may, at its discretion, elect to terminate the Company's leases,
beginning in 2001, and pay termination fees determined according to formulas
specified in the leases. If Host Marriott elects to terminate the Hotel Leases,
it would have to terminate all of the full-service Hotel Leases. Similarly, if
Host Marriott elects to terminate the subleases for the limited-service hotels,
it would have to terminate all of the Subleases.
Senior Living Leases
The Company leases two senior living 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 years 1999 and 1998 and the period from June 21,
1997 (inception) through January 2, 1998 was as follows:
<TABLE>
<CAPTION>
Period from
June 21, 1997 (inception)
through
1999 1998 January 2, 1998
-------- -------- --------------------------
(in thousands)
<S> <C> <C> <C>
Base rent.................................. $760,039 $279 $ 141
Percentage rent............................ 524,959 - -
--------- ------- --------
$1,284,998 $ 279 $ 141
========== ======= ========
</TABLE>
53
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Hotel Management Agreements
All of the Company's owned, leased and subleased hotels are operated by
hotel management companies under long-term hotel management agreements (the
"Hotel Management Agreements").
Assignment of Hotel Management Agreements for Leased and Subleased Hotels
The existing Hotel Management Agreements for the leased and subleased
hotels 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 real estate and personal property
taxes, property casualty insurance, equipment rent, ground lease rent,
maintaining a reserve fund for FF&E replacements and capital expenditures, for
which Host Marriott retains responsibility.
Marriott International Hotel Management Agreements for Leased Hotels
Marriott International manages 86 of the 116 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 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 Management 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.
Marriott International Hotel Management Agreement for Owned Hotels
Marriott International also manages the eleven owned Residence Inn limited-
service hotels pursuant to a long-term management agreement with an initial term
expiring December 30, 2011 with renewal terms at the option of Marriott
International to extend the agreement on one or more of the owned hotels for up
to five 10-year terms. The Hotel Management Agreement provides for the payment
of a base management fee equal to two percent of revenues, a Residence Inn
system fee equal to four percent of revenues, and incentive management fees
equal to 20 percent of operating profit, as defined, over a priority return to
the owner. The payment of base management fees is subordinate to qualifying
debt service, a provision for administrative expenses and retention by the
Company of stipulated annual cash flow. The payment of incentive management
fees is payable out of 50 percent of cash flow remaining after qualifying debt
service, administrative expenses and the retention by the Company of a
stipulated cash flow. In addition, Marriott International is required to
furnish Chain Services similar to the leased Hotel Management Agreements
discussed above.
54
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Hotel Management Agreement for the owned Residence Inn limited-service
hotels also provides for the establishment of a property improvement fund to
cover the cost of (a) certain routine repairs and maintenance of the hotels
which are normally capitalized and (b) replacements and renewals to the hotels'
property and improvements. Contributions to the property improvement fund are
equal to five percent of revenues. In 1999, the Company contributed $1,611,000
to the property improvement fund. The Hotel Management Agreement also provides
that the Company will fund the costs of certain major non-routine repairs,
alterations, improvements, renewals and replacements to the hotels.
Ritz-Carlton Hotel Management Agreements
The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of
Marriott International, manages nine 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 up to a
maximum of 2.1% of revenues.
Other Hotel Management Agreements
The Company's remaining 21 leased hotels are managed by other hotel
management companies. Four of the leased hotels are managed by the SwissHotel
Management (USA) LLC, four are managed by Hyatt Corporation, and two are managed
by Four Seasons Hotel Limited. The remaining eleven leased 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
Nine 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, and two of the Company's other leased hotels are managed under franchise
agreements with other lodging companies with similar terms. In connection with
the assignment of the corresponding Hotel Management Agreement, the Company
assumed the franchise agreements for these leased 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.
7. Senior Living Operating Agreements
The senior living communities are subject to operating agreements (the
"Operating Agreements") which provide for Marriott International to operate
the senior living 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 equal to five percent of
revenues
55
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and incentive management fees equal 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 senior living 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 senior living
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 generally waived for the
first year of the Operating Agreement.
The Company is required under the Operating Agreements to contribute a
percentage of revenues into an interest-bearing reserve account to cover the
cost of (a) certain routine repairs and maintenance to the senior living
communities which are normally capitalized and (b) replacements and renewals to
the senior living communities' property and improvements. The annual
contribution 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 years 1999 and 1998 and for
the period June 21, 1997 (inception) through January 2, 1998 was $6,431,000,
$6,291,000 and $2,025,000, respectively. The Operating Agreements provide that
the Company shall separately fund the cost of certain major or non-routine
repairs, alterations, improvements, renewals and replacements to the senior
living communities.
