<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 1994
REGISTRATION NO. 33-51707
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HOST MARRIOTT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7011 53-0085950
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION
ORGANIZATION) NUMBER)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN J. MCKENNA, ESQ.
10400 FERNWOOD ROAD BETHESDA,
MARYLAND 20817
(301) 380-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER,
INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
PLEASE SEND COPIES OF COMMUNICATIONS TO:
BRUCE E. ROSENBLUM, ESQ. LATHAM & NICK P. SAGGESE, ESQ. GREGG A. NOEL,
WATKINS 1001 PENNSYLVANIA AVENUE, N.W. ESQ. SKADDEN, ARPS, SLATE, MEAGHER &
SUITE 1300 WASHINGTON, D.C. 20004-2505 FLOM 300 S. GRAND AVENUE, SUITE 3400
LOS ANGELES, CA 90071
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after the effective date of this
Registration Statement.
If the securities being registered on this form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
HOST MARRIOTT CORPORATION
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
LOCATION OR HEADING IN THE PROSPECTUS
FORM S-1 ITEM NUMBER AND CAPTION OR REGISTRATION STATEMENT
-------------------------------- -------------------------------------
<C> <C> <S>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover
of Prospectus............................. Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.............. Prospectus Summary; Risk Factors;
Ratio of Earnings to Fixed Charges
(Inapplicable)
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ *
6. Dilution................................... *
7. Selling Security Holders................... *
8. Plan of Distribution....................... Underwriting
9. Description of Securities to be Registered. Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information With Respect to the Registrant. Business and Properties; Legal
Proceedings; Price Range of Common
Stock and Dividends; Selected
Historical Financial Data;
Management's Discussion and
Analysis of Results of Operations
and Financial Condition; Pro Forma
Financial Data; Management's
Discussion and Analysis of Pro
Forma Financial Data; Index to
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... *
</TABLE>
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* Inapplicable
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 19, 1994
PROSPECTUS JANUARY , 1994
17,500,000 SHARES
(LOGO TO COME)
COMMON STOCK
Of the 17,500,000 shares of Common Stock offered by the Company, 14,000,000
shares are being offered for sale in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and 3,500,000 shares are being offered for
sale outside the United States and Canada in a concurrent offering by the
International Managers (the "International Offering" and, together with the
U.S. Offering, the "Offerings"), subject to transfers between the U.S.
Underwriters and the International Managers.
The Common Stock of the Company is traded on the New York Stock Exchange and
on the Chicago Stock Exchange, the Pacific Stock Exchange and the Philadelphia
Stock Exchange under the symbol "HMT". On January 18, 1994, the last reported
sale price of the Common Stock, as reported on the New York Stock Exchange
Composite Tape, was $11.25 per share. See "Price Range of the Common Stock and
Dividends."
SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
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- -
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
- -
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total (3)...................................... $ $ $
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- -
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option to purchase up to
2,625,000 additional shares of Common Stock, on the same terms and conditions
as set forth above, at the Price to the Public, less the Underwriting
Discounts and Commissions, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to the Public,
Underwriting Discounts and Commissions, and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares are offered by the several Underwriters when, as and if delivered
to and accepted by the Underwriters and subject to various prior conditions,
including the right of the Underwriters to reject any order in whole or in
part. It is expected that delivery of the shares will be made in New York, New
York on or about January , 1994.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY SHEARSON INC.
BT SECURITIES CORPORATION
<PAGE>
Residence Inns have approximately
120 suites and resemble garden
apartments. They are designed for
the extended stay market.
Courtyard by Marriott hotels
are moderately priced for
the business transient
market. Each Courtyard has
approximately 150
guestrooms.
The Fort Lauderdale Marina Marriott has 580 guestrooms. The
Company recently acquired this property.
The New York Marriott
Marquis has 1,871
guestrooms and over
80,000 square feet of
meeting space.
The San Francisco Marriott has 1,500 guestrooms
and is directly adjacent to the Moscone
Convention Center.
Fairfield Inns are designed for the
economy minded traveler and have
approximately 120 guestrooms.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE
PACIFIC STOCK EXCHANGE, THE CHICAGO STOCK EXCHANGE, THE PHILADELPHIA STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may be obtained by mail from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Reports, proxy
statements and other information regarding the Company may also be inspected at
the offices of the New York Stock Exchange (the "NYSE"), 20 Broad Street, New
York, New York 10005, the Pacific Stock Exchange, 301 Pine Street, San
Francisco, California 94104, the Chicago Stock Exchange, 440 South LaSalle
Street, Chicago, Illinois 60605 or the Philadelphia Stock Exchange 1900 Market
Street, Philadelphia, Pennsylvania 19103.
The Company has filed with the Commission a Registration Statement on Form S-
1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement and exhibits thereto. The Registration Statement,
together with the exhibits thereto, may be inspected at the Commission's public
reference facilities in Washington, D.C. and copies of all or any part thereof
may be obtained from the Commission upon payment of the prescribed fees.
----------------
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless the context otherwise requires, the term "Company" refers to Host
Marriott Corporation and its subsidiaries and their respective operations.
Unless otherwise indicated, the information in this Prospectus does not give
effect to the exercise of the over-allotment option described in
"Underwriting."
THE COMPANY
The Company is one of the largest owners of lodging properties in the world.
The Company's 130 owned lodging properties are operated under Marriott brand
names and managed by Marriott International, Inc. ("Marriott International"),
formerly a wholly-owned subsidiary of the Company. The Company is the largest
owner of hotels operated under Marriott brands and owns approximately 23% of
the lodging properties operated by Marriott International. The Company also
holds minority interests in various partnerships that own an additional 272
properties operated by Marriott International. The Company's properties span
several market segments, including full service (Marriott Hotels, Resorts and
Suites), moderately-priced (Courtyard by Marriott), extended-stay (Residence
Inn by Marriott) and economy (Fairfield Inn by Marriott). These Marriott brands
are among the most respected and widely recognized in the lodging industry. In
1992, each brand was ranked either first or second overall in its segment by
Business Travel News. The Company's hotels consistently outperform the
industry's average occupancy rate by a significant margin, and averaged
approximately 78.9% for the first eight months of 1993 compared to 65.3% for
the lodging industry.
The Company seeks to grow through opportunistic acquisitions of full service
hotels in the U.S. and abroad. The Company believes that the full service
segment of the market offers numerous opportunities to acquire assets at
attractive multiples of cash flow and at discounts to replacement value,
including under-performing hotels which can be improved under new management.
The Company believes that the full service segment, in particular, has
potential for improved performance as the economy continues to improve and as
business travel continues to increase. The Company has recently acquired the
580-room Ft. Lauderdale Marina Marriott and is pursuing discussions with
respect to other acquisition opportunities.
The Company believes it is well qualified to pursue its acquisition strategy.
Management has extensive experience in acquiring and financing lodging
properties and believes its industry knowledge, relationships and access to
information provide a competitive advantage with respect to evaluating and
acquiring hotel assets. In addition, the Company is well positioned to convert
acquired properties to high quality lodging brand names due to its strategic
alliance with Marriott International.
The Company is also the leading operator of airport and tollroad food and
merchandise concessions, with facilities in virtually every major commercial
airport in the U.S. The Company operates restaurants, gift shops and related
facilities at 73 airports, on 14 tollroads (including 93 travel plazas) and at
42 tourist attractions, stadiums and arenas. Many of the Company's concessions
operate under branded names, including Pizza Hut, Burger King, Taco Bell,
Sbarro's, Dunkin' Donuts, TCBY yogurt, Mrs. Fields cookies, Nathan's Famous hot
dogs and Cheers. In addition, the Company owns 14 senior living facilities
which are leased to Marriott International under long-term leases.
4
<PAGE>
THE DISTRIBUTION AND RELATED TRANSACTIONS
Prior to October 8, 1993, the Company was named "Marriott Corporation." In
addition to conducting the Company's existing businesses of owning lodging
properties and senior living facilities (the "Ownership Business") and
operating restaurants, cafeterias, gift shops and related facilities at
airports, stadiums, arenas and tourist attractions and on highway systems (the
"Host/Travel Plazas Business"), Marriott Corporation engaged in lodging and
senior living services management, timeshare resort development and operation,
food service and facilities management and other contract services businesses
(the "Management Business"). On October 8, 1993, Marriott Corporation made a
special dividend consisting of the distribution (the "Distribution") to holders
of outstanding shares of Common Stock, on a share-for-share basis, of all
outstanding shares of its wholly-owned subsidiary, Marriott International,
which at the time of the Distribution held all of the assets relating to the
Management Business. Marriott International now conducts the Management
Business as a separate publicly-traded company. The Distribution was designed
to separate two types of businesses with distinct financial, investment and
operating characteristics so that each could adopt strategies and pursue
objectives appropriate to its specific needs. See "The Distribution." As a
result of the Distribution, the Company believes it is better able to
concentrate its attention and financial resources on its core businesses and to
manage its real estate holdings and Host/Travel Plazas Business for cash flow.
The Company and Marriott International are parties to several important ongoing
arrangements, including (i) agreements pursuant to which Marriott International
manages or leases the Company's lodging properties and senior living facilities
and (ii) a $630 million line of credit (the "Credit Agreement") provided by
Marriott International to the Company's wholly-owned subsidiary, HMH Holdings,
Inc. ("Holdings"). See "Financing--Credit Agreement." In connection with the
Distribution, the Company consummated an exchange offer (the "Exchange Offer")
pursuant to which holders of approximately $1.2 billion of its senior notes
("Old Notes") exchanged Old Notes for a combination of (i) cash, (ii) Common
Stock and (iii) new notes ("New Notes") issued by Host Marriott Hospitality,
Inc. ("Hospitality"), an indirect wholly-owned subsidiary of the Company. See
"The Exchange Offer and Restructuring." References herein to "the Distribution
and related transactions" include the Exchange Offer.
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock Offered
U.S. Offering................................... 14.0 million shares
International Offering.......................... 3.5 million shares
----
Total......................................... 17.5 million shares
Common Stock to be Outstanding after the Offer-
ings............................................. 137.1 million shares(1)
Use of Proceeds................................... For the funding of future
acquisitions and for general
corporate purposes
NYSE Trading Symbol............................... HMT
</TABLE>
- --------
(1) Based on the shares outstanding on December 10, 1993. Does not include (i)
up to 13.7 million shares of Common Stock subject to options granted to
executive officers and certain employees of the Company, with a weighted
average exercise price of $3.97 per share (certain of which options are
subject to vesting requirements), (ii) up to 5.9 million shares of Common
Stock issued to executive officers and certain employees under deferred
stock incentive plans and restricted stock plans (certain of which shares
are subject to vesting requirements), (iii) 7.1 million shares of Common
Stock issuable upon the exercise of conversion rights by holders of the
Company's Liquid Yield Option Notes due June 12, 2006 (the "LYONs"), (iv)
up to 7.7 million shares of Common Stock issuable upon exercise of warrants
to be issued by the Company to certain plaintiffs as part of a class action
settlement, with a current exercise price of $8 per share, and (v) 5.6
million shares of Common Stock issuable upon exercise of conversion rights
by holders of the Company's Series A Cumulative Convertible Preferred Stock
(the "Convertible Preferred Stock"). See "Recent Developments--LYONs
Redemption," "Description of Capital Stock--Convertible Preferred Stock;--
Warrants," "Management--Executive Officer Compensation," and "Financing."
5
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following table presents summary unaudited pro forma financial
information of the Company for the thirty-six weeks ended September 10, 1993
and September 11, 1992 and for the fiscal year ended January 1, 1993. This
information is derived from the unaudited pro forma financial statements
included in this Prospectus under "Pro Forma Financial Data" and reflects
consummation of the Distribution and related transactions. During the fourth
quarter of 1993, the Company effected the Distribution, which caused a
substantial change in the composition of the Company's assets, liabilities and
operations. Accordingly, the Company's historical financial data (see "Selected
Historical Financial Data") does not reflect the financial condition and
results of operations of the Company as it exists subsequent to the
Distribution. The pro forma financial information set forth below is not
necessarily indicative of the results that would have been achieved had such
transactions been consummated as of the dates indicated, or that may be
achieved in the future. The information presented below should be read in
conjunction with the Host Marriott Corporation Pro Forma Consolidated
Statements of Income for the thirty-six weeks ended September 10, 1993 and
September 11, 1992 and the year ended January 1, 1993 ("fiscal year 1992"), the
Host Marriott Corporation Pro Forma Consolidated Balance Sheet at September 10,
1993, the Host Marriott Corporation Consolidated and Condensed Consolidated
Financial Statements and Notes thereto, Management's Discussion and Analysis of
Results of Operations and Financial Condition and Management's Discussion and
Analysis of Pro Forma Financial Data included in this Prospectus.
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
--------------------------- FISCAL
SEPTEMBER 10, SEPTEMBER 11, YEAR
1993 1992 1992
------------- ------------- -----------
(UNAUDITED, IN MILLIONS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.................................. $ 963 $832 $1,209
Operating profit before corporate ex-
penses and interest................... 133 126 160
Interest expense....................... 131 135 198
Loss before cumulative effect of
changes in accounting principles(1)... (25) (20) (37)
BALANCE SHEET DATA:
Total assets........................... $3,742
Long-term debt......................... 2,156
Convertible subordinated debt
("LYONs")(2).......................... 241
OTHER DATA:
EBITDA(3).............................. $ 251 $235 $ 329
</TABLE>
- --------
(1) Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was adopted in the first fiscal quarter of 1993. In the second
fiscal quarter of 1993, the Company changed its accounting method for
assets held for sale. See "Notes to Condensed Consolidated Financial
Statements."
(2) Pursuant to the LYONs Allocation Agreement (as defined), Marriott
International has assumed responsibility for 90% of the LYONs obligation or
$217 million of the outstanding balance of $241 million of the LYONs as of
September 10, 1993. In December 1993, the Company gave notice of redemption
of the LYONs and set a redemption date of January 25, 1994. Based on the
aggregate principal amount of LYONs outstanding on December 13, 1993, the
aggregate redemption price will be $197 million, of which $177 million is
payable by Marriott International. However, the Company believes that most
of the LYONs will be converted into Common Stock and Marriott International
common stock, given the current market prices of such stocks relative to
the redemption price. If all of the LYONs are converted, the Company will
issue an additional 7,108,000 shares of its Common Stock. See "Recent
Developments--LYONs Redemption."
(3) EBITDA consists of the sum of consolidated net income (loss), interest
expense, income taxes, depreciation and amortization and certain other non-
cash charges, subject to certain other adjustments. EBITDA is not intended
to represent cash flow from operations as defined by generally accepted
accounting principles, and such information should not be considered as an
alternative to net income, cash flow from operations or any other
performance measures prescribed by generally accepted accounting
principles. The Company's pro forma EBITDA in fiscal 1992 includes $12
million from the operation of certain hotels and other operations which
were sold during the year.
6
<PAGE>
RECENT DEVELOPMENTS
ACQUISITIONS
The Company recently acquired the 580-room Ft. Lauderdale Marina Marriott for
a purchase price of approximately $40 million.
The Company has participated in discussions with respect to a potential
acquisition of the CIGA hotel chain. The CIGA hotel acquisition, if
consummated, would consist of up to 35 full service lodging properties located
throughout Western Europe. Other competitive bidders are also pursuing a
potential acquisition of CIGA. The Company has not yet determined to what
extent it will continue to pursue the CIGA acquisition, which decision will
depend in part on the activities of competing bidders. If the Company elects to
pursue such acquisition, there can be no assurance that the Company would be
able to reach an agreement to acquire these hotels.
DISPOSITIONS
The Company has executed a letter of intent to sell 26 of its Fairfield Inn
by Marriott hotels. The net proceeds from the sale of such hotels is expected
to be approximately $115 million, of which approximately $27 million will be
payable in the form of a note from the purchaser. The letter of intent is non-
binding, and consummation of the transaction is subject to certain conditions,
including the completion of due diligence review by the purchaser and the
execution of a definitive agreement with respect to the sale. While these
hotels were previously considered as long-term investments, the attractiveness
of the proposed transaction caused the Company to reconsider its position
relating to the sale of these hotels and to execute the letter of intent with
respect to the sale of these hotels. Therefore, because of the proposed
transaction, the Company is now considering these hotels as available for sale
and is evaluating the carrying value of such hotels based on the current net
realizable value (on the basis of expected sales price less the estimated costs
of disposal) of individual hotels. While the transaction referred to above
would result in an aggregate sales price in excess of the aggregate carrying
value of the hotels, certain individual hotels have an indicated net realizable
value below their carrying value. Therefore, the Company will record a charge
to earnings in the fourth quarter of fiscal 1993 of approximately $11 million
to write down 15 such properties to their individual estimated net realizable
value.
In December 1993, the Company sold its 15% interest in the partnership owning
the Boston Copley Marriott hotel for $10.4 million (which exceeds the carrying
value of the interest). During the fourth quarter of fiscal 1993, the Company
realized $30 million on the disposition of its preferred stock investment in
the American Restaurant Group and realized $11.7 million on the disposition of
its preferred stock investment in the Restaurant Enterprises Group.
RESIDENCE INNS
In the fourth quarter of fiscal 1993, the Company sold certain of its equity
interests in a partnership owning eleven Residence Inn by Marriott hotels for
approximately $15 million. These sales reduced the Company's ownership to 16.6%
and allowed the Company to be released from certain debt guarantee obligations.
Accordingly, the Company will no longer be consolidating the partnership and
will remove the $64 million of debt and $96 million of property, plant and
equipment from its balance sheet. A gain will be recorded in installments as
certain guarantee obligations expire.
NEW YORK MARRIOTT MARQUIS
The Company owns a 50% interest in Times Square Hotel Company ("TSHCO"), the
owner of the New York Marriott Marquis, and also holds security interests in an
additional 39% of the partnership interests as collateral for loans made to
certain partners. The partners are in default on the loans and the Company has,
for accounting purposes, realized an in-substance foreclosure of their
partnership interests. The Company is in the process of legal foreclosure on
these interests, which should be completed in early 1994.
Effective in the fourth quarter of fiscal 1993, the Company consolidated
TSHCO. The Company's balance sheet will be impacted by an increase in debt and
other liabilities of approximately $445 million, and
7
<PAGE>
a corresponding increase in assets (principally, property and equipment). Since
the Company began reporting substantially all of the losses of TSHCO in 1993,
the consolidation will have no material impact on consolidated net income or
earnings per share.
Of the $445 million of liabilities of TSHCO, $375 million represents a non-
recourse first mortgage loan which matured December 7, 1993. A preliminary
agreement has been reached for the extension of the loan for a term of five
years, which is subject to final approval by the lenders and completion of
definitive documentation. The preliminary agreement calls for a paydown of the
loan by $37 million at, or before, closing. However, there can be no assurance
that a final agreement will be reached. See "Certain Transactions."
HOST/TRAVEL PLAZAS RESTRUCTURING
In November 1993, the Company's Host/Travel Plazas business announced a plan
to redesign its operations structure to improve the effectiveness and
competitiveness of the business. Implementation of the new structure is
currently underway and is expected to be completed in the first quarter of
fiscal 1994. The Company will incur costs of approximately $7 million,
principally for severance, relocation, and the closing of certain offices. The
Company will take a restructuring charge in the fourth quarter of fiscal 1993
to reflect these costs.
LYONS REDEMPTION
In December 1993, the Company gave notice of redemption of the LYONs. The
LYONs will be redeemed on January 25, 1994, unless prior to such time holders
exercise their conversion rights. To the extent LYONs are redeemed for cash,
Marriott International will fund 90% of the redemption price pursuant to the
terms of the LYONs Allocation Agreement. Based on the aggregate principal
amount of LYONs outstanding on December 13, 1993, the aggregate redemption
price will be approximately $197 million, of which approximately $177 million
is payable by Marriott International. The LYONs are redeemable at $367.60 per
$1,000 principal amount and are convertible into 13.277 shares of Common Stock
and 13.277 shares of Marriott International common stock per $1,000 principal
amount. Based on the current market prices of the Common Stock and the Marriott
International common stock, the Company expects that most holders will elect to
convert LYONs into Common Stock and Marriott International common stock prior
to redemption. If all of the LYONs holders elected to convert prior to
redemption, LYONs holders would receive approximately 7.1 million shares of
Common Stock upon conversion. See "Relationships Between the Company and
Marriott International--LYONs Allocation Agreement."
8
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
purchasing the shares of Common Stock offered hereby.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
The Company has substantial indebtedness. After giving effect to the
Distribution and related transactions, on a pro forma basis, the Company had
consolidated long-term debt of $2.2 billion and total shareholders' equity of
$439 million as of September 10, 1993. The Ownership Business and the
Host/Travel Plazas Business are capital intensive, and the Company will have
significant capital requirements in the future. The Company's leverage could
affect its ability to obtain financing in the future or to undertake
refinancings on terms and subject to conditions deemed acceptable by the
Company. However, of the Company's pro forma long term debt of $2.2 billion as
of September 10, 1993, debt maturities prior to the year 2000 aggregate $305
million.
Most of the Ownership Business and the Host/Travel Plazas Business is
conducted by subsidiaries of Hospitality (a second-tier subsidiary of the
Company). Hospitality has issued $1.2 billion in aggregate principal amount of
New Notes, which are secured by a pledge of the stock of, and guaranteed by,
Hospitality and certain of its subsidiaries. The indenture governing these
notes contains covenants that, among other things, (i) limit the ability of
Hospitality to pay dividends and make other distributions and restricted
payments, (ii) limit the ability of Hospitality and its subsidiaries to incur
additional debt, (iii) limit the ability of Hospitality and its subsidiaries to
create additional liens on their respective assets, (iv) limit the ability of
the subsidiaries of Hospitality to incur debt and issue preferred stock, (v)
limit the ability of Hospitality and its subsidiaries to engage in certain
transactions with related parties, (vi) limit the ability of each subsidiary of
Hospitality to enter into agreements which restrict such subsidiary in paying
dividends or making certain other payments and (vii) limit the activities and
businesses of Holdings. See "Financing--New Notes" and "The Exchange Offer and
Restructuring." In addition, the Credit Agreement with Marriott International
imposes certain restrictions on the ability of the Company and certain other
subsidiaries to incur additional debt, impose liens or mortgages on their
properties (other than various types of liens arising in the ordinary course of
business), extend new guarantees (other than replacement guarantees), pay
dividends, repurchase their common stock, make investments and incur capital
expenditures. The above restrictions may limit the Company's ability to secure
additional financing, and may prevent the Company from engaging in transactions
that might otherwise be beneficial to the Company. See "Financing--Credit
Agreement."
PENDING LITIGATION
Between October 9, 1992 and December 29, 1992, following the announcement of
the Distribution, ten plaintiffs (United Apple Sales Incorporated Profit
Sharing Trust U/A DTD 8/1/71; Bernard Fintz, Administrator of the Fintz Pension
Plan; John D. Halford, Trustee of the John D. Halford Trust; Harvey Levy, as
Trustee for the National Rubber Footwear, Inc. Profit Sharing Plan; Moges
Gebremariam, as Trustee for the Moges Gebremariam Profit Sharing Plan; Howard
W. Bleiman; Edmond Tomlinson; Robert Seigle; Matthew Harlib; and Paul L. Stone,
collectively the "Class Action Plaintiffs") filed lawsuits against the Company
purportedly brought on behalf of classes of holders and purchasers of Old Notes
and other senior notes and debentures of the Company (the "Class Action
Lawsuits"). The Class Action Plaintiffs were all holders, or former holders, of
Old Notes. The foregoing Class Action Lawsuits were consolidated under the
caption United Apple Sales Incorporated Profit Sharing Trust U/A DTD 8/l/71, et
al. v. Marriott Corp., et al. in the United States District Court for the
District of Maryland. A similar lawsuit filed by one of the Class Action
Plaintiffs in Maryland state court was stayed pending resolution of the cases
in the United States District Court for the District of Maryland (the "District
Court").
On October 29, 1992, a second group of plaintiffs (the "PPM Group")
purporting to hold approximately $120 million of principal amount of Old Notes
filed lawsuits against the Company (the "PPM Lawsuit"). The PPM Group consists
of PPM America, Inc.; London Pacific Life & Annuity Company; Transamerica
9
<PAGE>
Life Insurance & Annuity Company, Transamerica Income Shares. Inc.; National
Home Life Assurance Company; Commonwealth Life Insurance Company; Provident
Mutual Life Insurance Company of Philadelphia; Vanguard Fixed Income Securities
Fund. Inc.; Wellington Fund, Inc.; Anchor Series Trust; High Yield Plus Fund,
Inc.; New America High Income Fund, Inc.; Security Mutual Life Insurance
Company of New York, Security Equity Life Insurance Company; and Utica National
Life Insurance Company. People's Security Life Insurance Company, which
purportedly purchased approximately $16 million in Old Notes, was later added
as an additional plaintiff in the PPM Lawsuit.
On March 25, 1993, the State Board of Administration of Florida (the "Florida
Plaintiff"), purporting to hold approximately $7.5 million principal amount of
Old Notes, filed an additional class action lawsuit purportedly brought on
behalf of certain classes of holders of Old Notes and other senior notes and
debentures of the Company (the "Florida Lawsuit"). The Florida Lawsuit has been
consolidated with the PPM Lawsuit.
The Class Action Lawsuits and the Florida Lawsuit alleged, among other
things, that (i) the Distribution, if effected, would violate the terms of the
Old Notes, (ii) federal securities laws (and similar state laws) had been
violated in connection with the sale by the Company of certain series of its
Old Notes (the "Disclosure Claims"), (iii) the Distribution, if effected, would
be a fraudulent conveyance as to creditors of the Company and (iv) the
Distribution, if effected, would constitute a breach of fiduciary duty and a
breach of implied covenants of good faith and fair dealing allegedly owed by
the Company to holders of Old Notes. The PPM Lawsuit is limited to the
Disclosure Claims. The Company has counterclaimed against certain members of
the PPM Group, asserting tortious interference with business relationships.
The Company reached an agreement to settle the Class Action Lawsuits (the
"Class Action Settlement"), which settlement was approved by the District Court
on August 30, 1993. The Class Action Settlement disposes of all legal claims
challenging the Distribution, other than Disclosure Claims by certain holders
and former holders of Old Notes (principally members of the PPM Group and the
Florida Plaintiff) who have "opted out" of the Class Action Settlement with
respect to the Disclosure Claims. On October 18, 1993, the District Court also
dismissed all claims in the Florida Lawsuit other than those relating to the
Disclosure Claims. The Florida Plaintiff has filed an appeal with the United
States Court of Appeals for the Fourth Circuit, challenging the District
Court's approval of the Class Action Settlement.
As part of the Class Action Settlement, the Company effected the Exchange
Offer, paid certain legal fees and expenses of the Class Action Plaintiffs and
agreed to issue warrants to purchase up to 7.7 million shares of Common Stock,
exercisable for five years after the Distribution, at $8.00 per share during
the first three years and $10.00 per share during the last two years. The
warrants are not expected to be issued until the appeal of the Class Action
Settlement is resolved. See "Description of Capital Stock."
The PPM Group and the Florida Plaintiff continue to litigate their Disclosure
Claims. On December 17, 1993, the Company filed a motion for summary judgment
asking the District Court to enter judgment in favor of the Company and other
individual defendants on all the claims. The PPM Group also filed a motion for
summary judgment with respect to the Company's counterclaim. The Company
believes the Disclosure Claims are without merit and that the litigation
pursued by those who have opted out of the Class Action Settlement will not
have a material effect on the financial condition of the Company. Nevertheless,
there can be no certainty as to the ultimate outcome of such litigation.
POTENTIAL CONFLICTS WITH MARRIOTT INTERNATIONAL
The interests of the Company and Marriott International may potentially
conflict due to the ongoing relationships between the companies. In addition,
the Company and Marriott International share two common directors--J.W.
Marriott, Jr. serves as Chairman of the Board of Directors and President of
Marriott International and also serves as a director of the Company, and
Richard E. Marriott serves as Chairman of the Board of Directors of the Company
and also serves as a director of Marriott International. Messrs. J.W. Marriott,
Jr. and Richard E. Marriott, as well as certain other officers and directors of
Marriott
10
<PAGE>
International and the Company, also own shares (and/or options or other rights
to acquire shares) in both companies. With respect to the various contractual
arrangements between the two companies, the potential exists for disagreement
as to the quality of services provided by Marriott International and as to
contract compliance. Additionally, the possible desire of the Company, from
time-to-time, to finance, refinance or effect a sale of any of the properties
managed by Marriott International may, depending upon the structure of such
transactions, result in a need to modify the management agreement with Marriott
International with respect to such property. Any such modification proposed by
the Company may not be acceptable to Marriott International, and the lack of
consent from Marriott International could adversely affect the Company's
ability to consummate such financing or sale. In addition, certain situations
could arise where actions taken by Marriott International in its capacity as
manager of competing lodging properties would not necessarily be in the best
interests of the Company. The Company and Marriott International are also
parties to a noncompetition agreement that imposes certain limitations on the
companies' ability to compete with each other in certain businesses.
Nevertheless, the Company believes that there is sufficient mutuality of
interest between the Company and Marriott International to result in a mutually
productive relationship. Moreover, appropriate policies and procedures are
followed by the Board of Directors of each of the companies to limit the
involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott (and, if
appropriate, other officers and directors of such companies) in conflict
situations, including requiring them to abstain from voting as directors of
either the Company or Marriott International (or as directors of any of their
subsidiaries) on certain matters which present a conflict between the
companies. See "Relationship Between the Company and Marriott International."
DIVIDEND POLICY
The Company intends to retain future earnings for use in its business and
does not currently anticipate paying dividends on the Common Stock. In
addition, the Credit Agreement contains restrictions on the payment of
dividends on the Common Stock. See "Dividend Policy" and "Financing." The
Company has also stated its intention to pay dividends on its outstanding
Convertible Preferred Stock only to the extent of earnings, and the Company did
not declare a dividend on the Convertible Preferred Stock for the last
quarterly dividend period. If six quarterly dividend payments are in arrears,
the holders of the Convertible Preferred Stock will become entitled to elect
two directors of the Company. There are approximately 292,000 depositary
shares, each representing 1/1000th of a share of Convertible Preferred Stock,
that remain outstanding as of December 23, 1993, and the stated quarterly
dividend on these shares is approximately $300,000. The Company could
recommence payment of quarterly dividends in order to avoid the election of
additional directors. In addition, commencing January 15, 1996, the outstanding
Convertible Preferred Stock may be redeemed at an aggregate redemption price of
approximately $15 million plus accrued and unpaid dividends.
EFFECTS OF ECONOMIC CONDITIONS AND CYCLICALITY
The Company's ownership of real property, including hotels, senior living
facilities and undeveloped land parcels, is substantial. Real estate values are
sensitive to changes in local market and economic conditions and to
fluctuations in the economy as a whole. There can be no assurance that
downturns or prolonged adverse conditions in real estate or capital markets or
the economy as a whole will not have a material adverse impact on the Company.
ANTITAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation and Bylaws each contain
provisions that will make difficult an acquisition of control of the Company by
means of a tender offer, open market purchases, proxy fight, or otherwise, that
is not approved by the Board of Directors. Provisions that may have an
antitakeover effect include (i) a staggered board of directors with three
separate classes, (ii) a super-majority vote requirement for removal or filling
of vacancies on the Board of Directors and for amendment to the Restated
Certificate of Incorporation and Bylaws, (iii) limitations on shareholder
action by written consent and
11
<PAGE>
(iv) super-majority voting requirements for approval of mergers and other
business combinations involving the Company and interested shareholders. In
addition, the Company is subject to Section 203 of the Delaware General
Corporation Law requiring super-majority approval for certain business
combinations. The Company has also adopted a shareholder rights plan which may
discourage or delay a change in control of the Company. Finally, the Company
has granted Marriott International, for a period of ten years following the
Distribution, the right to purchase up to 20% of each class of the then
outstanding voting stock of the Company at the fair market value thereof upon
the occurrence of certain specified events, generally involving changes in
control of the Company (the "Marriott International Purchase Right"). The
Marriott International Purchase Right may have certain antitakeover effects
with respect to the Company. See "Purposes and Antitakeover Effects of Certain
Provisions of the Company Certificate and Bylaws and the Marriott International
Purchase Right" and "Description of Capital Stock--Rights and Junior Preferred
Stock."
THE COMPANY
The Company is one of the largest owners of lodging properties in the world.
The Company's 130 owned lodging properties are operated under Marriott brand
names and managed by Marriott International, formerly a wholly-owned subsidiary
of the Company. The Company is the largest owner of hotels operated under
Marriott brands and owns approximately 23% of the lodging properties operated
by Marriott International. The Company also holds minority interests in various
partnerships that own an additional 272 properties operated by Marriott
International. The Company's properties span several market segments, including
full service (Marriott Hotels, Resorts and Suites), moderately-priced
(Courtyard by Marriott), extended-stay (Residence Inn by Marriott) and economy
(Fairfield Inn by Marriott). These Marriott brands are among the most respected
and widely recognized in the lodging industry. In 1992, each brand was ranked
either first or second overall in its segment by Business Travel News. The
Company's hotels consistently outperform the industry's average occupancy rate
by a significant margin, and averaged approximately 78.9% for the first eight
months of 1993 compared to 65.3% for the lodging industry.
The Company seeks to grow through opportunistic acquisitions of full service
hotels in the U.S. and abroad. The Company believes that the full service
segment of the market offers numerous opportunities to acquire assets at
attractive multiples of cash flow and at discounts to replacement value,
including under-performing hotels which can be improved under new management.
The Company believes that the full service segment, in particular, has
potential for improved performance as the economy continues to improve and as
business travel continues to increase. The Company has recently acquired the
580-room Ft. Lauderdale Marina Marriott and is pursuing discussions with
respect to other acquisition opportunities.
The Company believes it is well qualified to pursue its acquisition strategy.
Management has extensive experience in acquiring and financing lodging
properties and believes its industry knowledge, relationships and access to
information provide a competitive advantage with respect to evaluating and
acquiring hotel assets. In addition, the Company is well positioned to convert
acquired properties to high quality lodging brand names due to its strategic
alliance with Marriott International.
The Company is also the leading operator of airport and tollroad food and
merchandise concessions, with facilities in virtually every major commercial
airport in the U.S. The Company operates restaurants, gift shops and related
facilities at 73 airports, on 14 tollroads (including 93 travel plazas) and at
42 tourist attractions, stadiums and arenas. Many of the Company's concessions
operate under branded names, including Pizza Hut, Burger King, Taco Bell,
Sbarro's, Dunkin' Donuts, TCBY yogurt, Mrs. Fields cookies, Nathan's Famous hot
dogs and Cheers. In addition, the Company owns 14 senior living facilities
which are leased to Marriott International under long-term leases.
The principal executive offices of the Company are located at 10400 Fernwood
Road, Bethesda, Maryland, 20817, and its telephone number is (301) 380-9000.
The Company was incorporated under the laws of the State of Delaware in 1929.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby, after deducting estimated underwriting discounts and commissions and
expenses of the Offerings, are estimated to be approximately $187 million
(approximately $215 million if the Underwriters' over-allotment option is
exercised in full), based on the last reported sale price per share of the
Common Stock on the NYSE Composite Tape on January 18, 1994. The Company
expects to use the net proceeds from the Offerings for future acquisitions of
lodging properties or related assets. To the extent not so expended, the net
proceeds will be used for general corporate purposes.
DIVIDEND POLICY
The Company intends to retain future earnings for use in its business and
does not currently anticipate paying any dividends on the Common Stock. In
addition, the Credit Agreement contains restrictions on the payment of
dividends on the Common Stock and the Company's subsidiaries are subject to
certain agreements that limit their ability to pay dividends to the Company.
See "Financing." The Company has also stated its intention to pay dividends on
its outstanding Convertible Preferred Stock only to the extent of earnings, and
the Company did not declare a dividend on the Convertible Preferred Stock for
the last quarterly dividend period. If six quarterly dividend payments are in
arrears, the holders of the Convertible Preferred Stock will become entitled to
elect two directors of the Company. There are approximately 292,000 depositary
shares, each representing 1/1000th of a share of Convertible Preferred Stock,
that remain outstanding as of December 23, 1993, and the stated quarterly
dividend on these shares is approximately $300,000. The Company could
recommence payment of quarterly dividends in order to avoid the election of
additional directors. In addition, commencing January 15, 1996, the outstanding
Convertible Preferred Stock may be redeemed at an aggregate redemption price of
approximately $15 million plus accrued and unpaid dividends.
13
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth, as of September 10, 1993, the pro forma
capitalization of the Company after giving effect to the Distribution and
related transactions and as adjusted to give effect to the sale of the shares
of Common Stock offered hereby (assuming an offering price of $11.25 per share,
the last reported sale price on the New York Stock Exchange on January 18,
1994) as if the Offerings had occurred on September 10, 1993. The Pro Forma
Capitalization of the Company should be read in conjunction with Host Marriott
Corporation's Consolidated and Condensed Consolidated Financial Statements and
Notes thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 10, 1993
(UNAUDITED, IN MILLIONS)
------------------------
PRO FORMA
PRO FORMA AS ADJUSTED(1)
--------- --------------
<S> <C> <C>
Cash and equivalents................................... $ 27 $ 214
====== ======
Long-term debt, including current portion.............. $2,164 $2,164
Convertible subordinated debt (LYONs)(2)............... 241 241
Shareholders' equity................................... 439 626
------ ------
Total Capitalization................................... $2,844 $3,031
====== ======
</TABLE>
- --------
(1) Reflects receipt of proceeds of the Offerings after deducting estimated
underwriting discounts and commissions and expenses of the Offerings. See
"Use of Proceeds."
(2) Pursuant to the LYONs Allocation Agreement, Marriott International assumed
responsibility for 90% of the LYONs obligation or $217 million of the
outstanding balance of $241 million of the LYONs as of September 10, 1993.
The LYONs have been called for redemption on January 25, 1994. Based on the
current market prices of the Common Stock and the Marriott International
common stock, the Company expects that most holders will elect to convert
LYONs into Common Stock and Marriott International common stock prior to
redemption. See "Prospectus Summary--Recent Developments--LYONs
Redemption."
14
<PAGE>
PRO FORMA FINANCIAL DATA
The unaudited Pro Forma Consolidated Balance Sheet of the Company as of
September 10, 1993 presents, in the "Host Marriott Corporation Pro Forma"
column, the financial position of the Company as if the Distribution and
related transactions had been completed as of such date. The unaudited Pro
Forma Consolidated Statement of Income of the Company for the thirty-six weeks
ended September 10, 1993 and September 11, 1992 and for the fiscal year ended
January 1, 1993 present, in the "Host Marriott Corporation Pro Forma" column,
the results of operations of the Company as if the Distribution and related
transactions had been completed at the beginning of the applicable period. The
adjustments required to reflect the Distribution and related transactions are
set forth in the "Distribution Pro Forma Adjustments" column and discussed in
the accompanying notes. The unaudited Pro Forma Financial Data of the Company
are presented for informational purposes only and may not reflect the Company's
future results of operations and financial position or what the results of
operations and financial position of the Company would have been had such
transactions occurred as of the dates indicated.