8. Debt
Debt consists of the following as of December 31, 1999 and January 1, 1999:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Mortgage debt:
Secured by eight senior living communities with $247 million
of real estate assets, with an interest rate of 10.01%, maturing
through 2020 (balance includes debt premium
of $14.1 million)..................................................... $133,586 $135,719
Secured by ten hotels with $81 million of real estate assets
with an interest rate of 8.08%, maturing on January 1, 2010........... 55,588 -
Secured by nine senior living communities with $118 million of
real estate assets, with an interest rate of 9.93%, maturing
on January 1, 2001 (balance includes debt premium
of $0.9 million)..................................................... 45,097 47,340
Line of Credit secured by eight senior living communities
with $214 million of real estate assets, with interest rates
ranging from 8.81% to 8.94% maturing on April 15, 2002................ 45,000 -
-------- --------
279,271 183,059
-------- --------
</TABLE>
56
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Other debt:
Revenue bonds with an interest rate of 5.875%, due 2027................ 14,700 14,700
Capital lease obligations.............................................. 10,277 10,668
Other notes, with an average rate of 7.5%, maturing
through December 31, 2001............................................. 1,969 4,649
-------- --------
26,946 30,017
-------- --------
Subtotal.............................................................. 306,217 213,076
-------- --------
Hotel working capital notes payable to Host Marriott, with an interest
rate of 5.12%, maturing through December 2012.......................... 89,650 95,114
-------- --------
Total debt............................................................ $395,867 $308,190
======== ========
</TABLE>
Debt maturities at December 31, 1999, excluding the unamortized debt
premiums of $15,025,000, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000.............................................. $ 5,991
2001.............................................. 48,635
2002.............................................. 49,112
2003.............................................. 7,722
2004.............................................. 5,074
Thereafter........................................ 264,308
--------
$380,842
========
</TABLE>
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 loaned
the Company $92 million to repay the notes payable to Marriott International.
In the third quarter of 1998, Host Marriott forgave the $92 million note and it
was recorded as a capital contribution to the Company.
During the first quarter of 1998, Host Marriott prepaid $26.4 million of
the Company's mortgage debt. Host Marriott's prepayment of the debt was recorded
as a capital contribution to the Company.
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. In connection with
the termination of five hotel leases in 1999, the Company repaid the hotel
working capital notes with the proceeds from the hotel working capital reducing
the Company's balance on the hotel working capital notes to $89.7 million.
On April 15, 1999, Crestline Ventures LLC ("Ventures"), a subsidiary of the
Company, entered into a secured, three-year $100 million revolving credit
facility (the "Line of Credit") for funding future investments in the lodging
and senior living industries and for general corporate purposes. The Line of
Credit bears interest at a Eurodollar rate plus 2.75%. An annual fee of 0.25%
is charged on the unused portion of the commitment. The Line of Credit is
secured by substantially all of the assets of Ventures and its subsidiaries
consisting of eight senior living communities, and is
57
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
also guaranteed by the Company and certain subsidiaries of the Company. The Line
of Credit contains covenants that, among other things, (i) prohibits the Company
from paying dividends; (ii) limits the ability of the Company to incur
additional indebtedness, sell certain assets, repurchase shares of its common
stock and make certain investments; and (iii) limits the ability of Ventures to
pay dividends and make loans to its parent. The Line of Credit also contains
certain financial covenants relating to, among other things, maintaining certain
levels of net worth and certain ratios of earnings before interest expense,
taxes, depreciation and amortization and other non-cash charges ("EBITDA") to
interest and fixed charges, EBITDA to total debt and total debt to
capitalization.
In connection with the Company's acquisition of a controlling interest in a
partnership that owned eleven Residence Inn limited-service hotels in 1999 (see
Note 14), the Company consolidated the debt of the partnership totaling $54.5
million at the date of acquisition. The debt was secured by mortgages on ten of
the hotels, bore interest at 330 basis points over the 90-day Eurodollar rate
and matured on December 29, 1999. On December 29, 1999, the Company entered
into a new loan agreement to provide $55.6 million of fixed rate, non-recourse
debt financing with the proceeds from the issuance used to repay the existing
indebtedness and refinancing costs. The new loan is also secured by mortgages
on ten of the hotels. The new loan bears interest at 8.08% and has a scheduled
maturity of January 1, 2010.
The indentures governing the mortgages of certain of the Company's senior
living communities and hotels contain restrictive covenants that, among other
things, (i) require maintenance of segregated cash collection of all rents for
certain of the senior living communities; (ii) require separate cash reserves
for debt service, property improvements, real estate taxes and insurance; and
(iii) limit the ability to incur additional indebtedness, enter into or cancel
leases, enter into certain transactions with affiliates or sell certain assets.
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 amount to interest expense over the
remaining life of the related debt. The amortization of this debt premium for
fiscal years 1999 and 1998 was $1,550,000, respectively, and $834,000 for the
period from June 21, 1997 (inception) through January 2, 1998. Cash paid for
interest for fiscal years 1999 and 1998 and for the period from June 21, 1997
(inception) through January 2, 1998 totaled $28,249,000, $19,825,000 and
$8,183,000, respectively. Deferred financing costs, which are included in other
assets on the accompanying consolidated balance sheet, were $3,095,000 as of
December 31, 1999, net of accumulated amortization of $662,000.