The unaudited Pro Forma Financial Data and Notes thereto of the Company
should be read in conjunction with the Host Marriott Corporation Consolidated
and Condensed Consolidated Financial Statements and Notes thereto contained
elsewhere in this Prospectus.
15
<PAGE>
HOST MARRIOTT CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
AT SEPTEMBER 10, 1993 (IN MILLIONS)
--------------------------------------------------------------------
ADJUSTMENT TO
REFLECT MARRIOTT HOST
MARRIOTT INTERNATIONAL, ADJUSTED DISTRIBUTION MARRIOTT
CORPORATION INC. ON THE MARRIOTT PRO FORMA CORPORATION
HISTORICAL(1) EQUITY METHOD CORPORATION ADJUSTMENTS PRO FORMA
------------- ---------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents... $ 322 $ (141) $ 181 $ (25)(A) $ 27
(172)(N)
43 (O)
Accounts receivable,
net................... 612 (524) 88 (9)(A) 79
Inventories............ 298 (223) 75 (14)(A) 61
Other current assets... 201 (151) 50 (10)(A) 40
------ ------- ------ ----- ------
1,433 (1,039) 394 (187) 207
------ ------- ------ ----- ------
Property and equipment,
net.................... 3,399 (743) 2,656 (42)(J) 2,614
Investments in affili-
ates................... 451 (93) 358 358
Investment and advances
to Marriott
International, Inc..... -- 718 718 (718)(B) --
Intangibles............. 442 (415) 27 27
Notes receivable and
other.................. 629 (310) 319 217 (C) 536
------ ------- ------ ----- ------
$6,354 $(1,882) $4,472 $(730) $3,742
====== ======= ====== ===== ======
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable....... $ 754 $ (541) $ 213 $ (99)(N) $ 77
(37)(A)
Other current liabili-
ties.................. 759 (565) 194 (46)(A) 148
------ ------- ------ ----- ------
1,513 (1,106) 407 (182) 225
------ ------- ------ ----- ------
Long-term debt.......... 2,623 (382) 2,241 (8)(A) 2,156
43 (O)
(42)(J)
(44)(L)
200 (K)
(60)(M)
(200)(K)
26 (N)
Other long-term liabili-
ties................... 467 (333) 134 (2)(A) 132
Deferred income......... 161 (78) 83 83
Deferred income taxes... 473 17 490 (14)(J) 466
(10)(N)
Convertible subordinated
debt................... 241 241 241
Shareholders' Equity
Convertible preferred
stock................. 200 200 (184)(P) 16
Common stock........... 105 105 11 (P) 118
2 (M)
Additional paid-in cap-
ital.................. 41 41 173 (P) 272
58 (M)
Retained earnings...... 581 581 (718)(B) 84
217 (C)
35 (A)
(89)(N)
14 (J)
44 (L)
Treasury stock, at
cost.................. (51) (51) (51)
------ ------- ------ ----- ------
876 876 (437) 439
------ ------- ------ ----- ------
$6,354 $(1,882) $4,472 $(730) $3,742
====== ======= ====== ===== ======
</TABLE>
- --------
(1) Certain amounts have been reclassified to facilitate separate company
presentation.
16
<PAGE>
HOST MARRIOTT CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 10, 1993
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------------------------
ADJUSTMENT TO
REFLECT MARRIOTT HOST
MARRIOTT INTERNATIONAL, ADJUSTED DISTRIBUTION MARRIOTT
CORPORATION INC. ON THE MARRIOTT PRO FORMA CORPORATION
HISTORICAL(1) EQUITY METHOD CORPORATION ADJUSTMENTS PRO FORMA
------------- ---------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Sales
Lodging
Rooms.................. $2,037 $(1,671) $ 366 $(366)(E) $ --
Food and beverage...... 802 (694) 108 (108)(E) --
Other.................. 413 (385) 28 140 (E) 168
------ ------- ------ ----- -------
3,252 (2,750) 502 (334) 168
Contract services...... 3,011 (2,176) 835 (40)(D) 795
------ ------- ------ ----- -------
6,263 (4,926) 1,337 (374) 963
------ ------- ------ ----- -------
Operating costs and ex-
penses
Lodging
Departmental direct
costs
Rooms................. 492 (403) 89 (89)(E) --
Food and beverage..... 625 (539) 86 (86)(E) --
Other operating ex-
penses, including pay-
ments to hotel owners. 1,872 (1,633) 239 (147)(E) 93
1 (J)
------ ------- ------ ----- -------
2,989 (2,575) 414 (321) 93
Contract services...... 2,901 (2,121) 780 (43)(D) 737
------ ------- ------ ----- -------
5,890 (4,696) 1,194 (364) 830
------ ------- ------ ----- -------
Operating profit
Lodging................ 263 (175) 88 (12)(E) 75
(1)(J)
Contract services...... 110 (55) 55 3 (D) 58
------ ------- ------ ----- -------
Operating profit before
corporate expenses and
interest............... 373 (230) 143 (10) 133
Corporate expenses...... (80) 39 (41) (41)
Interest expense........ (156) 16 (140) 12 (C) (131)
(4)(G)
2 (K)
2 (J)
4 (M)
(1)(N)
(1)(O)
(5)(L)
Interest income......... 21 (2) 19 19
------ ------- ------ ----- -------
Income (loss) before in-
come taxes, equity
earnings of subsidiary
and cumulative effect
of changes in account-
ing principles(2)...... 158 (177) (19) (1) (20)
Provision (benefit) for
income taxes........... 76 (74) 2 3 (H) 5
------ ------- ------ ----- -------
Income (loss) before eq-
uity in earnings of
subsidiary and cumula-
tive effect of changes
in accounting princi-
ples(2)................ 82 (103) (21) (4) (25)
Equity in earnings of
subsidiary, net of tax. 103 103 (103)(B) --
------ ------- ------ ----- -------
Income (loss) before a
cumulative effect of
changes in accounting
principles(2).......... 82 -- 82 (107) (25)
Dividends on preferred
stock.................. 12 -- 12 (11)(P) 1
------ ------- ------ ----- -------
Income (loss) available
for common stock before
cumulative effect of
changes in accounting
principles(2).......... $ 70 $ -- $ 70 $ (96) $ (26)
====== ======= ====== ===== =======
Fully diluted earnings
(loss) per share before
cumulative effect of
changes in accounting
principle(2)........... $ 0.64 $ 0.64 $ (0.23)
====== ====== =======
(7.6) (I)
10.6 (P)
Fully diluted common
shares................. 109.8 109.8 1.8 (M) 114.6
====== ====== ===== =======
</TABLE>
- -------
(1) Certain costs have been reclassified to facilitate separate Company
presentation.
(2) Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was adopted in the first fiscal quarter of 1993. In the second
fiscal quarter of 1993, the Company changed its accounting method for
assets held for sale. See "Notes to Condensed Consolidated Financial
Statements."
17
<PAGE>
HOST MARRIOTT CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1992
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------------------
ADJUSTMENT TO
REFLECT MARRIOTT
MARRIOTT INTERNATIONAL, ADJUSTED DISTRIBUTION HOST MARRIOTT
CORPORATION INC. ON THE MARRIOTT PRO FORMA CORPORATION
HISTORICAL(1) EQUITY METHOD CORPORATION ADJUSTMENTS PRO FORMA
------------- ---------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Sales
Lodging
Rooms.................. $2,004 $(1,618) $ 386 $(386)(E) $ --
Food and beverage...... 809 (688) 121 (121)(E) --
Other.................. 353 (325) 28 146 (E) 174
------ ------- ----- ----- -------
3,166 (2,631) 535 (361) 174
Contract services...... 2,771 (2,088) 683 (25)(D) 658
------ ------- ----- ----- -------
5,937 (4,719) 1,218 (386) 832
------ ------- ----- ----- -------
Operating costs and ex-
penses
Lodging
Departmental direct
costs
Rooms................. 474 (386) 88 (88)(E) --
Food and beverage..... 629 (531) 98 (98)(E) --
Other operating
expenses, including
payments to hotel
owners................ 1,824 (1,556) 268 (162)(E) 107
1 (J)
------ ------- ----- ----- -------
2,927 (2,473) 454 (347) 107
Contract services...... 2,676 (2,043) 633 (34)(D) 599
------ ------- ----- ----- -------
5,603 (4,516) 1,087 (381) 706
------ ------- ----- ----- -------
Operating profit
Lodging................ 239 (158) 81 (13)(E) 67
(1)(J)
Contract services...... 95 (45) 50 9 (D) 59
------ ------- ----- ----- -------
Operating profit before
corporate expenses and
interest............... 334 (203) 131 (5) 126
Corporate expenses...... (74) 40 (34) (34)
Interest expense........ (161) 17 (144) 11 (C) (135)
(4)(G)
1 (K)
2 (J)
4 (M)
(5)(L)
Interest income......... 20 (2) 18 -- 18
------ ------- ----- ----- -------
Income (loss) before
income taxes and equity
earnings of subsidiary. 119 (148) (29) 4 (25)
Provision (benefit) for
income taxes........... 53 (64) (11) 6 (H) (5)
------ ------- ----- ----- -------
Income (loss) before eq-
uity in earnings of
subsidiary............. 66 (84) (18) (2) (20)
Equity in earnings of
subsidiary, net of tax. -- 84 84 (84)(B) --
------ ------- ----- ----- -------
Income (loss)........... 66 -- 66 (86) (20)
Dividends on preferred
stock.................. 12 -- 12 (11)(P) 1
------ ------- ----- ----- -------
Income (loss) available
for common stock....... $ 54 $ -- $ 54 $ (75) $ (21)
====== ======= ===== ===== =======
Fully diluted earnings
(loss) per share....... $ 0.51 $0.51 $ (0.19)
====== ===== =======
(5.8)(I)
10.6 (P)
Fully diluted common
shares................. 105.3 105.3 1.8 (M) 111.9
====== ===== ===== =======
</TABLE>
- --------
(1) Certain costs have been reclassified to facilitate separate Company
presentation.
18
<PAGE>
HOST MARRIOTT CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 1, 1993
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------------------
ADJUSTMENT TO
REFLECT MARRIOTT
MARRIOTT INTERNATIONAL, ADJUSTED DISTRIBUTION HOST MARRIOTT
CORPORATION INC. ON THE MARRIOTT PRO FORMA CORPORATION
HISTORICAL(1) EQUITY METHOD CORPORATION ADJUSTMENTS PRO FORMA
------------- ---------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Sales
Lodging
Rooms.................. $2,843 $(2,315) $ 528 $ (528)(E) $ --
Food and beverage...... 1,190 (1,023) 167 (167)(E) --
Other.................. 518 (479) 39 194 (E) 233
------ ------- ------ ------ -------
4,551 (3,817) 734 (501) 233
Contract services...... 4,171 (3,154) 1,017 (41)(D) 976
------ ------- ------ ------ -------
8,722 (6,971) 1,751 (542) 1,209
------ ------- ------ ------ -------
Operating costs and ex-
penses
Lodging
Departmental direct
costs
Rooms................. 676 (546) 130 (130)(E) --
Food and beverage..... 917 (782) 135 (135)(E)
Other operating
expenses, including
payments to hotel
owners................ 2,625 (2,253) 372 (228)(E) 145
1 (J)
------ ------- ------ ------ -------
4,218 (3,581) 637 (492) 145
Contract services...... 4,021 (3,064) 957 (53)(D) 904
------ ------- ------ ------ -------
8,239 (6,645) 1,594 (545) 1,049
------ ------- ------ ------ -------
Operating profit
Lodging................ 333 (236) 97 (8)(E) 88
(1)(J)
Contract services...... 150 (90) 60 12 (D) 72
------ ------- ------ ------ -------
Operating profit before
corporate expenses and
interest............... 483 (326) 157 3 160
Corporate expenses...... (129) 67 (62) 16 (F) (46)
Interest expense........ (235) 25 (210) 16 (C) (198)
(6)(G)
(8)(L)
6 (M)
2 (K)
2 (J)
Interest income......... 31 (3) 28 -- 28
------ ------- ------ ------ -------
Income (loss) before
income taxes and equity
in earnings of
Subsidiary............. 150 (237) (87) 31 (56)
Provision (benefit) for
income taxes........... 65 (103) (38) 19 (H) (19)
------ ------- ------ ------ -------
Income (loss) before eq-
uity in earnings of
subsidiary............. 85 (134) (49) 12 (37)
Equity in earnings of
subsidiary, net of tax. -- 134 134 (134)(B) --
------ ------- ------ ------ -------
Net Income (loss)....... 85 -- 85 (122) (37)
Dividends on preferred
stock.................. 17 -- 17 (16)(P) 1
------ ------- ------ ------ -------
Net Income (loss) avail-
able for common stock.. $ 68 $ -- $ 68 $ (106) $ (38)
====== ======= ====== ====== =======
Earnings (loss) per
share.................. $ 0.64 $ 0.64 $ (0.34)
====== ====== =======
10.6 (P)
(6.7)(I)
Fully diluted common
shares................. 106.5 106.5 1.8 (M) 112.2
====== ====== ====== =======
</TABLE>
- --------
(1) Certain costs have been reclassified to facilitate separate Company
presentation.
19
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
A. Represents the elimination of working capital for lodging properties and
working capital and certain noncurrent liabilities for retirement
communities owned by the Company and operated by Marriott International.
B. Represents distribution of 100% of Marriott International common stock to
the Company's common shareholders.
C. Represents assumption by Marriott International of 90% of the LYONs. (See
"Relationship Between the Company and Marriott International--LYONs
Allocation Agreement.")
D. Represents sales and operating expenses, other than depreciation, offset by
rental income, for retirement communities owned by the Company and leased
to Marriott International.
E. Represents adjustment to reduce lodging sales of properties owned by the
Company and operated by Marriott International to amounts to be remitted by
Marriott International to the Company.
F. Represents the elimination of nonrecurring costs directly related to the
Distribution.
G. Represents 1% commitment fee to Marriott International on the unborrowed
portion of the revolving line of credit.
H. Represents income tax impact of pro forma adjustments, at statutory rates,
adjusted to reflect the loss of certain state income tax benefits.
I. Represents elimination of shares that are antidilutive on a pro forma
basis.
J. Represents the transfer of land owned by the Company and leased to a
partnership owning a Marriott hotel, along with related deferred taxes, and
assumption of debt by Marriott International equal to the book value of the
land and related impact on interest expense.
K. Represents initial draw by the Company under the Marriott International
line of credit (and corresponding paydown of other Company debt), the
related impact on interest expense, and the reduction in commitment fee to
Marriott International.
L. Represents the impact of additional debt assumed by Marriott International,
and the 100 basis point increase in interest rate applicable to the New
Notes.
M. Represents the Common Stock issued concurrently with the Distribution as
part of the Exchange Offer, and the corresponding impact on interest
expense.
N. Represents adjustment to allocate outstanding drafts, cash and certain
other assets and liabilities between the Company and Marriott International
in accordance with the Distribution Agreement (as defined).
O. Represents adjustment to reflect draws and related interest expense under a
mortgage with Marriott International related to the funding of capital
expenditures for the Philadelphia Convention Center Hotel.
P. Represents adjustment to reflect conversion of Convertible Preferred Stock
prior to the Distribution.
Q. Excludes adjustment to reflect the loss on extinguishment of the Old Notes
of approximately $9 million and transaction costs with respect to the
Distribution and related transactions of approximately $13 million, because
the amounts are non-recurring.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL DATA
The Company's Management's Discussion and Analysis of Pro Forma Financial
Data should be read in conjunction with the Management's Discussion and
Analysis of Results of Operations and Financial Condition for the thirty-six
week periods ended September 10, 1993 and September 11, 1992 and the three
fiscal years in the period ended January 1, 1993, which is attached as Annex A
hereto.
On October 8, 1993, the Company completed the Distribution and the Exchange
Offer. As a result, the assets, liabilities, and businesses of the Company have
changed substantially. Accordingly, the following pro forma analysis of
financial position and results of operations is considered by management of the
Company to be more reflective of the financial resources and operations of the
Company as they now exist than Management's Discussion and Analysis of Results
of Operations and Financial Condition which is included as part of this
Prospectus. The following analysis should be read in conjunction with the
Company's Consolidated and Condensed Consolidated financial statements and
notes thereto, as well as the Pro Forma Financial Data, all of which are
included as part of this Prospectus.
PRO FORMA RESULTS OF OPERATIONS
Thirty-six weeks ended September 10, 1993 compared to thirty-six weeks ended
September 11, 1992. Pro forma sales increased approximately 16% to $963 million
for the thirty-six weeks ended September 10, 1993 over the comparable 1992
amount. Total pro forma lodging sales declined by approximately 3% in the
thirty-six weeks ended September 10, 1993 from the thirty-six weeks ended
September 11, 1992 due primarily to the sale of seven full service hotels in
1992. However, on a comparable basis, excluding results for the seven full
service hotels sold, pro forma lodging sales increased 8% in 1993, primarily
due to a 7.7% increase in revenue per available room (weighted average room
rate multiplied by the weighted average occupancy rate) for the Company's
combined lodging operations. This increase represents a contribution from each
of the Company's four lodging products with particularly strong improvement by
the Residence Inn and Courtyard products. The Company's hotels consistently
outperform the industry's average occupancy rate by a significant margin, and
averaged approximately 78.9% for the first eight months of 1993 compared to
65.3% for the lodging industry.
Pro forma lodging operating profit increased 12% in the 1993 thirty-six week
period compared with the comparable period in 1992, principally due to the
increase in revenues. Because the lodging property operations have a relatively
fixed cost structure, increases in room rate generally yield greater percentage
increases in operating profit.
The Host/Travel Plazas Business experienced a sales increase in the 1993
period of 20% which is primarily attributable to the Company's acquisition of
the Dobb's Houses, Inc. concessions in late 1992. See "Business and
Properties--Host/Travel Plazas Business." Pro forma operating profit for the
Host/Travel Plazas Business was relatively unchanged due principally to a
general decline in U.S. enplanements, reduced traffic on several major tollroad
systems, higher rent at one airport and unit remodeling on one tollroad system.
The Host/Travel Plazas Business has led the industry in introducing branded
products at its locations, including brands such as Pizza Hut, Burger King,
Taco Bell, Sbarro's, Dunkin' Donuts, TCBY yogurt, Mrs. Fields cookies, Nathan's
Famous hot dogs and Cheers. This strategy has resulted in enhanced customer
capture rate but has caused a narrowing of profit margins. Management of the
Company believes that the restructuring of the Host/Travel Plazas Business
currently being implemented will better position it to increase operating
efficiency and build synergies between its product offerings. See "Summary--
Recent Developments--Host/Travel Plazas Restructuring."
Pro forma corporate expenses increased 20% in 1993 due to an increase in
losses on the Company's equity investments, primarily due to the Company
reporting substantially all of the losses of TSHCO beginning in fiscal 1993.
Pro forma interest expense decreased slightly in the thirty-six weeks ended
September 11, 1993 due to lower interest rates.
Pro forma income tax expense increased $10 million principally as a result of
the impact of a Federal tax rate increase enacted during the year.
SOURCES AND USES OF CAPITAL
Operating cash flow is generated principally by the Company's Ownership
Business (approximately two-thirds of 1992 pro forma operating cash flow) and
by the Host/Travel Plazas Business. As a result of the
21
<PAGE>
Distribution, the Company is substantially more leveraged than it was prior to
the Distribution. However, the Company believes that financial resources from
ongoing operations as well as funds available under its $630 million line of
credit will be sufficient to enable it to meet its debt service needs and
finance its capital expenditures for the forseeable future.
Financing Activities. On a pro forma basis, the Company had consolidated
long-term debt of $2.2 billion at September 10, 1993. Substantially all of this
debt carries fixed interest rates and the weighted average rate approximates
9.5%. The Company is also party to $527 million aggregate notional amount of
interest exchange agreements. The principal agreement (covering $500 million)
requires payment by the Company of interest based on specified floating rates
(average rate 3.4% at September 10, 1993) and collects interest at fixed rates
(average rate of 7.6% at September 10, 1993) through 1997.
The Company owns a portfolio of real estate which can be sold or used to
secure new financings. Pro forma net property and equipment, including property
and equipment of the Host/Travel Plazas Business, totaled $2.6 billion at
September 10, 1993, including approximately $1.8 billion which had not been
pledged or mortgaged. The Company has initiated discussions with several
financial institutions and investment banks which have expressed an interest in
assisting it in obtaining long-term financing and (subject, among other things,
to compliance with its existing debt agreements, including requirements to use
the proceeds of certain refinancings to repay indebtedness) may use
unencumbered assets as security for future financings, if such financings are
determined to be advantageous. Such financings could take the form of
traditional secured real estate financings or could be effected through
vehicles such as formation of a real estate investment trust (REIT), assignment
of senior living services lease payments or collateralized mortgage financings.
In addition, the Company may, from time to time, consider opportunities to
sell certain of its real estate properties if price targets can be achieved.
Management does not believe that sales of property will be required for the
Company to meet its debt service and capital expenditure requirements. In cases
where there is an intent to sell particular properties, the Company assesses
net realizable value of each individual property to be sold, on the basis of
expected sales price less estimated costs of disposal. Otherwise, the Company
assesses impairment of its real estate properties based on whether it is
probable that undiscounted future cash flows from such properties will be less
than their net book value.
Capital expenditure program. Management estimates that capital spending for
renovation and refurbishment of the Company's existing real estate properties
will approximate $45 million annually. The majority of this amount is expected
to be reserved in accordance with the terms of the management agreements for
the lodging properties. Additionally management anticipates that an additional
$50 million will be spent annually to maintain and expand the Host/Travel
Plazas Business.
In addition, the Company is committed to completing construction of two hotel
properties and one retirement community. Capital expenditures for these
projects are estimated to be $100 million in 1993 (including amounts incurred
before the Distribution), $125 million in 1994 and $50 million in 1995. The
Company has obtained a $40 million industrial development bond to finance a
portion of the construction costs for the Philadelphia Airport Hotel and will
also receive mortgage financing from Marriott International of up to $125
million to finance a portion of the construction costs for the Philadelphia
Convention Center Hotel, of which approximately $43 million was borrowed as of
December 31, 1993. The remaining portion of capital expenditures will be funded
from cash from operations or borrowings under the Credit Agreement.
Acquisitions. The Company expects to use the net proceeds of the Offering for
acquisitions of lodging properties or related assets, to the extent that
attractive acquisition opportunities become available. The Company may seek
additional debt or equity financing in connection with such acquisitions,
including debt secured by properties acquired. The Company believes it will
have adequate sources of funding to permit it to pursue its acquisition
strategy.
Debt service guarantees. In addition to servicing its own debt, the Company
will continue to be contingently liable under various guarantees of obligations
of certain affiliates. Such commitments are limited, in the aggregate, to $296
million at October 8, 1993. Management believes fundings under these guarantees
in 1993 will be approximately $22 million and will decline significantly in
1994 as the Company's obligations expire or maturities of partnership debt are
extended.
Credit Facility from Marriott International. An additional source of
liquidity for the Company is the $630 million revolving credit facility from
Marriott International available through 2007. See "Financing--Credit
Agreement." The Company estimates that, as of December 31, 1993, approximately
$175 million (net of cash on hand) was outstanding under the credit facility.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents certain selected historical financial data of
the Company which has been derived from the Host Marriott Corporation
Consolidated Financial Statements as of and for the thirty-six weeks ended
September 10, 1993 and September 11, 1992 and the five most recent fiscal years
ended January 1, 1993. The information in the table does not reflect the
Distribution and related transactions and, accordingly, the table presents data
for the Company that include amounts attributable to Marriott International. As
a result of the Distribution and related transactions, the assets, liabilities
and businesses of the Company have changed substantially. Accordingly, the
financial disclosures set forth in the table below do not reflect the financial
condition and results of operations of the Company as it now exists. See "Pro
Forma Financial Data" included elsewhere in this Prospectus. The information
set forth below should be read in conjunction with the Host Marriott
Corporation Consolidated and Condensed Consolidated Financial Statements and
Notes thereto and the Management's Discussion and Analysis of Results of
Operations and Financial Condition attached hereto as Annex A.
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 10, SEPTEMBER 11, -------------------------------------
1993 1992 1992(1) 1991 1990(2) 1989(3) 1988
------------- ------------- ------- ------ ------- ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED) (53 WEEKS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................... $6,263 $5,937 $8,722 $8,331 $7,646 $7,536 $6,624
Operating profit before
corporate expenses and
interest............... 383 344 496 478 353 535 501
Interest expense........ 166 171 248 265 183 185 136
Income from continuing
operations before
cumulative effect of a
change in accounting
principle (4)(5)....... 82 66 85 82 47 181 189
Net income.............. 80 66 85 82 47 177 232
Per share:(6)
Income from continuing
operations before
cumulative effect of a
change in accounting
principle............. $0.65 $0.51 $0.64 $0.80 $0.46 $1.62 $1.59
Net income............. 0.63 0.51 0.64 0.80 0.46 1.58 1.95
Cash dividends declared
per share.............. 0.14 0.21 0.28 0.28 0.28 0.25 0.21
BALANCE SHEET DATA:
Total assets............ $6,341 $6,425 $6,410 $6,509 $7,034 $6,600 $6,079
Long-term debt.......... 2,614 2,848 2,732 2,979 3,598 3,050 2,857
Convertible subordinated
debt ("LYONs")(7)...... 241 222 228 210 -- -- --
</TABLE>
- --------
(1) Operating results in 1992 included pretax costs of $21 million related to
the Distribution.
(2) Operating results in 1990 reflect pretax restructuring charges and
writeoffs, net of certain nonrecurring gains, of $153 million related to
continuing operations.
(3) Operating profit in 1989 reflects pretax restructuring charges and
writeoffs of $256 million related to continuing operations and a $231
million pretax gain on the transfer of the airline catering division. Net
income also reflects a $39 million after-tax charge recorded in conjunction
with the planned disposal of restaurant operations.
(4) Restaurant operations were discontinued in 1989.
(5) Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was adopted in the first fiscal quarter of 1993. In the second
fiscal quarter of 1993, the Company changed its accounting method for
assets held for sale. See "Notes to Condensed Consolidated Financial
Statements."
(6) Earnings per share is computed on a fully diluted basis using weighted
average number of outstanding common and common equivalent shares, plus
other potentially dilutive securities.
(7) Pursuant to the LYONs Allocation Agreement, Marriott International assumed
responsibility for 90% of the LYONs obligation or $217 million of the
outstanding balance of $241 million of the LYONs as of September 11, 1993.
The LYONs have been called for redemption on January 25, 1994. Based on the
current market prices of the Common Stock and the Marriott International
common stock, the Company expects that most holders will elect to convert
LYONs into Common Stock and Marriott International common stock prior to
redemption. See "Prospectus Summary--Recent Developments--LYONs
Redemption."
23
<PAGE>
BUSINESS AND PROPERTIES
OWNERSHIP BUSINESS
The Company is one of the largest owners of lodging properties in the world.
The Company's lodging properties are operated under Marriott brand names and
managed by Marriott International. The Company is the largest owner of hotels
operated under Marriott brand names and owns approximately 23% of the lodging
properties operated by Marriott International.
The following table sets forth information regarding the lodging properties
and senior living facilities that comprise the Company's Ownership Business.
Each of these properties are operated by Marriott International pursuant to
Lodging Management Agreements, in the case of lodging properties, or a Senior
Living Services Lease Agreement, in the case of senior living facilities.
<TABLE>
<CAPTION>
NUMBER NUMBER
OF PROPERTIES OF ROOMS
------------- --------
<S> <C> <C>
Marriott Hotels, Resorts and Suites.................... 28(1) 14,774
Courtyard Hotels....................................... 54 7,940
Residence Inns......................................... 18(2) 2,178
Fairfield Inns......................................... 30(3) 3,632
Senior Living Communities.............................. 14(4) 3,942(5)
--- ------
Total.............................................. 144 32,466
=== ======
</TABLE>
- --------
(1) Includes (i) two hotels currently under development, with one scheduled
for completion in the first quarter of 1995 and one scheduled for
completion in the first quarter of 1996, (ii) the New York Marriott
Marquis, which was recently consolidated on the Company's balance sheet
and (iii) the Ft. Lauderdale Marina Marriott hotel which was recently
acquired by the Company.
(2) Excludes 11 Residence Inns included in a partnership no longer
consolidated with the Company.
(3) The Company has executed a non-binding letter of intent to sell 26 of
these Fairfield Inns. See "Prospectus Summary--Recent Developments--
Dispositions."
(4) Includes a senior living facility currently under development and
scheduled for completion in January 1994.
(5) Represents total number of beds.
Management believes that the lodging industry as a whole is benefitting from
an improved supply/demand dynamic. Based on industry data, demand for hotel
rooms increased 4.0% in 1992 and 3.9% in the first eight months of 1993.
Management believes that recent demand increases have occurred due to an
improved economic environment and a corresponding increase in business travel.
In recent years, room supply growth in the lodging industry overall has
slowed dramatically. From 1987 to 1990, room supply increased an average of
approximately 4% annually and resulted in an oversupply of rooms. This growth
slowed to 2.3% in 1991 and 1.3% in 1992. Management believes the decrease in
growth is attributable to many factors, including the limited availability of
financing for new hotel construction, availability of existing properties for
sale at attractive prices and the recent recession in the U.S.
While the lodging industry in general has recently improved, the full
service hotel segment has lagged this recovery. Management believes that
significant opportunities exist within the full service segment to acquire
hotels at attractive multiples of cash flow or at significant discounts to
replacement value. In addition, the Company believes that this segment offers
many opportunities to acquire underperforming hotels, which can be improved
under new management. The Company believes that the full service segment, in
particular, has significant potential for improved occupancy and average room
rates as the economy continues to improve and as business travel continues to
increase.
The Company's lodging properties consistently outperform the industry's
average occupancy rate by a significant margin, and averaged approximately
78.9% for the first eight months of 1993 compared to 65.3% for the lodging
industry. Management anticipates that, due to these superior occupancy rates,
the limited supply of new rooms and the recent increase in business travel,
there may be an opportunity to increase room rates at the Company's
properties. Because the lodging property operations have a relatively fixed
cost structure, increases in room rate generally yield greater percentage
increases in operating cash flow.
24
<PAGE>
Marriott Hotels, Resorts and Suites. The full service Marriott hotels owned
by the Company are part of the full service Marriott hotel system, which was
ranked first overall for 1992 in the full service hotel segment by Business
Travel News in its February 8, 1993 issue. These hotels achieved an occupancy
rate of 72.2 percent for 1992, compared to the 62 percent average occupancy
rate for the entire hotel industry. The chart below sets forth performance
information for such hotels for the first three fiscal quarters of 1992 and
1993 and for fiscal years 1990 through 1992.
<TABLE>
<CAPTION>
3Q 3Q
1990 1991 1992 1992 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of Properties...................... 23 23 23 23 24
Number of Rooms........................... 9,741 10,276 10,276 10,276 10,560
Average Daily Rate........................ $88.77 $85.35 $89.27 $87.28 $89.24
Occupancy Percentage...................... 68.2% 69.4% 72.2% 73.1% 75.6%
</TABLE>
In addition to the properties set forth above, the Company is developing two
other full service Marriott Hotels, the Philadelphia Convention Center Hotel
(1,200 rooms, completion scheduled for first quarter, 1995) and the
Philadelphia Airport Hotel (419 rooms, completion scheduled for first quarter,
1996), that, when completed, will be operated by Marriott International under
Lodging Management Agreements. The Philadelphia Airport Hotel has been largely
pre-financed through the issuance of $40 million of industrial revenue bonds.
The Philadelphia Convention Center Hotel will be financed, in part, by the
Philadelphia Mortgage (as defined). See "Relationship Between the Company and
Marriott International--Philadelphia Mortgage." In addition, the Company
recently acquired the 580-room Ft. Lauderdale Marina Marriott and the Company
owns a 50% interest in TSHCO, the owner of the New York Marriott Marquis.
Effective in the fourth fiscal quarter of 1993, the Company consolidated TSHCO.
See "Prospectus Summary--Recent Developments--Acquisitions;--New York Marriott
Marquis."
Courtyard Hotels. The 54 Courtyard hotels owned by the Company are among the
newest in the Courtyard hotel system, which was ranked first in price value,
and second overall, for 1992 in the mid-priced hotel segment by Business Travel
News in its February 8, 1993 issue. These hotels achieved an occupancy rate of
76.3 percent for 1992 compared to the 62 percent average occupancy rate for the
entire hotel industry. The chart below sets forth performance information for
such hotels for the first three fiscal quarters of 1992 and 1993 and for fiscal
years 1990 through 1992.
<TABLE>
<CAPTION>
3Q 3Q
1990 1991 1992 1992 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of Properties...................... 37 52 54 55 54
Number of Rooms........................... 5,283 7,395 7,896 8,045 7,940
Average Daily Rate........................ $63.57 $61.12 $61.54 $60.98 $64.64
Occupancy Percentage...................... 57.6% 63.7% 76.3% 77.8% 80.5%
</TABLE>
Residence Inns. The 18 Residence Inns owned by the Company are among the
newest in the Residence Inn system, which was ranked first overall for 1992
among extended stay operators in the all suites segment by Business Travel News
in its February 8, 1993 issue. These Residence Inns achieved an occupancy rate
of 77.4 percent for 1992, compared to the 62 percent average occupancy rate for
the hotel industry. The chart below sets forth performance information for such
Inns for the first three fiscal quarters of 1992 and 1993 and for fiscal years
1990 through 1992. In the fourth fiscal quarter of 1993, the Company sold
certain of its equity interests in a partnership owning eleven Residence Inn by
Marriott hotels. The following table excludes information with respect to these
eleven Residence Inns. See "Prospectus Summary--Recent Developments--Residence
Inns."
<TABLE>
<CAPTION>
3Q 3Q
1990 1991 1992 1992 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of Properties...................... 6 17 18 18 18
Number of Rooms........................... 637 2,072 2,178 2,178 2,178
Average Daily Rate........................ $72.32 $73.69 $73.38 $73.59 $74.39
Occupancy Percentage...................... 67.2% 68.7% 77.4% 77.3% 85.4%
</TABLE>
25
<PAGE>
Fairfield Inns. The 30 Fairfield Inns owned by the Company are among the
newest in the Fairfield Inn system, which was ranked first overall for 1992 in
the economy hotel segment by Business Travel News in its February 8, 1993
issue. These Fairfield Inns achieved an occupancy rate of 77.2 percent for
1992, compared to the 62 percent average occupancy rate for the entire hotel
industry. The chart below sets forth performance information for such Inns for
the first three fiscal quarters of 1992 and 1993 and for fiscal years 1990
through 1992. The Company has executed a non-binding letter of intent to sell
26 of these Fairfield Inn by Marriott hotels. See "Prospectus Summary--Recent
Developments--Dispositions."
<TABLE>
<CAPTION>
3Q 3Q
1990 1991 1992 1992 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of Properties...................... 23 30 30 30 30
Number of Rooms........................... 2,841 3,633 3,632 3,632 3,632
Average Daily Rate........................ $37.94 $36.46 $38.07 $38.38 $40.05
Occupancy Percentage...................... 50.9% 71.2% 77.2% 79.5% 81.0%
</TABLE>
Senior Living Facilities. The Company also owns 13 operating senior living
facilities, located in seven states, which offer independent living apartments,
assisted living services and skilled nursing care. Certain of these senior
living facilities are operated under the trade names Brighton Gardens and
Stratford Court. The chart below sets forth performance information for such
senior living facilities for the first three fiscal quarters of 1992 and 1993
and for fiscal years 1990 through 1992. Units open more than one year at the
beginning of 1992 achieved an average occupancy rate in excess of 90 percent as
of the end of 1992.
<TABLE>
<CAPTION>
3Q 3Q
1990 1991 1992 1992 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Number of Units................................ 7 9 12 12 13
Number of Beds................................. 1,881 2,359 3,437 3,345 3,589
Occupancy Percentage........................... 74.5% 72.2% 72.1% 69.7% 81.4%
</TABLE>
In addition, the Company is scheduled to complete a Stratford Court Facility
in Boca Raton (Boca Point), Florida (353 beds) in January 1994. The Company's,
Jefferson Senior Living facility in Arlington, Virginia (included in the above
chart) is being sold as condominium units. Approximately 118 of these units
remain unsold as of December 20, 1993. The average price per unit sold in 1993
through December 20 was approximately $212,000.
HOST/TRAVEL PLAZAS BUSINESS
The Company is the leading operator of airport concessions in the United
States with restaurants, gift shops and related facilities at 70 domestic
airports and three foreign airports. The Company's foreign airport operations
include concessions at two airports in New Zealand and one airport in
Australia. The Company's airport concessions operate primarily under the trade
name "Host" and include restaurants, cafeterias, snack bars and gift shops.
Payments by the Company under operating contracts with airport authorities are
typically based on percentages of sales subject to an annual minimum. The terms
of such agreements vary but many have initial terms of ten or more years for
food and beverage concessions, and five or more years for merchandise
facilities. Additionally, the Company operates restaurants, gift shops and
related facilities at 42 major tourist attractions, stadiums and arenas.
During the fourth quarter of 1992, the Company acquired the 19 airport
concessions of Dobbs Houses, Inc. for approximately $47 million.
The Company is also the leading operator of travel plazas in the United
States, with 93 travel plazas on 14 tollroads. The Company currently operates
such facilities under contracts with the highway authorities which typically
extend 15 years. The highway systems are located primarily in the Mid-Atlantic,
Midwest and New England states as well as in Florida. Travel plazas typically
include restaurants, snack bars, vending areas and merchandise facilities.
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The Host/Travel Plazas Business includes branded food, beverage and
merchandise concepts at many of its airports and tollroads, including Pizza
Hut, Burger King, Taco Bell, Sbarro's, Dunkin' Donuts, TCBY yogurt, Mrs. Fields
cookies, Nathan's Famous hot dogs, and Cheers. As a licensee of these brands,
the Company typically pays royalties based on a percentage of sales.
Three major Host airport contracts will expire in 1994. These contracts
represent approximately 18% of total airport concessions business annual
revenue. The Company has detailed development strategies in place with respect
to each of these airports in order to maintain significant presence on a
profitable basis. Based on the Company's successful track record in achieving
lease extensions of existing contracts and gaining new contracts, management
expects that these strategies will be successful.