9. Income Taxes
Total deferred tax assets and liabilities as of December 31, 1999 and
January 1, 1999 were as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Deferred tax assets................................ $ 18,847 $ 15,677
Deferred tax liabilities........................... (82,787) (77,030)
-------- --------
Net deferred income tax liability............. $(63,940) $(61,353)
======== ========
</TABLE>
58
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Property and equipment.......................... $(78,242) $(72,993)
Debt adjustment to fair value at acquisition.... 6,160 6,662
Other, net...................................... 8,142 4,978
-------- --------
Net deferred income tax liability.......... $(63,940) $(61,353)
======== ========
</TABLE>
The provision for income taxes for fiscal years 1999 and 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
1999 1998 January 2, 1998
------- ------ --------------------------
(in thousands)
<S> <C> <C> <C>
Current--Federal..................... $22,904 $2,447 $(25)
--State....................... 3,926 420 (5)
------- ------ ------
26,830 2,867 (30)
------- ------ ------
Deferred--Federal.................... 757 1,062 238
--State....................... 130 182 41
------- ------ ------
887 1,244 279
------- ------ ------
$27,717 $4,111 $249
======= ====== ======
</TABLE>
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for fiscal years 1999 and 1998 and for the period from
June 21, 1997 (inception) through January 2, 1998 follows:
<TABLE>
<CAPTION>
Period from
June 21, 1997 (inception)
through
1999 1998 January 2, 1998
------- ------ --------------------------
<S> <C> <C> <C>
Statutory federal tax rate.............. 35.0% 35.0% 35.0%
State income taxes, net of federal
tax benefit........................... 6.0 6.0 6.0
----- ----- -----
41.0% 41.0% 41.0%
===== ===== =====
</TABLE>
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.
59
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For income tax purposes, the Company has net operating loss carryforwards
of $9,852,000 which expire through 2006. Cash paid for income taxes was
$24,932,000 in 1999.
10. Litigation
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, CCC Retirement Partners, LP, formerly 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 increasing the
Company's ownership interest in FRP to approximately 93%. In 1999, the Company
and FRP completed a merger pursuant to a consent solicitation whereby the
partnership unit holders received cash consideration for each limited
partnership unit from the Company. In connection with this merger, the Company
acquired the remaining limited partner units for approximately $6,158,000.
Also, the Company paid the Settling Partners an Additional Payment in 1999 of
approximately $557,000 pursuant to the merger transaction. The purchase price
of the units for both transactions approximated fair value, and accordingly, no
portion of the purchase price has been expensed.
11. Fair Value of Financial Instruments
The fair values of certain financial liabilities are shown below:
<TABLE>
<CAPTION>
1999 1998
------------------ --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(in thousands)
Debt, net of capital leases............. $385,590 $376,943 $297,522 $294,769
</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. The fair value of all of the
Company's other financial assets and liabilities are assumed to equal their
carrying amounts.
12. Employee Stock Plans
In conjunction with the Distribution, the Company adopted two stock-based
compensation plans which are described below. Under the comprehensive stock
incentive 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
60
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 1999 are:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Comprehensive Plan 1,447
Employee Stock Purchase Plan 430
------
1,877
======
</TABLE>
Certain of the employees of the Company 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 three years following
the date of the grant.
A summary of the activity of the Company's stock option plan for 1999
follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------- ------------------
(in thousands)
<S> <C> <C>
Balance at January 1, 1999....................... 182 $ 12
Granted....................................... 1,914 11
Exercised..................................... (1) 6
Forfeited/Expired............................. (65) 10
-------- --------
Balance at December 31, 1999..................... 2,030 $ 11
======== ========
Options exercisable at December 31, 1999......... 227 $ 11
======== ========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 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 December 31, 1999 Life Price December 31, 1999 Price
- ------------------------ ----------------- ----------------- ----------------- ----------------- ---------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$ 1-4 13 7 $ 3 13 $ 3
5-8 62 9 8 62 8
9-12 1,442 14 10 106 10
13-16 401 14 15 16 15
17-20 59 13 19 30 19
21-22 53 15 22 - -
------- -------
2,030 227
======= =======
</TABLE>
61
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company continues to account for expense under its plans under the
provision of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations as permitted under SFAS No.
123, "Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for its fixed stock options under the Comprehensive
Plan and its Employee Stock Purchase Plan.
By electing to continue to account for expense under APB No. 25, the
company is required under SFAS No. 123 to provide pro forma disclosure as if the
Company had accounted for the expense under the fair value method. For purposes
of pro forma disclosure, the estimated fair value of the options at the date of
grant is amortized to expense over the vesting period. The following is the pro
forma financial data if the Company had recorded compensation expense under the
fair value method.
<TABLE>
<CAPTION>
1999
-------
(in thousands,
except per share data)
<S> <C>
Net income................................. $37,863
Basic earnings per common share............ 1.85
Diluted earnings per common share.......... 1.82
</TABLE>
The weighted average fair value of options granted in 1999 was $6.63. The
fair value of each option granted has been estimated on the date of grant using
an option-pricing model with the following weighted average assumptions used for
grants in 1999: risk-free interest rate of 4.9%, volatility of 40%, expected
lives of 12 years and no dividend yield.
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. In 1999, approximately 7,000 shares were granted under this plan.
The compensation expense that has been charged against income for deferred stock
was not material for 1999. The weighted average fair value per share granted in
1999 was $9.91.
In 1999, the Company issued 375,000 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. The Company recorded compensation expense
of $730,000 in 1999 related to these awards. The weighted average fair value
per share granted in 1999 was $10.22.
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.
13. Profit Sharing and Postemployment Benefit Plans
The Company contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements and
electing participation in the plans. The amount to be matched by the Company is
determined annually by the Board of Directors. The amounts for these items were
not material for 1999.
62
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Acquisitions
On March 29, 1999, the Company acquired a 74% limited partner interest in
the Marriott Residence Inn USA Limited Partnership ("Residence Inn USA") from a
private investor for $34.4 million in cash and the consolidation of $54.5
million of debt for a total consideration of $89 million. In subsequent
separate transactions, the Company acquired an additional 3% limited partner
interest in Residence Inn USA in the second quarter of 1999 for $1.6 million in
cash and the 5% general partner interest in Residence Inn USA from Host Marriott
in the third quarter of 1999 for $2.7 million in cash increasing the Company's
ownership to an 82% interest. Residence Inn USA owns eleven Residence Inn
limited-service hotels that are managed by Marriott International under a long-
term management agreement. The Company accounted for the acquisition of
Residence Inn USA under the purchase method of accounting.
The following summarizes unaudited pro forma data for fiscal years 1999 and
1998 assuming the acquisition of Residence Inn USA occurred at the beginning of
fiscal year 1998. In addition, the summarized unaudited pro forma financial
data for the fiscal year 1998 also reflects the Distribution and related
transactions discussed in Note 2.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(in thousands, except per share data)
(unaudited)
<S> <C> <C>
Revenues..................................... $4,456,223 $4,339,800
Net income................................... 40,573 28,371
Basic earnings per common share.............. 1.99 1.29
Diluted earnings per common share............ 1.95 1.29
</TABLE>
15. Shareholders' Equity
In 1999, the Company's Board of Directors authorized the Company to
repurchase shares of the Company's common stock. During 1999, the Company
repurchased 5,260,000 shares of its common stock for $99,917,000. As of
December 31, 1999, the Company had authorization from its Board of Directors to
purchase an additional 353,000 shares of its common stock.
In 1999, the Company initiated a stock purchase loan program whereby
certain Company executives could purchase Company common stock at market prices
through loans from the Company. During 1999, certain executives purchased
approximately 149,000 shares of common stock for $2,645,000. The loans are
secured by the common stock purchased and are recourse to the executives and
bear interest at 5.5%.
16. Geographic and Business Segment Information
As of December 31, 1999, the Company operated three business segments:
hotel leasing, hotel ownership and senior living community ownership. The
Company's leased full-service hotels are operated under the Marriott or Ritz-
Carlton brands as well as, among others, Four Seasons, Hyatt and SwissHotel
brands. The Company's subleased and owned limited-service hotels are operated
under the Courtyard by Marriott and Residence Inn brands. The Company's senior
living communities are operated under Marriott brands.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses and interest expense.
The Company charges general and administrative costs to its business segments
using a variety of methods, principally including specific identification of
individual costs items and otherwise through allocations based upon estimated
levels of effort devoted by its general and administrative departments to
individual segments or relative measures of size of the segments based on
operating profit.
63
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's income taxes are included in the consolidated Federal income tax
return of the Company and its affiliates and are allocated based upon the
relative contribution to the Company's consolidated taxable income or loss and
changes in temporary differences. The allocation of income taxes is not
evaluated at the segment level and, therefore, the Company does not believe the
information is material to the consolidated financial statements. There were no
intercompany sales between segments. For fiscal year 1998 and for the period
from June 21, 1997 (inception) through January 2, 1998, the Company's only
business segment was senior living community ownership.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------
Hotel Hotel Senior Living
Leasing Ownership Ownership Corporate & Other Consolidated
----------- ---------- -------------- ------------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues........................... $4,162,773 $32,217 $246,498 $ 5,637 $4,447,125
Operating profit (loss)............ 65,296 9,598 40,168 (4,222) 110,840
Interest expense................... (4,856) (3,586) (19,214) (55) (27,711)
Interest income.................... 116 277 773 1,103 2,269
Other.............................. (6,119) (1,517) (2,230) (7,930) (17,796)
Income (loss) before income taxes.. 54,437 4,772 19,497 (11,104) 67,602
Depreciation and amortization...... - 2,934 21,624 746 25,304
Capital expenditures............... - 1,567 9,239 824 11,630
Total assets....................... 166,308 96,502 682,478 19,580 964,868
</TABLE>
The Company's foreign operations consist of four leased full-service hotels
located in Canada. The following table presents revenues and long-lived assets
for 1999 for each of the geographical areas in which the Company operates:
<TABLE>
<CAPTION>
1999
--------------------------
Long-lived
Revenues Assets
------------ -----------
(in thousands)
<S> <C> <C>
United States................................. $4,370,269 $ 745,615
International................................. 76,856 -
---------- ----------
Total..................................... $4,447,125 $ 745,615
========== ==========
</TABLE>
17. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
1999
------------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
---------- ---------- ----------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $962,348 $1,091,658 $ 969,405 $1,423,714 $4,447,125
Operating profit................................ 21,489 30,659 27,952 30,740 110,840
Net income...................................... 7,897 11,420 10,457 10,111 39,885
Basic earnings per common share................. .35 .54 .52 .55 1.95
Diluted earnings per common share............... .35 .53 .51 .53 1.91
</TABLE>
The first three quarters consist of 12 weeks each and the fourth quarter
includes 16 weeks. The sum of the basic and diluted earnings per common share
for the four quarters in 1999 differs from the annual earnings per common share
due to the required method of computing the weighted average number of shares in
the respective periods. Approximately one-fourth of the Company's leased full-
service hotels have managers that have a different accounting calendar from the
Company. For these hotels, which record revenues on a monthly basis versus the
Company's four week period, the Company records two months of operations in the
first quarter, three months of operations in each of the second and third
quarters and four months of operations in the fourth quarter.