In November 1993, the Company's Host/Travel Plazas Division announced a plan
to redesign its operations structure to improve the effectiveness and
competitiveness of the business. Implementation of the new structure is
currently underway and is expected to be completed in the first quarter of
1994. The Company will incur costs of approximately $7 million, principally for
severance, relocation, and the closing of certain offices. The Company will
take a restructuring charge in the fourth quarter of fiscal 1993 to reflect
these costs. See "Prospectus Summary--Recent Developments--Host/Travel Plazas
Restructuring."
PARTNERSHIP INVESTMENTS
The Company and certain of its subsidiaries also conduct the Company's
partnership investments and partnership services business. The Company and/or
its subsidiaries own an equity investment in, and serve as the managing general
partner for, various partnerships which collectively own 52 Marriott full
service hotels, 120 Courtyard hotels, 50 Residence Inns and 50 Fairfield Inns.
Of these, 117 lodging properties are located on land leased from Marriott
International or one of its subsidiaries. In addition, the Company holds notes
receivable from partnerships in the aggregate amount of approximately $265
million.
As a managing general partner, the Company or its subsidiary is responsible
for the day-to-day management of partnership operations, which includes payment
of partnership obligations from partnership funds, preparation of financial
reports and tax returns and communications with lenders, limited partners and
regulatory bodies. As managing general partner, the Company or its subsidiary
is usually reimbursed for the cost of providing these services.
Hotel properties owned by the partnerships generally were acquired from the
Company in connection with limited partnership offerings. These hotel
properties are currently operated under agreements with Marriott International.
As the general partner of such partnerships, the Company and its subsidiaries
oversee and monitor Marriott International's performance pursuant to these
agreements.
The Company's interests in these partnerships range from 1% to 50%. Cash
distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt owed by
the partnership. Partnership distributions to the Company approximated $6
million in 1993. All partnership debt is non-recourse to the Company except to
the extent of limited debt service guarantees discussed below. In most
circumstances, the Company has the ability to sell all or a portion of its
investments in each partnership to other partners or outside third parties.
The Company is contingently liable under various guarantees of obligations of
certain of these partnerships. Such commitments are limited in the aggregate to
$296 million at October 8, 1993. Management believes fundings under these
guarantees in 1993 will be approximately $22 million and will decline
significantly in 1994 as the Company's obligations expire or maturities of
partnership debts are extended. In all cases, fundings of such guarantees
represent loans to the respective partnerships.
OTHER ASSETS AND OPERATIONS
In connection with the aforementioned businesses, the Company conducts
certain property and lease management activities including (i) real estate
sales, (ii) office leasing and (iii) facilities and property management.
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The Company owns approximately 65 undeveloped parcels of vacant land
totalling approximately 315 acres originally purchased for the development of
hotels or senior living facilities. In addition, the Company owns a 210-acre
parcel of undeveloped land in Germantown, Maryland, suitable for commercial
use. The Company may sell these properties from time to time when market
conditions are favorable.
The Company has disposed of most of its restaurant business, but continues to
own certain free-standing restaurants. The Company also holds notes receivable
arising from disposition of properties and businesses, including its airline
catering business and restaurant business.
COMPETITION
Competition in the U.S. lodging industry is strong and is generally based on
quality of service, attractiveness of facilities and locations, consistency of
product offerings, price and other factors. Room revenues, which are determined
by occupancy levels and room rates, have continued to be constrained in 1993 as
a result of a slow growth economy, overbuilt markets, price sensitive customers
and the effect of corporate restructurings. However, the Company has
experienced increases in occupancy and room rates in each of its lodging
product lines through the third quarter of 1993 over a comparable period for
1992. Room supply growth is expected to be minimal over the next few years due
principally to a scarcity of financing for new construction.
The cyclical nature of the U.S. lodging industry has been demonstrated over
the past two decades--low hotel profitability during the 1974-75 recession led
to a prolonged slump in new construction and, over time, high occupancy rates
and real price increases in the late 1970s and early 1980s. Changes in tax and
banking laws during the early 1980s precipitated a construction boom that
peaked in 1986 but created an oversupply of hotel rooms that has not yet been
absorbed by increased demand. The Company expects the U.S. hotel supply/demand
imbalance to continue to improve.
The Company believes that its lodging properties enjoy competitive advantages
arising from their participation in the Marriott hotel systems. Repeat guest
business is enhanced by the Marriott Honored Guest Awards program, which awards
frequent travelers with free stays of varying lengths at Marriott Hotels,
Resorts and Suites, and by frequent stay programs established by Courtyard by
Marriott (Courtyard Club) and Fairfield Inn by Marriott (INNsiders Club).
Marriott International's nationwide marketing programs and reservation systems
as well as the advantage of increasing customer preference for Marriott brands
should also help these properties to maintain or increase their premium over
competitors in both occupancy and room rates.
In connection with the Host/Travel Plazas Business, the Company competes with
several national and regional companies to obtain the rights from airport and
highway authorities to operate food, beverage and merchandise concessions. To
compete effectively, the Company regularly updates and refines its product
offerings (including the addition of branded products) and facilities to
generate higher sales and thereby increase returns both to the airport and
highway authorities and the Company.
EMPLOYEES
The Company and its subsidiaries collectively have approximately 23,000
employees. Approximately 5,900 of such employees are covered by collective
bargaining agreements.
LEGAL PROCEEDINGS
A number of holders of the Company's Old Notes instituted legal proceedings
against the Company. For a discussion of the allegations raised and agreements
to settle certain of such claims, see "Risk Factors--Pending Litigation."
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THE DISTRIBUTION
Prior to October 8, 1993, the Company was named "Marriott Corporation." In
addition to conducting its existing Ownership Business and the Host/Travel
Plazas Business, Marriott Corporation engaged in lodging and senior living
services management, timeshare resort development and operation, food service
and facilities management and other contract services businesses (the
"Management Business"). On October 8, 1993, Marriott Corporation made a
special dividend consisting of the distribution (the "Distribution") to
holders of outstanding shares of Common Stock, on a share-for-share basis, of
all outstanding shares of its wholly-owned subsidiary, Marriott International,
which at the time of the Distribution held all of the assets relating to the
Management Business. Marriott International now conducts the Management
Business as a separate publicly-traded company. The Distribution was designed
to separate two types of businesses with distinct financial, investment and
operating characteristics so that each could adopt strategies and pursue
objectives appropriate to its specific needs. As a result of the Distribution,
the Company believes it is better able to concentrate its attention and
financial resources on its core businesses and to manage its real estate and
Host/Travel Plazas Business for cash flow. The Company and Marriott
International are parties to several important ongoing arrangements, including
(i) agreements pursuant to which Marriott International manages or leases the
Company's portfolio of lodging properties and senior living facilities and
(ii) the Credit Agreement pursuant to which Marriott International provides a
$630 million line of credit to Holdings. See "Relationship Between the Company
and Marriott International" and "Financing--Credit Agreement."
THE EXCHANGE OFFER AND RESTRUCTURING
THE EXCHANGE OFFER
In connection with the Distribution, the Company also completed the Exchange
Offer pursuant to which holders of Old Notes in aggregate principal amount of
approximately $1.2 billion exchanged such Old Notes for a combination of (i)
cash, (ii) Common Stock and (iii) New Notes issued by Hospitality. The coupon
and maturity date for each series of New Notes was 100 basis points higher and
four years later, respectively, than the series of Old Notes for which it was
exchanged (except that the maturity of the New Notes issued in exchange for
the Series L Senior Notes due 2012 was shortened by five years). The Company
also conducted a consent solicitation pursuant to which, as a condition to
participation in the Exchange Offer, holders of Old Notes were required to
deliver (i) a consent to the Distribution and a waiver of any defaults, claims
or rights under the Old Note Indenture relating thereto, (ii) a release and
discharge of legal or equitable claims relating to the Distribution and (iii)
a consent to the deletion of a negative pledge covenant in the Old Note
Indenture to permit the Restructuring and grant of a stock pledge under the
New Note Indenture (collectively, the "Consents and Releases").
The Company received tenders of approximately $1.2 billion of Old Notes.
Excluding the Series F Notes due 1995 (the "Old Series F Notes") and the
Series I Senior Notes due 1995 (the "Old Series I Notes"), the Company
received tenders for 82% of the aggregate amount of Old Notes subject to the
Exchange Offer. The Company has redeemed all of the Old Series F Notes that
did not tender in the Exchange Offer, and has secured the Old Series I Notes
equally and ratably with the New Notes issued in the Exchange Offer. The
Company expects to recognize an extraordinary pre-tax loss of approximately $9
million in the fourth quarter of fiscal 1993 in connection with extinguishment
of debt in the Exchange Offer.
THE RESTRUCTURING
In connection with the Exchange Offer, the Company effected the
restructuring of its assets (the "Restructuring"). As a result of the
Restructuring, the Company's primary asset is the capital stock of Holdings,
although the Company conducts certain operations directly and holds interests
in various other subsidiaries. Holdings is a holding company, the primary
asset of which is the capital stock of Hospitality, and is the borrower under
the Credit Agreement. Hospitality is also a holding company which owns the
capital stock of HMH Properties, Inc. ("HMH Properties") and Host Marriott
Travel Plazas, Inc. ("HMTP"). In the Restructuring, most of the assets
relating to the Ownership Business were transferred to HMH Properties and its
subsidiaries, and most of the assets relating to the Host/Travel Plazas
Business were transferred to HMTP and its subsidiaries. Certain assets
relating to such businesses (the "Retained Business") were retained directly
by the Company and certain of its other subsidiaries (the "Retained Business
Subsidiaries").
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The Company also has two subsidiaries used to fund new acquisitions. HMC
Ventures, Inc. ("HMC Ventures") is an unrestricted subsidiary under the Credit
Agreement that will be capitalized with approximately $50 million from recent
asset sales. HMC Acquisitions, Inc. ("HMC Acquisitions") is a newly-formed
subsidiary that, pursuant to pending amendments to the Credit Agreement, will
be permitted to use the net proceeds of the Offering to fund acquisitions. HMC
Acquisitions will be a guarantor under the Credit Agreement. See "Financing--
Credit Agreement."
The following chart shows the structure of the Company and its subsidiaries.
The businesses that are owned by the Company through HMH Properties and HMTP
are described below next to the boxes designated "HMH Properties, Inc. and
Subsidiaries" and "Host Marriott Travel Plazas, Inc. and Subsidiaries." The
"Retained Business," which is owned by the Company either directly or through
one or more of the Retained Business Subsidiaries and HMC Ventures, Inc., is
described next to the box designated "Host Marriott Corporation." The following
chart should be read in conjunction with the narrative description set forth in
"Business and Properties." References to airports, tollroads, stadiums, arenas
and tourist attractions indicate Host/Travel Plazas concessions at such
facilities. All unit counts listed below are as of January 19, 1994. See
"Prospectus Summary--Recent Developments--Acquisitions."
The Retained Business (a)
14 Full Service Hotels
(b)(c)
9 Airports
Host Marriott Corporation 6 Tollroads
(Old Notes Issuer) 3 Stadiums and arenas
30 Restaurants
33 Partnership Investments
1 Undeveloped Land Parcel
HMC HMC HMH Holdings, Inc.
Acquisitions, Ventures, (New Notes Guarantor) Retained Business
Inc. Inc. (Credit Agreement Borrower) Subsidiaries
Host Marriott Hospitality, Inc.
(New Notes Issuer) (d)
HMH Properties, Inc. Host Marriott Travel Plazas, Inc.
and Subsidiaries (g) and Subsidiaries (h)
(New Notes Guarantors) (New Notes Guarantors)
11 Full Service Hotels 64 Airports
54 Courtyard Hotels 8 Tollroads
18 Residence Inns 39 Major tourist attractions,
30 Fairfield Inns (a) stadiums and arenas
14 Senior Living Facilities (f) 3 Full Service Hotels
65 Undeveloped Land Parcels 24 Restaurants
- --------
(a) The Retained Business is owned by either the Company or one of the Retained
Business Subsidiaries, and excludes 11 Residence Inns that were
deconsolidated from the Company's balance sheet in the fourth quarter.
(b) Includes (i) two hotels under development with one scheduled for completion
in the first quarter of 1995 and one scheduled for completion in the first
quarter 1996 and (ii) the New York Marriott Marquis which was consolidated
by the Company in the fourth quarter of fiscal 1993.
(c) Includes the Ft. Lauderdale Marina Marriott hotel which was recently
acquired by HMC Ventures, Inc.
(d) The New Notes are guaranteed by Holdings and all material subsidiaries of
Hospitality, and are secured by a pledge of the stock of Hospitality and
its material subsidiaries other than Marriott Financial Services, Inc.
(e) The Company has executed a letter of intent to sell 26 of these Fairfield
Inns. See "Prospectus Summary--Recent Developments--Dispositions."
(f) Includes a senior living facility under development and scheduled for
completion in January 1994.
(g) Includes HMH Courtyard Properties, Inc., Marriott Financial Services, Inc.
and HMC Retirement Properties, Inc.
(h) Includes Host International, Inc., Gladieux Corporation and Marriott Family
Restaurants, Inc.
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FINANCING
The following is a summary of important terms of certain indebtedness and
financing arrangements of the Company and its subsidiaries. For more complete
information regarding such documents, reference is made to the definitive
agreements and instruments governing such indebtedness and financing
arrangements, copies of which have been filed as exhibits to, or incorporated
by reference in, the Registration Statement of which this Prospectus is a part,
and which are incorporated by reference herein.
NEW NOTES
Hospitality issued $1.2 billion in aggregate principal amount of New Notes in
the Exchange Offer. Each series of New Notes is secured by a pledge of all of
the capital stock of Hospitality, HMH Properties, HMTP and certain of their
subsidiaries, and is guaranteed (the "Guarantees") by Holdings, HMH Properties,
HMTP and their material subsidiaries (the "Guarantors"). The New Notes were
issued in series with an average maturity of 11.3 years. The weighted average
interest rate on the New Notes is 10.5%. The New Notes are senior obligations
of Hospitality and the Guarantees are senior obligations of the Guarantors. The
New Note Indenture contains covenants that, among other things, (i) limit the
ability of Hospitality to pay dividends and make other distributions and
restricted payments, (ii) limit the ability of Hospitality and its subsidiaries
to incur additional debt, (iii) limit the ability of Hospitality and its
subsidiaries to create additional liens on their respective assets, (iv) limit
the ability of the subsidiaries of Hospitality to incur debt and issue
preferred stock, (v) limit the ability of Hospitality and its subsidiaries to
engage in certain transactions with related parties, (vi) limit the ability of
each subsidiary of Hospitality to enter into agreements restricting such
subsidiary in paying dividends or making certain other payments and (vii) limit
the activities and businesses of Holdings.
Under certain circumstances, Hospitality is required to redeem all or a
portion of the New Notes with the proceeds of Refinancing Indebtedness (as
defined in the New Note Indenture) incurred by Hospitality or its subsidiaries,
and with certain proceeds of the sale of equity interests of HMTP and/or its
subsidiaries, at a redemption price of (i) 100% of the aggregate principal
amount of such notes plus accrued and unpaid interest thereon, if the
Comparable Interest Rate (as defined in the New Note Indenture) of this
Refinancing Indebtedness (or, in the case of the sale of equity interests,
certain Refinancing Indebtedness incurred substantially contemporaneously
therewith) is not less than the interest rate of the notes redeemed or if the
notes redeemed mature within 18 months, or (ii) otherwise, 103% of the
aggregate principal amount of such notes plus accrued and unpaid interest
thereon. Hospitality is also required, under certain circumstances, to redeem
and offer to repurchase New Notes upon the sale of certain assets of
Hospitality or its subsidiaries, with up to 75% of the net proceeds of such
asset sales, at a redemption/repurchase price of 100% of the aggregate
principal amount of such notes plus accrued and unpaid interest thereon. In
addition, each holder of the New Notes has the right to require Hospitality to
repurchase the New Notes of such holder, at 101% of their aggregate principal
amount plus accrued and unpaid interest thereon, upon the occurrence of certain
events constituting a Change of Control as defined under the New Note
Indenture.
OLD NOTES
The Company has $231 million in aggregate principal amount outstanding of Old
Notes. The Old Notes are senior obligations of the Company. The Old Notes were
issued in series and have an average maturity of 4.2 years. The weighted
average interest rate on the Old Notes is 9.0%, exclusive of the impact of
interest rate swaps. The Old Note Indenture contains certain covenants that,
among other things, limit the ability of the Company to (i) create liens on its
assets and (ii) enter into certain sale and leaseback transactions.
CREDIT AGREEMENT
Marriott International and Holdings have entered into a Credit Agreement
pursuant to which Holdings has the right to borrow from Marriott International
up to $630 million to fund (i) obligations under certain
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guarantees made by the Company, (ii) specified recourse debt of the Company and
its subsidiaries (including the New Notes at maturity), (iii) repayment of
interest on amounts borrowed under the Credit Agreement and on specified
recourse debt of the Company and its subsidiaries (including the New Notes),
(iv) the Company's allocable portion (maximum of approximately $20 million as
of the date of the notice of redemption) of the amounts payable on the LYONs
due to a Marriott International initiated call of LYONs (see "Relationship
Between the Company and Marriott International--LYONs Allocation Agreement"),
(v) certain capital expenditures under commitments to construct the
Philadelphia Airport hotel (to the extent not funded by an existing $40 million
credit facility) and Philadelphia Marriott hotel (the "Philadelphia Convention
Center hotel") (to the extent not funded under the Philadelphia Mortgage
(defined below)) and Port St. Lucie and Boca Point, Florida senior living
service facilities, and (vi) other Marriott International approved capital
expenditures or guarantees of the Company. The line of credit established by
the Credit Agreement will be available through August 2007 (or, if earlier, the
date when no New Notes are outstanding), with final maturity one year
thereafter. Holdings will pay Marriott International a commitment fee equal to
one percent per year on any unborrowed amounts. Additionally, any such
borrowings are guaranteed by, or secured by the pledge of the stock of, certain
subsidiaries of the Company, other than Hospitality or any of Hospitality's
subsidiaries.
Borrowings under the Credit Agreement bear interest at a floating rate equal
to the London Interbank Borrowing Rate ("LIBOR") (as defined in the Credit
Agreement) plus 400 basis points (provided that any interest in excess of 10.5
percent per annum will be deferred until maturity and will not reduce
availability under the Credit Agreement). Outstanding borrowings must be
reduced or repaid out of Net Cash Flow (as defined in the Credit Agreement), on
an annual basis, with respect to fiscal year 1994, and on a quarterly basis
thereafter. Amounts repaid may be reborrowed for the purposes specified in the
Credit Agreement during the commitment term, subject to availability under the
commitment (which is $630 million, subject to reduction to the extent that the
sum of outstanding borrowings plus the principal amount of New Notes
outstanding is less than $630 million).