64
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Marriott Senior Living Services, Inc.:
We have audited the accompanying consolidated statements of operations and
cash flows for the 24-week period ended June 20, 1997 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). 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 results of their operations and
their cash flows of Forum Group, Inc. as partitioned for sale to Host Marriott
Corporation 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 8,
as to which the date is December 29, 1998.)
65
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the 24-week period ended June 20, 1997
(in thousands)
<TABLE>
<S> <C>
REVENUES
Routine............................................................ $84,646
Ancillary.......................................................... 10,757
-------
95,403
-------
OPERATING COSTS AND EXPENSES
Property-level operations costs and expenses
Routine......................................................... 53,059
Ancillary....................................................... 8,774
Other operating costs and expenses
Depreciation and amortization................................... 6,698
Base management fees............................................ 5,586
Property taxes and other...................... ................. 3,311
-------
Total operating costs and expenses........................... 77,428
-------
OPERATING PROFIT BEFORE INTEREST AND MINORITY
INTEREST............................................................. 17,975
Corporate expenses.................................................... (4,519)
Interest expense...................................................... (9,141)
Interest income....................................................... 598
Minority interest expense............................................. (596)
-------
INCOME BEFORE INCOME TAXES............................................ 4,317
Provision for income taxes............................................ (1,689)
-------
NET INCOME............................................................ $ 2,628
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
66
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the 24-week period ended June 20, 1997
(in thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
NET INCOME........................................................... $2,628
Adjustments to reconcile cash from operations:
Depreciation and amortization...................................... 6,698
Changes in operating accounts:
Other assets.................................................... (225)
Other liabilities............................................... (9,580)
-------
Cash used in operating activities.................................... (479)
-------
INVESTING ACTIVITIES
Capital expenditures............................................ (16,407)
--------
Cash used in investing activities.................................... (16,407)
--------
FINANCING ACTIVITIES
Repayment of debt............................................... (1,324)
Advances from parent............................................ 13,997
--------
Cash provided by financing activities................................ 12,673
--------
DECREASE IN CASH AND CASH EQUIVALENTS................................ (4,213)
CASH AND CASH EQUIVALENTS, beginning of period....................... 18,640
--------
CASH AND CASH EQUIVALENTS, end of period............................. $ 14,427
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest............................................. 9,700
Noncash investing and financing activities:
Property, Plant and Equipment, net.............................. $ (3,977)
Debt............................................................ 3,977
</TABLE>
The accompanying notes are an integral part of this financial statement.
67
<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 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 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. 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 results of operations and cash flows of the
Partitioned Business for the 24-week period ended June 20, 1997.
The Partitioned Business receives certain services and participates in
certain centralized MI activities, the allocated costs of which are included in
these financial statements.
68
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED 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 was approximately
$252,000. 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. 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.
Deferred Revenue from Non-refundable Fees
Monthly fees deferred for the non-refundable portion of the entry fees 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.
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
69
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 in the accompanying consolidated statement
of operations. The adoption of EITF 97-2 increased both revenues and operating
costs and expenses by $61.8 for the 24-week period ended June 20, 1997 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.
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.
70
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED 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. 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. 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 income tax provision (benefit) is determined as if the Partitioned
Business filed a separate income tax return. The provision (benefit) for income
taxes for the 24-week period ended June 20, 1997 consists of (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current --Federal................................. $(3,125)
--State................................... (357)
-------
(3,482)
-------
Deferred--Federal.................................. 4,641
--State.................................... 530
-------
5,171
-------
$ 1,689
=======
</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
follows:
<TABLE>
<S> <C>
Statutory federal tax rate............................. 35.0%
State income taxes, net of federal tax benefit......... 4.0%
----
39.0%
====
</TABLE>
The provision or benefit is not indicative of what should have been
recorded if the Partitioned Business had determined the tax provision or benefit
based on its share of MI's allocation of a tax provision or benefit to all
entities included in the consolidated return based on taxable income or loss.
However, the Partitioned Business will reimburse or be reimbursed by MI for its
share of the consolidated provision or benefit based on MI's allocation of the
provision or benefit to all entities included in the consolidated return based
on taxable income or loss. The difference between the liability to or the
receivable from MI and the tax provision or benefit determined as if the
Partitioned Business filed a separate tax return will be recorded as a capital
contribution or a dividend.
71
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS
Due to Marriott International, Inc.
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.
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 for the
24-week period ended June 20, 1997.
6. 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.
7. LITIGATION
On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court of the Southern District
of Indiana (the "Indiana Court") against Forum Retirement Inc., ("FRI") a
wholly-owned subsidiary of Forum, and general partner of Forum Retirement
Partners L.P. (the "Partnership"), alleging breach of the partnership
agreement, breach of fiduciary duty, fraud, insider trading and civil
conspiracy/aiding and abetting. On February 4, 1998, the Plaintiff, MSLSI, FRI,
Forum and Host Marriott entered into a Settlement and Release Agreement (the
"Settlement Agreement"), pursuant to which Host Marriott agreed to pay each
limited partner electing to join in the Settlement Agreement $4.50 per unit in
exchange for (i) the transfer of all Partnership units owned by a settling
limited partner; (ii) an agreement by each settling limited partner not to
purchase additional Partnership units; (iii) a release of all claims asserted in
the litigation; and (iv) a dismissal of the litigation. Because of the
derivative nature of the allegations contained in the Plaintiff's complaint, the
General Partner invited all limited partners, in their sole discretion, to
participate in the Settlement Agreement, and detailed the requirements for
participation in two notices to unitholders, dated March 27, 1998, and May 6,
1998, respectively. Initially, the period within which a limited partner could
elect to participate in the Settlement Agreement was scheduled to expire on
April 27, 1998. This period was extended to May 22, 1998. Host Marriott also
agreed to pay as much as an additional $1.25 per unit to the settling Limited
Partners, under certain conditions, in the event that Host Marriott within three
years following the date of settlement initiates a tender offer for the purchase
of units not presently held by Host Marriott or the settling Limited Partners.
On February 5, 1998, the Indiana Court entered an order approving the dismissal
of the Plaintiff's case.
In connection with the Settlement Agreement, Host Marriott initially
acquired 1,000,894 limited partner units from the Plaintiff and related parties
for $4,504,023 on March 25, 1998. Host Marriott subsequently acquired additional
1,140,901 limited partner units from other limited partners electing to
participate in the Settlement Agreement for
72
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$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.
8. 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.
73
<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 2000 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 Schedule:
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.
74
<PAGE>
(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- -------------------------------------------------------------------------------------------
<S> <C> <C>
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 Hotels Managed by Marriott
International and Host Marriott for Full-Service
#10.2* -- Form of Hotel Lease Agreement between a Subsidiary Limited-Service Hotels of Host
Marriott and HPT for
10.3* -- Form of Hotel Sublease Agreement between the Company and Host Marriott for
Limited-Service Hotels
#10.4* -- Form of Full-Service Hotel Management Agreement International between the Company
and Marriott
#10.5* -- Form of Owner's Agreement between the Company, Host Marriott and Marriott International
#10.6* -- Form of Limited-Service Hotel Management Agreement International between the Company
and Marriott
#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 International Host Marriott and
Marriott
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.
75
<PAGE>
(b) Reports On Form 8-K
. September 20, 1999 - Report of the election of William L. Wilson to the
Board of Directors and the resignation of Christopher J. Nassetta.
. September 23, 1999 - Report of the amendment to Current Report on Form 8-K
dated September 20, 1999 correcting the date of resignation of Christopher
J. Nassetta.
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Bethesda, State of
Maryland, on March 30, 2000.
Crestline Capital Corporation
By /s/ James L. Francis
______________________________
James L. Francis
Executive Vice President,
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
------------- ------- ------
<S> <C> <C>
/s/ Bruce D. Wardinski Chairman of the Board of Directors, March 30, 2000
- --------------------------------- President and Chief Executive Officer
Bruce D. Wardinski (Principal Executive Officer)
/s/ James L. Francis Executive Vice President, March 30, 2000
- --------------------------------- Chief Financial Officer
James L. Francis (Principal Financial Officer)
/s/ Larry K. Harvey Senior Vice President, March 30, 2000
- --------------------------------- Treasurer and Controller
Larry K. Harvey (Principal Accounting Officer)
/s/ Adam M. Aron Director March 30, 2000
- ---------------------------------
Adam M. Aron
/s/ Louise M. Cromwell Director March 30, 2000
- ---------------------------------
Louise M. Cromwell
/s/ Kelvin L. Davis Director March 30, 2000
- ---------------------------------
Kelvin L. Davis
/s/ John W. Marriott III Director March 30, 2000
- ---------------------------------
John W. Marriott III
/s/ John B. Morse, Jr. Director March 30, 2000
- ---------------------------------
John B. Morse, Jr.