The Credit Agreement imposes certain restrictions on the ability of the
Company and the Retained Business Subsidiaries to incur additional debt, impose
liens or mortgages on their properties (other than various types of liens
arising in the ordinary course of business), extend new guarantees (other than
replacement guarantees), pay dividends, repurchase their common stock, make
investments and incur capital expenditures. New debt is generally restricted to
refinancing debt, non-recourse secured debt with a loan to value ratio of not
less than 50% and certain types of subordinated debt. Liens and mortgages
securing debt, other than existing liens and replacements of existing liens in
connection with a debt refinancing, are generally limited to liens securing the
new non-recourse secured debt described above. New guarantees of the Company's
and its subsidiaries' debt, with an aggregate guarantee liability of not more
than $150 million, are permitted, to the extent that each such guarantee
supports no more than 20% of the principal amount of new non-recourse secured
debt to which it relates and the principal amount of such debt is not greater
than 70% of the value of the property which secures it. Dividends and
distributions on stock (other than dividends on the Company's existing
preferred stock, which are permitted), repurchases of stock, capital
expenditures (other than expenditures to maintain existing assets and business
operations), investments in persons other than subsidiaries and certain other
restricted payments by the Company and the Retained Business Subsidiaries are
generally prohibited (subject to specified exceptions), so long as there are
any outstanding advances under the Credit Agreement. When no advances are
outstanding under the Credit Agreement and the Company and the Retained
Business Subsidiaries have adequately reserved for debt maturities over a 6-
month term, (i) capital expenditures and additional investments to acquire
entities engaged in the Ownership Business and the Host/Travel Plazas Business
are generally permitted and (ii) such restricted payments as would otherwise be
prohibited are permitted in the amount by which aggregate EBITDA of the Company
and the Retained Business Subsidiaries (unconsolidated with Hospitality) and
the proceeds of specified stock issuances exceed 170% of the aggregate of
certain specified charges. Other covenants under the Credit Agreement restrict
the ability of the Company and the Retained Business Subsidiaries to enter into
new leases (other than in the ordinary course of business), sell assets (except
for fair market value and, subject to certain
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exceptions, for at least 75% cash consideration), issue new preferred stock,
prepay indebtedness (other than in connection with refinancings, prepayments of
LYONs and other specified exceptions), merge or consolidate with other entities
or change the nature of their business.
If an event of default (as defined in the Credit Agreement) occurs and is
continuing, Marriott International is entitled to certain specified remedies,
including the right to foreclose on its security interest in the stock of
certain of the Retained Business Subsidiaries and the right to require Net Cash
Flow (which includes proceeds of stock issuances) of the Company and the
Retained Business Subsidiaries to be turned over on a quarterly basis to
Marriott International, to be used to repay all advances under the Credit
Agreement with the remainder to be held by Marriott International in trust as
security for future such advances until all events of default cease to exist.
However, prior to August 2007 (or such earlier date as no New Notes are
outstanding) Marriott International will not be entitled to (i) accelerate the
maturity of amounts due under the Credit Agreement (other than upon the
occurrence of certain bankruptcy events, or the acceleration of the maturity of
the New Notes as a result of an event of default under the New Note Indenture)
or (ii) foreclose on its security interest in the stock of Holdings.
In connection with the Offering, Marriott International and the Company are
entering into an amendment to the Credit Agreement, that will (i) permit the
Company to use the proceeds of the Offering to capitalize HMC Acquisitions,
Inc. ("HMC Acquisitions"), a new subsidiary formed to make acquisitions, and
(ii) exempt such proceeds from the mandatory repayment provisions of the Credit
Agreement. HMC Acquisitions will be permitted to incur indebtedness and to
reinvest its Net Cash Flow (including proceeds from asset sales) in its ongoing
businesses and/or new acquisitions, except that, when the outstanding balance
under the Credit Agreement exceeds $450 million, then HMC Acquisitions will be
required to use Net Cash Flow to repay balances under the Credit Agreement and
will be restricted in developing or acquiring new assets.
RELATIONSHIP BETWEEN THE COMPANY AND
MARRIOTT INTERNATIONAL
For the purpose of governing certain of the ongoing relationships between the
Company and Marriott International after the Distribution and to provide
mechanisms for an orderly transition, the Company and Marriott International
have entered into various agreements and have adopted policies, as described in
this section. The Company believes that the agreements are fair to both parties
and contain terms which generally are comparable to those which would have been
reached in arms-length negotiations with unaffiliated parties (although
comparisons are difficult with respect to certain agreements, such as the LYONs
Allocation Agreement, which relate to the specific circumstances of the
Distribution). In many cases (such as with the Lodging Management Agreements,
the Senior Living Services Lease Agreements and the Transitional Services
Agreements), the agreements were based on agreements that the Company has in
fact negotiated with third parties. In other cases (such as the Distribution
Agreement and the Tax Sharing Agreement), the agreements are comparable to
those used by others in similar situations. In each case the terms of these
agreements were reviewed by individuals who are at a senior management level in
the Company and by individuals who are at a senior management level in Marriott
International.
The following are summaries of the principal terms of most such agreements
and do not purport to be complete. The following summaries are qualified in
their entirety by reference to the actual agreements which have been previously
filed by the Company with the Securities and Exchange Commission.
DISTRIBUTION AGREEMENT
Prior to the Distribution, the Company and Marriott International entered
into the Distribution Agreement, which provided for, among other things, (i)
certain asset transfers to occur prior to the
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Distribution (the "Assets Transfers"), (ii) the Distribution, (iii) the
division between the Company and Marriott International of certain liabilities
and (iv) certain other agreements governing the relationship between the
Company and Marriott International following the Distribution.
Subject to certain exceptions, the Distribution Agreement provides for, among
other things, assumptions of liabilities and cross-indemnities designed to
allocate, effective as of the Distribution, financial responsibility for the
liabilities arising out of or in connection with the Management Business to
Marriott International and its subsidiaries, and financial responsibility for
the liabilities arising out of or in connection with the Ownership Business and
Host/Travel Plazas Business, along with the Company's liabilities under a
substantial portion of its pre-existing financing and long-term debt
obligations, to the Company and its retained subsidiaries. The agreements
executed in connection with the Distribution Agreement also set forth certain
specific allocations of liabilities between the Company and Marriott
International.
To avoid adversely affecting the intended tax consequences of the
Distribution and related transactions, the Distribution Agreement provides
that, until the second anniversary of the Distribution, Marriott International
must obtain an opinion of counsel reasonably satisfactory to the Company or a
supplemental tax ruling before Marriott International may make certain material
dispositions of its assets, engage in certain repurchases of Marriott
International capital stock or cease the active conduct of its business
independently, with its own employees and without material changes. The Company
must also obtain an opinion of counsel reasonably satisfactory to Marriott
International or a supplemental tax ruling before the Company may engage in
similar transactions during such period. The Company does not expect these
limitations to inhibit significantly its operations, growth opportunities or
its ability to respond to unanticipated developments.
Under the Distribution Agreement, Marriott International has a right (the
"Marriott International Purchase Right") to purchase up to 20% of each class of
the Company's voting stock (determined after assuming full exercise of the
right) at its then fair market value (based on an average of trading prices
during a specified period), upon the occurrence of certain specified events
generally involving a change in control of the Company. The Marriott
International Purchase Right terminates on the tenth anniversary of the
Distribution. The Marriott International Purchase Right may have certain
antitakeover effects as described in "Antitakeover Effects of Certain
Provisions of the Company's Certificate and Bylaws and the Marriott
International Purchase Right."
In addition, under the Distribution Agreement, Marriott International has a
right of first offer if the Company decides to sell all or any substantial
portion of the Host/Travel Plazas Business. Pursuant to such right, prior to
selling all or a substantial portion of the Host/Travel Plazas Business to any
third-party, the Company must first offer to sell the Host/Travel Plazas
Business (or applicable portion thereof) to Marriott International. If Marriott
International declines to purchase the Host/Travel Plazas Business at a price
established by the Company, the Company will be free to sell such business for
a specified period of time to an unrelated third-party at a price at least
equal to 95% of the price offered to Marriott International and on terms and
conditions substantially consistent with those offered to Marriott
International. The right of first offer with respect to the Host/Travel Plazas
Business will terminate on the tenth anniversary of the Distribution.
Notwithstanding the foregoing, the Company has no plan or intention to sell or
dispose of all or any significant portion of the Host/Travel Plazas Business.
LODGING MANAGEMENT AGREEMENTS
Marriott International and certain of its subsidiaries entered into
management agreements with the Company and certain of its subsidiaries (the
"Lodging Management Agreements") to manage the Marriott Hotels, Resorts and
Suites, Courtyard hotels, Residence Inns and Fairfield Inns owned by the
Company and its subsidiaries. There are four types of Lodging Management
Agreements corresponding to each line of Marriott lodging facilities. The terms
of each type of Lodging Management Agreement reflect market terms and
conditions and are substantially similar to the terms of recently negotiated
management agreements with
34
<PAGE>
third-party owners regarding lodging facilities of the same type. A separate
agreement was entered into with respect to each individual lodging facility, or
in certain cases a group of lodging facilities, based on the appropriate form
of Lodging Management Agreement for lodging facilities of such type, with
appropriate adjustments made for properties subject to ground leases, existing
mortgages or covenants, conditions and other special factors relating to a
particular lodging facility. Each Lodging Management Agreement has an initial
term of 20 years and, at the option of Marriott International, may be renewed
for up to three additional terms of ten years each, aggregating 30 years, for a
total term of up to 50 years. Each Lodging Management Agreement for the
Courtyard hotels, Fairfield Inns and Residence Inns (but not full service
hotels) is also subject to the terms of a Consolidation Agreement (the
"Consolidation Agreement") entered into between Marriott International and the
Company, pursuant to which (i) certain fees payable under the Lodging
Management Agreement with respect to a particular lodging facility will be
determined on a consolidated basis with certain fees payable under the Lodging
Management Agreements for all lodging facilities of the same type, and (ii)
certain base fees payable under Lodging Management Agreements with respect to a
particular lodging facility will be waived in return for payment of an
incentive fee upon the sale of such facility. In general, properties remain
subject to the Lodging Management Agreement upon the sale of such property to
third parties. The principal terms of the four types of Lodging Management
Agreements, along with the Consolidation Agreement, are summarized below.
Marriott Hotels, Resorts and Suites. The form of Lodging Management Agreement
for full service hotels in the Marriott Hotels, Resorts and Suites line
provides for a base management fee equal to three percent of annual gross
revenues plus an incentive management fee equal to 50 percent of "Available
Cash Flow" for each fiscal year (provided that the cumulative incentive
management fee may not on any date exceed 20 percent of the cumulative
operating profit of the hotel from the Distribution through such date).
"Available Cash Flow" is defined to be the excess of "Operating Profit" over
the "Owner's Priority." "Operating Profit" is defined generally in all forms of
Lodging Management Agreements as gross revenues, less all ordinary and
necessary operating expenses, including all base and system fees and
reimbursement for certain system-wide operating costs ("Chain Services"), as
well as a deduction to fund a required reserve for furniture, fixtures and
equipment, before any depreciation or amortization or similar fixed charges.
"Owner's Priority" in all forms of Lodging Management Agreements is derived
from an agreed upon base amount assigned to each lodging facility. Marriott
International is also entitled to reimbursement for certain costs attributable
to Chain Services of Marriott International. The Company has the option to
terminate the agreement if specified performance thresholds regarding Operating
Profit are not satisfied and if specified revenue market share tests are not
met (provided that Marriott International can elect to avoid such termination
by making cure payments to the extent necessary to allow the specified
Operating Profit thresholds to be satisfied).
Limited Service Hotels. The forms of Lodging Management Agreements for
Courtyard hotels, Residence Inns and Fairfield Inns provide for a system fee
equal to three percent (in the case of Courtyard hotels and Fairfield Inns) or
four percent (in the case of Residence Inns) of annual gross revenue, and a
base fee equal to two percent of annual gross revenues. The base fee is
deferred in favor of the Owner's Priority, and in any fiscal year in which the
base fee is greater than Operating Profit (prior to deduction of the base fee)
less Owner's Priority, the excess base fee is deferred, to be paid in a
subsequent fiscal year out of excess Operating Profit. Owner's Priority and
Operating Profit are determined in substantially the same manner as described
above for Marriott Hotels, Resorts and Suites. In addition, the agreements
provide for an incentive management fee equal to 50 percent of "Available Cash
Flow" for each fiscal year (provided that the cumulative incentive management
fee may not on any date exceed 20 percent of the cumulative Operating Profit of
the hotel through such date). "Available Cash Flow" is defined to be the excess
of Operating Profit (after deduction of the base fee, including any portion of
the base fee that is deferred or waived) over the Owner's Priority. Under such
forms of agreement, Marriott International is also entitled to reimbursement
for certain costs attributable to Chain Services of Marriott International. The
Company or its subsidiaries have the option to terminate the agreement if
specified performance thresholds regarding Operating Profit are not satisfied
and if specified revenue market share tests are not met (provided that Marriott
International
35
<PAGE>
can elect to avoid such termination by making cure payments to the extent
necessary to allow the specified Operating Profit thresholds to be satisfied).
Consolidation Agreement. Each Lodging Management Agreement for the Courtyard
hotels, Fairfield Inns and Residence Inns (but not full service hotels) is
subject to the terms of the Consolidation Agreement. Pursuant to the
Consolidation Agreement, certain revenues, expenses and fees payable under the
Lodging Management Agreements for Courtyard hotels, Residence Inns and
Fairfield Inns are consolidated by product line as set forth below. With
respect to any Courtyard hotels, Residence Inns or Fairfield Inns managed by
Marriott International under a Lodging Management Agreement, for so long as the
Company has not sold or financed any such lodging facility, then the
calculations, distributions and dispositions of gross revenues, reserves, base
fees, Owner's Priority, incentive management fees and system fees under the
Lodging Management Agreement with respect to such lodging facility will be
determined and reported on an aggregate basis, together with all such
facilities governed by a Lodging Management Agreement in the same product line.
After any such lodging facility is sold or financed, the Consolidation
Agreement will no longer be applicable to such facility, and the gross
revenues, reserves, base fee, Owner's Priority, incentive management fee and
system fee for such facility will be determined solely in accordance with the
Lodging Management Agreement applicable to such facility.
In addition, pursuant to the terms of the Consolidation Agreement, the base
fee payable under the Lodging Management Agreements (other than Lodging
Management Agreements for full service hotels) is modified as set forth below.
Until December 31, 2000, in lieu of the base fees payable to Marriott
International with respect to the Courtyard hotels, Residence Inns and
Fairfield Inns managed by Marriott International under a Lodging Management
Agreement, Marriott International will receive a "Bonus Incentive Fee" upon the
sale of any of such facilities by the Company. The "Bonus Incentive Fee" is
defined to be 50 percent of the "Net Excess Sale Proceeds" resulting from the
sale of such facility (provided that the Bonus Incentive Fee shall not exceed
two percent of the cumulative gross revenues of such facility, from the date of
inception of the Lodging Management Agreement for such facility through the
earlier of December 31, 2000 or the date of sale). "Net Excess Sale Proceeds"
is defined to be the gross property sales price for the facility less (i) the
reasonable costs incurred by the Company in connection with the sale and (ii) a
base amount assigned to each lodging facility. Any future owners of such
facility, and the Company to the extent that it retains ownership of such
facility after December 31, 2000, will not be subject to the foregoing terms
and will be required to pay to Marriott International the base fee as set forth
in the Lodging Management Agreement applicable to such facility.
SENIOR LIVING SERVICES LEASE AGREEMENTS
Marriott International has entered into lease agreements with the Company
(the "Senior Living Services Lease Agreements") to operate the 14 senior living
facilities (including one under development) owned by the Company and its
subsidiaries. Under the terms of the Senior Living Services Lease Agreements,
Marriott International will pay or reimburse the Company for all costs and
expenses (including property taxes) associated with the facilities, and in
addition will pay the Company (i) fixed rentals, aggregating $28 million a year
for all 14 facilities and (ii) additional rentals equal to 4.5 percent of
annual revenues from operation of the facilities in excess of $72 million per
annum beginning in 1994. The Senior Living Services Lease Agreements have
initial terms of 20 years with renewal options aggregating 20 years and contain
other terms and conditions customary for "triple net" leases.
CREDIT AGREEMENT
Marriott International and Holdings have entered into a Credit Agreement
pursuant to which Holdings has the right to borrow from Marriott International
up to $630 million. For a description of the Credit Agreement, see "Financing--
Credit Agreement."
PHILADELPHIA MORTGAGE
Marriott International is providing first mortgage financing for the
Philadelphia Marriott hotel (the "Philadelphia Convention Center Hotel") to be
constructed by the Company pursuant to a mortgage
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<PAGE>
financing agreement (the "Philadelphia Mortgage") entered into between the
Company and Marriott International. The Philadelphia Mortgage will provide for
the funding of a portion (approximately 60 percent) of the construction and
development costs of such hotel, as and when such costs are incurred, up to a
maximum of $125 million of fundings. The Philadelphia Mortgage (i) is a two-
year construction loan, convertible into a two-year "mini-perm" facility upon
completion of construction, carrying a floating interest rate of LIBOR plus 300
basis points, and (ii) will, upon maturity of the two-year mini-perm, fund into
a ten-year term loan, bearing cash-pay interest at the rate of ten percent per
annum, plus deferred interest of two percent per annum. The Philadelphia
Mortgage is due on sale of the property (or any majority interest therein) and
is subject to other terms and conditions customary for mortgage financings.
LYONS ALLOCATION AGREEMENT
Marriott Corporation issued $675,000,000 principal amount of LYONs, with an
accreted value as of September 10, 1993 of approximately $241,000,000. Pursuant
to the LYONs Allocation Agreement, Marriott International assumed 90 percent of
the debt obligations evidenced by the LYONs ("Marriott International's
Allocable Portion"). The Company retained responsibility for the remainder of
the debt obligations evidenced by the LYONs ("Host Marriott's Allocable
Portion"). LYONs holders exercising their conversion rights are entitled to
receive 13.277 shares of Common Stock plus 13.277 shares of Marriott
International common stock in exchange for each $1,000 principal amount of
LYONs. Accordingly, Marriott International and the Company share, in accordance
with the foregoing percentages, responsibility for all increases in the
accreted value of the LYONs and all payment obligations at maturity or pursuant
to an exercise of issuer call rights or holder put rights, and each of the
Company and Marriott International will issue shares of its own stock in
satisfaction of any exercise by the LYONs holders of their conversion rights.
Notwithstanding Marriott International's assumption of such obligations,
however, all payments made by Marriott International on the LYONs will be
deemed to have been made on account of the Company's obligations to the holders
of the LYONs and will be subject to the subordination provisions of the LYONs
Indenture with respect to the relative rights of the holders of the LYONs and
the holders of the Company's Senior Indebtedness (as defined in the LYONs
Indenture). The LYONs Allocation Agreement further provides that (i) the
Company will not initiate a call of LYONs for redemption without the prior
approval of Marriott International and (ii) the Company will call the LYONs for
redemption at the request of Marriott International provided that, at the
Company's request, Marriott International will supply the funds required to
satisfy the Company's Allocable Portion of the amounts payable on the LYONs
called for redemption, in the form of an advance under the Credit Agreement.
In December 1993, Marriott International exercised its rights under the LYONs
Allocation Agreement to require the Company to call the LYONs for redemption.
The Company has initiated a call of the LYONs and the LYONs will be redeemed on
January 25, 1994, unless prior to such time holders exercise their conversion
rights. The aggregate redemption price for all LYONs as of the redemption date
will be approximately $197 million of which approximately $177 million is
payable by Marriott International. The LYONs are redeemable at $367.60 per
$1,000 principal amount and are convertible into 13.277 shares of Common Stock
and 13.277 shares of Marriott International common stock per $1,000 principal
amount. Based on current market prices of the Common Stock and the Marriott
International common stock, the Company expects that most holders will elect to
convert LYONs into Common Stock and Marriott International common stock prior
to redemption. If all of the LYONs holders elected to convert prior to
redemption, LYONs holders would receive approximately 7.1 million shares of
Common Stock upon conversion. To the extent LYONs are redeemed for cash,
Marriott International will fund 90% of the redemption price pursuant to the
terms of the LYONs Allocation Agreement.