/s/ Michael A. Wildish Director March 30, 2000
- ---------------------------------
Michael A. Wildish
/s/ William L. Wilson Director March 30, 2000
- ---------------------------------
William L. Wilson
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
Page 1 of 2
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(in thousands)
Gross Amount at
Initial Costs December 31, 1999
---------------------- -------------------------------
Subsequent
Buildings & Costs Buildings & Accumulated
Description Debt Land Improvements Capitalized Land Improvements Total Depreciation
- --------------------------- -------- --------- ------------ ----------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Remington Club
San Diego, CA............. $ 14,437 $ 10,419 $ 60,442 $ 1,987 $ 10,419 $ 62,429 $ 72,848 $ (6,263)
The Forum at Memorial Woods
Houston, TX............... 23,548 5,163 30,688 9,518 5,163 40,206 45,369 (2,522)
The Forum at Park Lane
Dallas, TX................ 24,169 5,472 34,903 816 5,472 35,719 41,191 (1,752)
The Forum at Knightsbridge
Columbus, OH.............. 21,500 -- 30,970 7,574 -- 38,544 38,544 (2,499)
Other properties, each
less than 5% of total..... 195,617 96,797 364,542 84,434 100,652 445,121 545,773 (28,949)
-------- -------- -------- -------- -------- -------- -------- --------
Total.................. $279,271 $117,851 $521,545 $104,329 $121,706 $622,019 $743,725 $(41,985)
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
Date of
Completion of Date Depreciation
Description Construction Acquired Life
- --------------------------- ------------- ------------ -----------
<S> <C> <C> <C>
The Remington Club
San Diego, CA............. N/A 1997 40
The Forum at Memorial Woods
Houston, TX............... N/A 1997 40
The Forum at Park Lane
Dallas, TX................ N/A 1997 40
The Forum at Knightsbridge
Columbus, OH.............. N/A 1997 40
Other properties, each
less than 5% of total.... N/A Various Various
Total..................
</TABLE>
S-1
<PAGE>
SCHEDULE III
Page 2 of 2
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(in thousands)
Notes:
(A) The change in total cost of properties for the fiscal years ended December
31, 1999 and January 1, 1999 and the period from June 21, 1997 (inception)
through January 2, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance as of June 21, 1997........................................... $546,056
Additions:
Contributions from Host Marriott................................... 43,931
Capital expenditures............................................... 30,783
--------
Balance as of January 2, 1998......................................... 620,770
Additions:
Contributions from Host Marriott................................... 7,801
Acquisitions....................................................... 18,779
Capital expenditures............................................... 8,653
--------
Balance as of January 1, 1999......................................... 656,003
Additions:
Acquisitions....................................................... 78,574
Capital expenditures............................................... 12,670
Loss on impairment................................................. (3,522)
--------
Balance as of December 31, 1999....................................... $743,725
========
</TABLE>
(B) The change in accumulated depreciation and amortization of real estate
assets for the fiscal years ended December 31, 1999 and 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)
Depreciation and amortization.................. (16,625)
--------
Balance as of December 31, 1999................... $(41,985)
========
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $644,387,000 at December 31, 1999.
S-2
<PAGE>
EXHIBIT 21
Page 1 of 4
CRESTLINE CAPITAL CORPORATION
SUBSIDIARIES
1) CC GB Leasing LLC
2) CC IM Corporation
3) CC NEquity Corporation
4) CC SPE Corporation
5) CC USAGP LLC
6) CCC Alpha Investment, Inc.
7) CCC A/H, Inc.
8) CCC Boynton Beach, Inc.
9) CCC Chesapeake LLC
10) CCC CMBS Corporation
11) CCC Delaware, Inc.
12) CCC Facilities Corporation
13) CCC Financing I Corporation
14) CCC Financing Limited, L.P.
15) CCC Investments I, LLC
16) CCC Leisure Park Corporation
17) CCC of Kentucky, Inc.
18) CCC Ohio Healthcare, Inc.
19) CCC Pueblo Norte, Inc.
20) CCC Retirement, Inc.
21) CCC Retirement Communities II, L.P.
22) CCC Retirement Partners, L.P.