TAX SHARING AGREEMENT
The Company and Marriott International have entered into a tax sharing
agreement (the "Tax Sharing Agreement") that defines the parties' rights and
obligations with respect to deficiencies and refunds of federal,
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<PAGE>
state and other income or franchise taxes relating to the Company's businesses
for tax years prior to the Distribution and with respect to certain tax
attributes of the Company after the Distribution. In general, with respect to
periods ending on or before the last day of 1993, the Company is responsible
for (i) filing both consolidated federal tax returns for the Company affiliated
group and combined or consolidated state tax returns for any group that
includes a member of the Company affiliated group, including in each case
Marriott International and its subsidiaries for the relevant periods of time
that such companies were members of the applicable group, and (ii) paying the
taxes relating to such returns (including any subsequent adjustments resulting
from the redetermination of such tax liabilities by the applicable taxing
authorities). Marriott International will reimburse the Company for the portion
of such taxes relating to the Management Business. Marriott International is
responsible for filing returns and paying taxes related to the Management
Business for subsequent periods. The Company and Marriott International have
agreed to cooperate with each other and to share information in preparing such
tax returns and in dealing with other tax matters.
HOST CONSULTING AGREEMENT
Pursuant to the Host Consulting Agreement, Marriott International has agreed
to provide certain consulting and advisory services to the Company and its
subsidiaries with respect to certain operational matters involving the
Host/Travel Plazas Business. The Host Consulting Agreement has an annual base
fee of $500,000 and runs for an initial three-year term and thereafter will
automatically renew for additional one-year terms unless cancelled by either
party. If services under the Host Consulting Agreement require more than 500
employee-hours, Marriott International will be paid an additional amount equal
to 200 percent of the hourly compensation payable to the employee providing
such consulting services. The Host Consulting Agreement reflects the fact that
the Host/Travel Plazas Business has in the past been included within the
Company's contract services segment, most of which was transferred to Marriott
International. Accordingly, certain of the key executive employees of the
contract services group who were transferred to Marriott International will
continue to provide certain advisory services to the management of the Company
with respect to operating and personnel matters.
ASSIGNMENT AND LICENSE AGREEMENT
Pursuant to the terms of an Assignment and License Agreement, all of the
Company's right, title and interest in certain trademarks, including the
trademarks "Marriott," "Courtyard," "Residence Inns by Marriott" and "Fairfield
Inns by Marriott," were conveyed to Marriott International. The Company and its
subsidiaries have been granted a license to use such trademarks in their
corporate names and in connection with the Host/Travel Plazas Business, subject
to specified terms and conditions.
NONCOMPETITION AGREEMENT
The Company and Marriott International entered into a noncompetition
agreement (the "Noncompetition Agreement") that defines the parties' rights and
obligations with respect to certain businesses operated by Marriott
International and the Company. Under the Noncompetition Agreement, the Company
and its subsidiaries are prohibited from entering into, or acquiring an
ownership interest in any entity that operates, any business that (i) competes
with the food and facilities management business as conducted by a former
subsidiary of the Company, Marriott Management Services, Inc. ("MMS," with such
business being referred to as the "MMS Business"), provided that such
restrictions do not apply to businesses that constitute part of the Host/Travel
Plazas Business as of the Distribution or (ii) competes with the hotel
management business as conducted by Marriott International with, however,
certain exceptions as to acquired hotel properties or systems having existing
management. Marriott International is prohibited from entering into, or
acquiring an ownership interest in any entity that operates any business that
competes with the Host/Travel Plazas Business, provided that such restrictions
do not apply to businesses that constitute part of the MMS Business as of the
Distribution. The Noncompetition Agreement has a seven-year term that commenced
on the Distribution.
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<PAGE>
TRANSITIONAL SERVICES AGREEMENTS
Marriott International and the Company entered into a number of agreements
pursuant to which Marriott International has agreed to provide certain
continuing services to the Company and its subsidiaries for a transitional
period. Such services are to be provided on market terms and conditions.
Subject to the termination provisions of the specific agreements, the Company
and its subsidiaries are free to procure such services from outside vendors or
may develop an in-house capability in order to provide such services
internally. The Company believes that these agreements are based on
commercially reasonable terms including pricing and payment terms. In general,
the transitional services agreements can be kept in place at least through
1997. The Company has the right to terminate such agreements upon giving 180
day (or less) notice.
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
The on-going relationships between Marriott International and the Company may
present certain conflict situations for Messrs. J.W. Marriott, Jr. and Richard
E. Marriott, as J.W. Marriott, Jr. serves as Chairman of the Board of Directors
and President of Marriott International and also serves as a director of the
Company and Richard E. Marriott serves as Chairman of the Board of Directors of
the Company and also serves as a director of Marriott International. Messrs.
J.W. Marriott, Jr. and Richard E. Marriott, as well as other executive officers
and directors of the Company and Marriott International, also own (or have
options or other rights to acquire) a significant number of shares of common
stock in both the Company and Marriott International. The Company and Marriott
International have adopted appropriate policies and procedures to be followed
by the Board of Directors of each company to limit the involvement of Messrs.
J.W. Marriott, Jr. and Richard E. Marriott (or such other executive officers
and directors having a significant ownership interest in both companies) in
conflict situations, including matters relating to contractual relationships or
litigation between the companies. Such procedures include requiring Messrs.
J.W. Marriott, Jr. and Richard E. Marriott (or such other executive officers or
directors having a significant ownership interest in both companies) to abstain
from making management decisions in their capacities as officers of Marriott
International and the Company, respectively, and to abstain from voting as
directors of either company, with respect to matters that present a significant
conflict of interest between the companies. Whether or not a significant
conflict of interest situation exists is determined on a case-by-case basis
depending on such factors as the dollar value of the matter, the degree of
personal interest of Messrs. J.W. Marriott, Jr. or Richard E. Marriott (or such
other executive officers and directors having a significant ownership interest
in both companies) in the matter, the interests of the shareholders of the
Company and the likelihood that resolution of the matter has significant
strategic, operational or financial implications for the business of the
Company. It is a principal responsibility of the general counsel of the Company
to monitor this issue in consultation with the Audit Committee of the Board of
Directors. See "Risk Factors--Potential Conflicts with Marriott International."
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<PAGE>
MANAGEMENT
BOARD OF DIRECTORS
Current Board of Directors. The Company's Board of Directors consists of
seven directors divided into three classes, one class consisting of three
directors and two classes consisting of two directors. Each director serves for
a three-year term. Set forth below is information with respect to those
individuals serving as directors of the Company.
Recent Changes in the Board of Directors. The Company's Board of Directors
formerly consisted of nine members: J. W. Marriott, Jr. (Chairman), Richard E.
Marriott, Alice S. Marriott, Harry L. Vincent, Jr., Sterling D. Colton, Gilbert
M. Grosvenor, Floretta Dukes McKenzie, R. Theodore Ammon and W. Mitt Romney. In
connection with the consummation of the Distribution, Mr. J. W. Marriott, Jr.
resigned as Chairman of the Board of Directors (although he remains a director)
and was replaced as Chairman by Mr. R. E. Marriott. Additionally, in connection
with the consummation of the Distribution, Mr. Colton, Mr. Grosvenor, Mrs.
Marriott, Ms. McKenzie and Mr. Romney each resigned as a director. Mrs.
Marriott, co-founder of the Company, was appointed Director Emeritus by the
Board of Directors.
On October 15, 1993 the Board of Directors, acting on the recommendation of
its Nominating and Corporate Governance Committee, appointed the Honorable
Andrew J. Young as a director of the Company. On December 2, 1993 the Board of
Directors, acting on the recommendation of its Nominating and Corporate
Governance Committee, appointed each of Anne Dore McLaughlin and Stephen F.
Bollenbach as a director of the Company. Messrs. Young and Bollenbach and Ms.
McLaughlin will each serve an initial term as director expiring at the 1994
Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
TERM
DIRECTOR EXPIRES OTHER POSITIONS
- -------- ------- ---------------
<S> <C> <C>
Richard E. Marriott* 1995 Mr. Marriott is a director of Host Marriott
Chairman of the Board Hospitality, Inc. and certain other subsidiaries
Director since 1979 of the Company. He also serves as a director of
Age: 54 Marriott International, Inc. and of Potomac
Electric Power Company. He also is President of
the National Restaurant Association. For
additional information on Mr. Marriott, see
"Executive Officers" below.
R. Theodore Ammon 1995 Mr. Ammon is a director of Host Marriott Hospital-
Director since 1992 ity, Inc. Mr. Ammon was formerly a general partner
Age: 44 of Kohlberg Kravis Roberts & Co. (a New York and
San Francisco-based investment firm). He also
serves on the boards of Astrum International, Big
Flower Press, Inc., Doskocil Incorporated, the New
York YMCA, the Coro Foundation and Bucknell Uni-
versity.
Stephen F. Bollenbach 1994 Mr. Bollenbach is President and Chief Executive
President and Chief Officer of the Company. He serves as a director of
Executive Officer certain subsidiaries of the Company, Carr Realty
Director since 1993 Corporation and Mid-America Apartment Communities,
Age: 51 Inc. He also serves on the CEO Magazine Advisory
Board. On December 2, 1993, Mr. Bollenbach was ap-
pointed by the Board of Directors to fill a va-
cancy on the Board. For additional information on
Mr. Bollenbach, see "Executive Officers" below.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
TERM
DIRECTOR EXPIRES OTHER POSITIONS
- -------- ------- ---------------
<S> <C> <C>
J.W. Marriott, Jr.* 1996 Mr. Marriott is a director of Host Marriott Hospi-
Director since 1964 tality, Inc. He is also Chairman of the Board and
Age: 61 President of Marriott International, Inc. and di-
rector of General Motors Corporation and Outboard
Marine Corporation. He is a member of the Confer-
ence Board, the Business Council and the Business
Roundtable and serves on the boards of trustees of
The Mayo Foundation, the National Geographic Soci-
ety and the Executive Council on Foreign
Diplomats.
Ann Dore McLaughlin 1994 Ms. McLaughlin is President of the Federal City
Director since 1993 Council and Vice Chairman of the Aspen Institute.
Age: 52 She was formerly President and Chief Executive Of-
ficer of New American Schools Development Corpora-
tion. Ms. McLaughlin has served with distinction
in several U.S. Administrations in such positions
as Secretary of Labor and Under Secretary of the
Department of the Interior. Ms. McLaughlin also
serves as a director of AMR Corporation, General
Motors Corporation, Kellogg Company, Nordstrom,
Potomac Electric Power Company, The Traveler Cor-
poration, Union Camp Corporation and Vulcan Mate-
rials Company. Additionally, Ms. McLaughlin serves
as a member of the governing boards of a number of
civic, non-profit organizations, including The
Public Agenda Foundation and the Conservation
Fund. Ms. McLaughlin is on the Board of Overseers
for the Wharton School of the University of Penn-
sylvania and is a Trustee of the Center for Stra-
tegic and International Studies. On December 2,
1993 Ms. McLaughlin was appointed by the Board of
Directors to fill a vacancy on the Board.
Harry L. Vincent, Jr. 1996 Mr. Vincent is a director of Host Marriott Hospi-
Director since 1969 tality, Inc. Mr. Vincent is a retired Vice Chair-
Age: 74 man of Booz-Allen & Hamilton, Inc.
Andrew J. Young 1994 Mr. Young is Vice Chairman of the Law Companies
Director since 1993 Group, Inc., an engineering and environmental con-
Age: 61 sulting group, and Co-Chairman of the Atlanta Com-
mittee for the Olympic Games. Mr. Young has spent
more than 35 years in public service. He was
elected to three terms in the U.S. Congress, rep-
resenting the Fifth Congressional District of
Georgia. In 1977 he was appointed U.S. Ambassador
to the United Nations. He was elected mayor of At-
lanta, Georgia in 1981, and reelected in 1985. Mr.
Young is a member of several additional boards in-
cluding those of Howard University, The Martin Lu-
ther King, Jr. Center, the Global Infrastructure
Fund and the Center for Global Partnership. He is
also a member of the Georgia Institute of Technol-
ogy advisory board. On October 15, 1993, Mr. Young
was appointed by the Board of Directors to fill
a vacancy on the Board.
</TABLE>
- --------
* J.W. Marriott, Jr. and Richard E. Marriott are brothers.
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<PAGE>
COMPENSATION POLICY COMMITTEE
The Compensation Policy Committee comprises two directors who are not
employees of the Company or any of its subsidiaries. Prior to the Distribution,
the members of the Compensation Policy Committee were former director Floretta
Dukes McKenzie (Chairperson), Harry L. Vincent, Jr. and former director W. Mitt
Romney. As a result of the resignation of Ms. McKenzie and Mr. Romney in
connection with the Distribution, the current members of the Compensation
Policy Committee are Mr. Vincent (Chairperson) and R. Theodore Ammon. The
committee's functions include recommendations on policies and procedures
relating to senior officers' compensation and various employee stock plans and
approvals of individual salary adjustments and stock awards in those areas.
COMPENSATION OF DIRECTORS
Company directors who are also officers of the Company receive no additional
compensation for their services as directors. Directors who are not officers of
the Company receive an annual retainer fee of $25,000 as well as an attendance
fee of $1,000 for each shareholders meeting, meeting of the Board of Directors
and meeting of a committee thereof, regardless of the number of meetings held
on a given day. The chairperson of each committee of the board of directors
receives an additional annual retainer fee of $1,000. Directors are also
reimbursed for travel expenses and other out-of-pocket costs incurred in
attending meetings.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the persons who are
executive officers of the Company.
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE PRIOR TO BECOMING
NAME AND TITLE AGE AN EXECUTIVE OFFICER OF THE COMPANY
- -------------- --- -------------------------------------
<S> <C> <C>
Richard E. Marriott 54 Richard E. Marriott joined the Company in 1965 and
Chairman of the Board has served in various executive capacities. In
1979, Mr. Marriott was elected to the Board of Di-
rectors. In 1984, he was elected Executive Vice
President and in 1986 he was elected Vice Chairman
of the Board of Directors. In 1993, Mr. Marriott
was elected Chairman of the Board. Mr. Marriott
also has been responsible for management of the
Company's government affairs functions.
Stephen F. Bollenbach 51 Stephen F. Bollenbach rejoined the Company in 1992
Chief Executive Officer as Executive Vice President and Chief Financial
and President Officer. He was named President and Chief Execu-
tive Officer of the Company in 1993. During the
period from 1982 to 1986, Mr. Bollenbach was Se-
nior Vice President--Finance and Treasurer of the
Company. He subsequently served as Chief Financial
Officer of Promus Companies from 1986 to 1990 and
served as Chief Financial Officer with the Trump
Organization from 1990 until he rejoined the Com-
pany.
William W. McCarten 45 William W. McCarten joined the Company in 1979 as
Executive Vice President Vice President and Controller--Corporate Account-
and President-- ing. He was promoted to Vice President and Con-
Host/Travel Plazas troller of the Roy Rogers Division in 1982 and be-
came Vice President--Group Finance in 1984. He was
named Vice President and Corporate Controller in
1985. Mr. McCarten was elected Senior Vice Presi-
dent--Finance and Corporate Controller in 1986. In
1991, he was elected Executive Vice President and
in 1992 was elected President--Host/Travel Plazas.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE PRIOR TO BECOMING
NAME AND TITLE AGE AN EXECUTIVE OFFICER OF THE COMPANY
- -------------- --- -------------------------------------
<S> <C> <C>
Matthew J. Hart 41 Matthew J. Hart joined the Company in 1981 as Man-
Executive Vice President ager of Project Finance and was named Vice Presi-
and Chief Financial dent of Project Finance in 1984. He was appointed
Officer Assistant Treasurer in 1987 and was appointed Se-
nior Vice President--Finance and Treasurer in
1991. Mr. Hart was named Executive Vice President
and Chief Financial Officer in 1993. Prior to
joining the Company, Mr. Hart spent five years
with Bankers Trust Company in the corporate lend-
ing division.
Stephen J. McKenna 53 Stephen J. McKenna joined the Company in 1973 as
Senior Vice President an attorney. He was appointed Assistant General
and General Counsel Counsel in 1976, and was promoted to Vice Presi-
dent and Assistant General Counsel in 1986. He be-
came Vice President and Associate General Counsel
in 1990 and became Senior Vice President and Gen-
eral Counsel in 1993. Prior to joining the Compa-
ny, Mr. McKenna was employed as an attorney in the
airline and aircraft manufacturing industries.
Jeffrey P. Mayer 37 Jeffrey P. Mayer joined the Company in 1986 as Di-
Senior Vice President-- rector--Corporate Accounting. He was promoted to
Finance and Corporate Assistant Controller--Corporate Accounting in 1987
Controller and Vice President--Corporate Accounting in 1989.
He was appointed Vice President--Project Finance
in the Company's Treasury Department in 1991 and
Senior Vice President--Finance and Corporate Con-
troller in 1993. Prior to joining the Company, Mr.
Mayer spent eight years with Arthur Andersen & Co.
</TABLE>
EXECUTIVE OFFICER COMPENSATION
Summary of Compensation. Table I below sets forth a summary of the
compensation paid by the Company for the last three fiscal years to its Chief
Executive Officer and four additional most highly compensated executive
officers. With the exception of Mr. McCarten, all such executive officers
assumed their current position effective October 8, 1993. Such information is
also provided for three additional persons for whom disclosure would have been
provided but for the fact that such persons were not serving as executive
officers of the Company at the end of the last fiscal year.
43
<PAGE>
TABLE I
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------- ---------------------------- -------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING LTIP COMPEN-
NAME AND PRINCIPAL FISCAL SALARY(2)(3) BONUS(4) SATION AWARDS(5)(6) OPTIONS PAYOUTS SATION(7)
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ------------------ ------ ------------ -------- ------- ------------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard E. Marriott 1993 227,942 125,369 -- 1,150,080(8) 0 0 8,408
Chairman of the Board 1992 210,000 100,800 -- 21,915 14,500 0 10,078
1991 214,039 101,026 -- 0 16,200 0 7,196
Stephen F. Bollenbach(1) 1993 468,750 328,125 -- 6,469,200(8)(9) 0 0 8,888
Chief Executive Offi- 1992 380,769 255,115 -- 253,200 193,000 0 150,000(10)
cer and President
William W. McCarten 1993 277,348 180,276 -- 1,088,640(8) 0 14,031 10,569
Executive Vice 1992 245,024 115,896 -- 0 23,000 12,102 13,073
President 1991 249,736 157,334 -- 0 25,000 5,544 12,081
Matthew J. Hart 1993 218,977 142,335 -- 1,088,640(8) 0 7,433 9,077
Executive Vice 1992 189,921 123,448 -- 0 16,500 3,996 9,083
President 1991 165,273 63,835 -- 0 13,200 1,344 7,421
Stephen J. McKenna 1993 195,178 126,866 -- 544,500(8) 0 0 6,272
Senior Vice President 1992 178,792 98,336 -- 0 10,000 0 8,829
and General Counsel 1991 171,916 93,694 -- 0 10,800 0 8,034
J.W. Marriott, Jr.(11) 1993 554,904 499,914 -- 0 0 13,697 38,069
Former Chairman of 1992 725,000 617,288 -- 75,799 114,000 0 40,967
the Board and Presi- 1991 738,942 539,428 -- 0 125,000 0 21,151
dent
William J. Shaw(12) 1993 363,558 254,490 -- 0 0 27,958 14,971
Former Executive Vice 1992 471,154 304,837 -- 47,009 68,000 17,174 4,943
President 1991 458,654 309,591 -- 300,000 85,000 7,046 4,800
William R. Tiefel(13) 1993 346,154 242,308 -- 0 0 5,178 10,571
Former Executive Vice 1992 444,231 288,750 -- 44,431 68,000 4,061 21,262
President 1991 331,250 212,000 -- 300,000 60,000 0 14,155
</TABLE>
- --------
(1) Mr. Bollenbach joined the Company as Executive Vice President and Chief
Financial Officer on March 2, 1992.