23) CCFS Atlanta LLC
24) CCFS Philadelphia LLC
25) CCH Meadowvale Corporation
26) CCHH Atlanta LLC
27) CCHH Burlingame LLC
28) CCHH Cambridge LLC
29) CCHH Reston LLC
30) CCHI DC LLC
31) CCHI Key West LLC
32) CCHI Singer Island LLC
33) CCHP I Corporation
34) CCHP II Corporation
35) CCHP III Corporation
36) CCHP IV Corporation
37) CCMH Atlanta Marquis Corporation
38) CCMH Atlanta Marquis LLC
39) CCMH Atlanta NW LLC
40) CCMH Atlanta Suites LLC
41) CCMH Bethesda LLC
42) CCMH Calgary Corporation
43) CCMH Charlotte LLC
44) CCMH Chicago Courtyard LLC
45) CCMH Coronado LLC
<PAGE>
EXHIBIT 21
Page 2 of 4
CRESTLINE CAPITAL CORPORATION
SUBSIDIARIES
46) CCMH Costa Mesa Suites LLC
47) CCMH Courtyard I LLC
48) CCMH Dallas/FW LLC
49) CCMH DC LLC
50) CCMH Deerfield Suites LLC
51) CCMH Denver SE LLC
52) CCMH Denver Tech LLC
53) CCMH Denver West LLC
54) CCMH Desert Springs Corporation
55) CCMH Desert Springs LLC
56) CCMH Diversified LLC
57) CCMH Downers Grove Suites LLC
58) CCMH Dulles AP LLC
59) CCMH Dulles Suites LLC
60) CCMH El Paso LLC
61) CCMH Farmington LLC
62) CCMH Fin Center LLC
63) CCMH Fisherman's Wharf LLC
64) CCMH Fort Lauderdale LLC
65) CCMH Gaithersburg LLC
66) CCMH Hanover LLC
67) CCMH Houston AP LLC
68) CCMH Houston Galleria LP
69) CCMH Jacksonville LLC
70) CCMH Kansas City AP LLC
71) CCMH Key Bridge LLC
72) CCMH Lenox LLC
73) CCMH Manhattan Beach LLC
74) CCMH Marina LLC
75) CCMH Memphis LLC
76) CCMH Metro Center LLC
77) CCMH Miami AP LLC
78) CCMH Minneapolis LLC
79) CCMH Moscone LLC
80) CCMH Nashua LLC
81) CCMH Newark LLC
82) CCMH Newport Beach LLC
83) CCMH Newport Beach Suites LLC
84) CCMH Newton LLC
85) CCMH Norcross LLC
86) CCMH Norfolk LLC
87) CCMH O'Hare AP LLC
88) CCMH O'Hare Suites LLC
89) CCMH Oklahoma City LLC
90) CCMH Ontario AP LLC
<PAGE>
EXHIBIT 21
Page 3 of 4
CRESTLINE CAPITAL CORPORATION
SUBSIDIARIES
91) CCMH Orlando LLC
92) CCMH Palm Beach LLC
93) CCMH Park Ridge LLC
94) CCMH Pentagon RI LLC
95) CCMH Perimeter LLC
96) CCMH Philadelphia AP LLC
97) CCMH Philadelphia Mkt. LLC
98) CCMH Pittsburgh LLC
99) CCMH Plaza San Antonio LLC
100) CCMH Portland LLC
101) CCMH Potomac LLC
102) CCMH Properties II Corporation
103) CCMH Properties II LLC
104) CCMH Quorum LLC
105) CCMH Raleigh LLC
106) CCMH Residence Inn LLC
107) CCMH Riverwalk LLC
108) CCMH Rocky Hill LLC
109) CCMH Romulus LLC
110) CCMH Salt Lake LLC
111) CCMH San Diego LLC
112) CCMH San Fran AP LLC
113) CCMH Santa Clara Corporation
114) CCMH Santa Clara LLC
115) CCMH Scottsdale Suites LLC
116) CCMH South Bend LLC
117) CCMH Tampa AP LLC
118) CCMH Tampa Waterside LLC
119) CCMH Tampa Westshore LLC
120) CCMH Times Square LLC
121) CCMH Toronto AP Corporation
122) CCMH Toronto EC Corporation
123) CCMH Torrance LLC
124) CCMH Vail LLC
125) CCMH Waterford LLC
126) CCMH Westfields LLC
127) CCMH Williamsburg LLC
128) CCMH World Trade Center LLC
129) CCMP Leasing Corporation
130) CCRC Amelia Island LLC
131) CCRC Atlanta LLC
132) CCRC Boston LLC
133) CCRC Buckhead/Naples LLC
134) CCRC Dearborn LLC
135) CCRC Marina LLC
<PAGE>
EXHIBIT 21
Page 4 of 4
CRESTLINE CAPITAL CORPORATION
SUBSIDIARIES
136) CCRC Phoenix LLC
137) CCRC San Francisco LLC
138) CCRC Tysons LLC
139) CCRI USA LLC
140) CCSH Atlanta LLC
141) CCSH Boston LLC
142) CCSH Chicago LLC
143) CCSH New York LLC
144) Crestline Hotels & Resorts, Inc.
145) Crestline RES III Corporation
146) Crestline Ventures LLC
147) CSL Group, Inc.
148) Leisure Park Venture LP LLC
149) LTJ Senior Communities LLC
150) Panther General Partner, Inc.
151) Panther Holdings Level I LP
152) Residence Inn USA Limited Partnership
153) Residence Inn III LLC
154) SDM Hotel Corporation
<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 DECEMBER 31, 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> DEC-31-1999
<PERIOD-START> JAN-02-1999
<PERIOD-END> DEC-31-1999
<CASH> 36,774
<SECURITIES> 0
<RECEIVABLES> 47,988
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 803,684
<DEPRECIATION> 58,069
<TOTAL-ASSETS> 964,868
<CURRENT-LIABILITIES> 0
<BONDS> 395,867
0
0
<COMMON> 223
<OTHER-SE> 400,525
<TOTAL-LIABILITY-AND-EQUITY> 964,868
<SALES> 4,194,990
<TOTAL-REVENUES> 4,194,990
<CGS> 4,336,285
<TOTAL-COSTS> 4,336,285
<OTHER-EXPENSES> 16,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,711
<INCOME-PRETAX> 67,602
<INCOME-TAX> 27,717
<INCOME-CONTINUING> 39,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,885
<EPS-BASIC> 1.95
<EPS-DILUTED> 1.91
</TABLE>