(2) Fiscal year 1991 base salary earnings were for 53 weeks.
(3) Salary amounts include base salary earned and paid in cash during the
fiscal year and the amount of base salary deferred at the election of the
executive officer under the Company's Employees' Profit Sharing, Retirement
and Savings Plan and Trust (the "Profit Sharing Plan") and the Company's
Executive Deferred Compensation Plan (the "Deferred Compensation Plan').
(4) Bonus includes the amount of cash bonus earned and accrued during the
fiscal year and paid subsequent to the end of each fiscal year. The bonus
awards for fiscal year 1993 are reflected at the maximum possible bonus
award; actual bonus determinations for fiscal year 1993 have not yet been
made and may be in an amount lower than reflected herein.
(5) As part of its long-term compensation program for executive officers, the
Company awards shares of restricted stock pursuant to the Company's 1993
Comprehensive Stock Incentive Plan (the "Comprehensive Stock Plan") and
previously awarded such shares under the Company's Restricted Stock Plan
for Key Employees (the "Company Restricted Stock Plan"), a predecessor plan
to the Comprehensive Stock Plan. On March 10, 1992, eight executive
officers received, in lieu of a salary increase, awards of restricted
common stock totalling 17,000 shares. These shares, including 1,275
44
<PAGE>
shares held by Mr. R.E. Marriott, 4,410 shares held by Mr. J.W. Marriott,
Jr., 2,735 shares held by Mr. Shaw, and 2,585 shares held by Mr. Tiefel,
were distributable at the earlier of the attainment of certain company
financial performance objectives or January 3, 1994. In connection with the
consummation of the Distribution, these awards were distributed on October
8, 1993 without regard for whether the financial performance objectives
were attained.
(6) The aggregate number and value of shares of restricted stock, including
such shares of restricted stock designated as long term incentive awards as
indicated in footnote 8 below, held by each identified executive officer as
of December 31, 1993, were as follows: Mr. R.E. Marriott, 400,000 shares
valued at $3,675,200; Mr. Bollenbach, 1,512,000 shares valued at
$13,892,256; Mr. McCarten, 360,000 shares valued at $3,307,680; Mr. Hart,
360,000 shares valued at $3,307,680; Mr. McKenna, 180,000 shares valued at
$1,653,840; Mr. Shaw, 37,000 shares valued at $333,296 and Mr. Tiefel,
20,000 shares valued at $180,160. Mr. J.W. Marriott, Jr. does not hold
shares of restricted stock. Of the above noted shares, 37,000 shares vest
pro rata over a 10 year period, 952,000 vest pro rata over a five year
period, 500,000 shares vest at the end of a five year period and 1,380,000
shares vest pursuant to certain performance objectives established by the
Compensation Policy Committee. During the period in which any restrictions
apply, holders of restricted stock are entitled to receive all dividends or
other distributions paid with respect to such stock.
(7) With the exception of Mr. Bollenbach's amount for 1992, amounts included as
"All Other Compensation" represent matching Company contribution amounts
received under one or both of the Profit Sharing Plan and the Deferred
Compensation Plan. The amounts of matching Company contributions for fiscal
year 1993 reflect such amounts contributed by the Company in respect of
employee contributions made through October 8, 1993, the date of the
Distribution. Contributions by the Company in respect of employee
contributions for the remainder of fiscal year 1993 have not yet been made.
(8) On October 17, 1993, the Compensation Policy Committee (the "Committee") of
the Board of Directors approved awards of restricted stock to 18 key
employees of the Company, including Mr. McCarten, Mr. Hart and Mr. McKenna.
On October 29, 1993, the Board of Directors approved an award of restricted
stock to Mr. Bollenbach, and on December 2, 1993, the Board of Directors
approved an award of restricted stock to Mr. R.E. Marriott. Each such grant
made in 1993 to the above named officers consists of two portions: shares
subject to restrictions relating primarily to continued employment
("General Restrictions") which vest ratably over a five year period or at
the end of a five-year period and awards subject to additional performance
objectives such as financial performance of the Company ("Performance
Restrictions"). Performance objectives are established by the Committee and
are subject to periodic review and revision. All restricted stock awards
subject only to General Restrictions are presented on Table I as
"Restricted Stock Awards." Restricted stock awards subject to additional
Performance Restrictions are presented as long term incentive ("LTIP")
awards on Table III.
(9) Includes 900,000 shares of restricted common stock awarded to Mr.
Bollenbach by the Board of Directors on October 29, 1993. See footnote 8
above. Pursuant to this award, 400,000 shares are subject to General
Restrictions and vest ratably over a five year period and 500,000 shares
are subject to General Restrictions and vest on the fifth anniversary of
the date of award.
(10) Mr. Bollenbach received a one-time payment of $150,000 pursuant to the
Company's relocation program.
(11) In connection with the Distribution, Mr. J.W. Marriott, Jr. resigned his
positions as Chairman of the Board and President of the Company effective
October 8, 1993. Mr. Marriott remains a director of the Company.
(12) In connection with the Distribution, Mr. Shaw resigned his position as
Executive Vice President and President of the Company's Contract Services
Group effective October 8, 1993. Mr. Shaw had assumed these duties on
February 10, 1992. Prior to such date, Mr. Shaw served as Executive Vice
President and Chief Financial Officer.
(13) In connection with the Distribution, Mr. Tiefel resigned his position as
Executive Vice President effective October 8, 1993.
Aggregated Stock Option Exercises and Year-End Value. Table II below sets
forth, on an aggregated basis, information regarding the exercise during the
1993 fiscal year of options to purchase Common Stock by each of the applicable
persons listed on Table I above and the value on December 31, 1993 of all
unexercised options held by such individuals. The Company did not grant any
stock options to the persons listed on Table I during fiscal year 1993.
45
<PAGE>
TABLE II
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT
(#)(1) FISCAL YEAR-END ($)(2)
-------------------------- -------------------------
SHARES
ACQUIRED ON VALUE REALIZED
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Marriott..... 0 0 60,475 30,225 301,521 174,720
Stephen F. Bollenbach... 0 0 48,250 144,750 284,142 852,426
William W. McCarten..... 8,000 103,920 127,657 46,250 698,973 254,357
Matthew J. Hart......... 0 0 36,763 22,100 194,741 133,614
Stephen J. McKenna...... 14,000 172,180 83,432 17,525 474,173 110,404
J.W. Marriott, Jr....... 0 0 487,250 236,750 2,389,744 1,365,619
William J. Shaw......... 19,125 231,846 351,125 139,750 1,834,321 834,474
William R. Tiefel....... 6,000 78,600 176,200 105,750 984,222 632,299
</TABLE>
- --------
(1) In connection with the Distribution, and pursuant to the Company's 1976
Employee Stock Option Plan, all Company stock options were adjusted to
reflect the effects of the Distribution. Each non-qualified stock option
held by a Company employee (or retiree) prior to the Distribution was
effectively converted into two separate options: a Company option and a
Marriott International Option, in both cases for a number of shares equal
to the underlying Company option. The exercise price of the underlying
Company option was allocated to the two options pursuant to a formula
designed to preserve the economic value of the underlying Company option
prior to the Distribution. Each incentive stock option held by an employee
remaining a Company employee after the Distribution was adjusted in number
and as to the exercise price in order to preserve the economic value of
each such incentive stock option immediately prior to the Distribution.
(2) Based on a per share price for Common Stock of $9.188. This price
represents the average of the high and low trading prices for a share on
December 31, 1993.
Long-Term Incentive Plan ("LTIP") Awards. Table III below sets forth
information regarding Deferred Stock Bonus Awards, Deferred Stock Agreements
and restricted stock awards subject to certain performance criteria granted by
the Company under the Comprehensive Stock Plan and previously awarded by the
Company under its Deferred Stock Incentive Plan or Restricted Stock Plan for
Key Employees, predecessor plans to the Comprehensive Stock Plan, to the person
listed on Table I above in respect of the 1993 fiscal year.
The number of shares underlying each Deferred Stock Bonus Award is derived by
dividing twenty percent of each individual's cash bonus award by the average of
the high and low trading prices for a share of Common Stock on the last trading
day of the fiscal year. No voting rights or cash dividends are attributed to
award shares until such award shares are distributed. Recipients of Deferred
Stock Bonus Awards listed on Table I may elect to denominate such awards as a
current award ("Current Award") or a deferred award ("Deferred Award").
A Current Award is distributed in ten annual installments commencing one year
after the award is granted. If an employee dies before distribution of all
shares to which the employee is entitled, the remaining shares are distributed
in one distribution to the employee's designated beneficiaries or, in the
absence of such beneficiaries, to the employee's estate.
Any undistributed shares subject to a Current Award will be forfeited and the
Deferred Stock Bonus Award terminated if the employee's employment with the
Company is terminated for any reason other than termination of employment at or
beyond age 55 with ten years of service, termination after 20 years of service
with retirement approval from the Compensation Policy Committee of the
Company's board of directors or its designee, permanent disability or death.
Any undistributed shares not subject to forfeiture shall continue to be paid to
the employee under the distribution schedule which would have applied to those
shares if the employee had not terminated employment, or over such shorter
period as the Chief Executive Officer of the Company may direct.
46
<PAGE>
A Deferred Award is distributed to the recipient, as elected, in a lump sum
or in up to ten installments following termination of employment. Deferred
Award shares contingently vest pro rata in annual installments commencing one
year after the Deferred Stock Bonus Award is granted to the employee, and
continuing on each January 2 thereafter until the expiration of a ten year
period from the commencement date. All shares subject to the Deferred Award
vest upon termination of employment after reaching age 55 with ten years of
service with the Company, termination of employment after 20 years of company
service with retirement approval from the Compensation Policy Committee of the
Company board of directors or its designee, permanent disability or death.
Vesting stops when employment terminates for any other reason.
On occasion, the Board of Directors, upon the recommendation of its
Compensation Policy Committee, awards to certain key employees shares of
restricted stock which vest upon satisfaction of specified performance
objectives. The award of such performance-restricted stock is maintained in the
name of the recipient in an account at the transfer agent and is restricted
from further transfer, sale, alienation or hypothecation, until such time as
the conditions restricting transfer have been satisfied. Such conditions
include continued employment, non-competition, proper conduct, and attainment
of specified Company business objectives. While such restricted shares are
maintained on account, the award recipient is entitled to vote such shares, and
receive any dividends if dividends on common shares are declared. Upon
satisfaction of the business objectives and all other conditions, the shares
are released from restrictions and may be sold or transferred by the employee.
47
<PAGE>
TABLE III
LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE OR OTHER PERIOD UNTIL
NAME SHARES MATURATION OR PAYOUT(1)
- ---- --------- ---------------------------------
<S> <C> <C>
Richard E. Marriott............... 2,800(2) 10 Years(3)
240,000 5 Years(4)
Stephen F. Bollenbach............. 7,500(2) 10 Years
600,000 5 Years(4)
William W. McCarten............... 4,120(2) 10 Years
216,000 5 Years(4)
Matthew J. Hart................... 3,253(2) 10 Years
216,000 5 Years(4)
Stephen J. McKenna................ 2,900(2) 10 Years(3)
108,000 5 Years(4)
J.W. Marriott, Jr................. 0 --
William J. Shaw................... 0 --
William R. Tiefel................. 0 --
</TABLE>
- --------
(1) The vesting procedures and rules governing forfeitability of these awards
are discussed in this section "Long-Term Incentive ("LTIP") Awards."
(2) Represents estimated Deferred Stock Bonus Awards or Deferred Stock
Agreements calculated based upon maximum bonus amounts presented in Table I
and an estimated trading price for Common Stock. Actual Deferred Stock
Bonus Awards and Deferred Stock Agreements have not yet been determined.
These awards are currently subject to forfeiture pursuant to the terms of
the Comprehensive Stock Plan, a successor plan to the Company's Deferred
Stock Incentive Plan. See footnote 1 above.
(3) Pursuant to the terms of the Company's Deferred Stock Incentive Plan, a
predecessor to the Comprehensive Stock Plan, Mr. Marriott's and Mr.
McKenna's awards are not subject to forfeiture as they each have over 20
years of service with the Company.
(4) Represents awards of shares of restricted stock that vest on a pro-rata
basis over a five year period subject to the satisfaction of certain
Performance Restrictions to be established by the Compensation Policy
Committee of the Board of Directors. See footnote 8 to Table I. The vesting
provisions governing these awards are subject to review and revision by the
Compensation Policy Committee.
CERTAIN TRANSACTIONS
In 1985, the Company sold for $10.03 million a 10.32 percent equity interest
in the Times Square Hotel Company partnership ("TSHCO"), owner of the New York
Marriott Marquis Hotel, to MM Times Square Hotel Investors ("MM Times Square"),
a limited partnership which includes J.W. Marriott, Jr. and Richard E. Marriott
as partners. The Company received cash at closing of $3.15 million and a $6.88
million nonrecourse promissory note due September 1, 2015 with interest at 12
percent per annum, collateralized by the ownership interest sold. At the same
time, the Company sold a 28.68 percent interest in TSHCO to an unrelated third-
party for approximately $26.3 million on essentially the same terms.
Preliminary agreements were reached in 1991 with the purchaser of the 28.68
percent interest, and in 1992 with MM Times Square, to restructure the
respective promissory notes payable to the Company. During the fourth quarter
of 1992, the purchaser of the 28.68 percent interest informed the Company that
he would not be making further payments on his promissory note. In view of this
action, the restructurings of the promissory notes with both TSHCO and MM Times
Square have been discontinued and the Company is seeking to foreclose on its
security interests. The Company expects to complete both foreclosures in early
1994. See "Prospectus Summary--Recent Developments--New York Marriott Marquis."
48
<PAGE>
The Company and its subsidiaries and Marriott International and its
subsidiaries have entered into certain relationships following the
Distribution. For a description of certain agreements entered into between the
Company and its subsidiaries and Marriott International and its subsidiaries,
see "Relationship Between the Company and Marriott International."
OWNERSHIP OF COMPANY SECURITIES
The Company has three outstanding classes of equity or equity-linked
securities: Common Stock, Convertible Preferred Stock and LYONs. None of the
directors, nominees or executive officers owns shares of Convertible Preferred
Stock or LYONs.
Set forth below is the ownership as of October 31, 1993 of Common Stock by
directors, nominees, the chief executive officer and the four additional most
highly compensated executive officers and certain former executive officers of
the Company, as well as by all directors and executive officers (including such
former executive officers) of the Company as a group, and to the best of the
Company's knowledge, beneficial holders of 5% or more of Common Stock. The
Company has no knowledge that any person is the beneficial holder of 5% or more
of the LYONs.
Based upon a Schedule 13D filed with the Securities and Exchange Commission
on September 27, 1993, the Company believes that a group including Gotham
Capital III, L.P., Alfred Partners, L.P., Joel M. Greenblatt and Daniel L. Nir
each with an address of 100 Jericho Quadrangle, Jericho, New York, 11753,
beneficially own 220,200 depositary shares representing 220.2 shares of the
Convertible Preferred Stock. As of December 21, 1993, such holdings represent
75.54% of the approximately 292,000 then outstanding depositary shares of
Convertible Preferred Stock.
<TABLE>
<CAPTION>
% OF SHARES
SHARES OF OUTSTANDING (NET
COMMON STOCK OF TREASURY
BENEFICIALLY OWNED SHARES) AS OF
NAME ON OCTOBER 31, 1993 OCTOBER 31, 1993
- ---- ------------------- ----------------
<S> <C> <C>
Directors
R. Theodore Ammon................... 0 0.00
Stephen F. Bollenbach............... 3,000(1) 0.00(2)
J.W. Marriott, Jr................... 4,913,174(1)(3)(4) 4.14
Richard E. Marriott................. 6,129,154(1)(3)(4) 5.16
Ann Dore McLaughlin................. 0 0.00
Harry L. Vincent, Jr................ 11,100 0.01
Andrew J. Young..................... 0 0.00
Non-Director Executive Officers
Matthew J. Hart..................... 1,628(1) 0.00(2)
William W. McCarten................. 13,152(1) 0.01
Stephen J. McKenna.................. 14,104(1) 0.01
Certain Former Executive Officers
William J. Shaw..................... 30,548 0.03
William R. Tiefel................... 54,323 0.05
All directors and executive officers
as a group........................... 11,171,261(5) 9.41(5)
Sanford C. Bernstein & Co., Inc....... 8,680,909(6) 7.31(6)
767 Fifth Avenue
New York, New York 10153
</TABLE>
- --------
(1) Does not include shares reserved, contingently vested or awarded under the
Company's 1993 Comprehensive Stock Incentive Plan or 1993 Employee Stock
Purchase Plan. For additional information, see Tables I through III above.
(2) Ownership of less than 1/100th of 1% is reflected as 0.00 in the table
above.
49
<PAGE>
(3) Does not include: (i) 1,612,915 shares held in trust for the children and
grandchildren of J.W. Marriott, Jr. or 1,089,949 shares held by his wife
and children; (ii) 1,783,042 shares held in trust for the children and
grandchildren of Richard E. Marriott or 447,562 shares held by his wife and
children; (iii) 2,280,287 shares held by The J. Willard Marriott
Foundation; (iv) 1,923,885 shares held by a charitable annuity trust,
created by the will of J. Willard Marriott, to which his descendants have a
remainder interest; (v) 2,707,590 shares held by J. Willard Family
Enterprises, L.P., (vi) 2,302,729 shares held by First Media, L.P., or
(vii) 1,126,441 shares owned directly or beneficially by certain other
members of the Marriott family. The shares referred to in this note
aggregated 12.86% of the common shares outstanding (net of treasury shares)
as of October 31, 1993.
(4) By virtue of their ownership of shares of common stock and their positions
as directors and officers of the Company, J.W. Marriott, Jr. and Richard E.
Marriott would be deemed in control of the Company within the meaning of
the federal securities laws. Other members of the Marriott family might
also be deemed control persons by reason of their ownership of shares
and/or their relationship to other family members. J.W. Marriott, Jr.,
Richard E. Marriott, their mother Alice S. Marriott and other members of
the Marriott family and various trusts established by members of the
Marriott family owned beneficially an aggregate of 26,364,799 shares or
22.21% of the total common shares outstanding (net of treasury shares) of
the Company as of October 31, 1993. All directors, nominees and current
executive officers as a group (other than members of the Marriott family)
owned beneficially an aggregate of 44,062 shares or .04% of the total
common shares outstanding (net of treasury shares) as of October 31, 1993.
In addition, the Company's Employees' Profit Sharing, Retirement and
Savings Plan and Trust owned 605,855 shares or .51% of the total common
shares outstanding (net of treasury shares) as of October 31, 1993.
(5) Includes shares of Common Stock beneficially owned by the former executive
officers listed on the table.
(6) Source of information: Schedule 13G as filed with the Securities and
Exchange Commission by Sanford C. Bernstein & Co., Inc. reporting ownership
as of December 31, 1992.
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's Capital Stock is only a summary,
and is qualified in its entirety by reference to the Company's Restated
Certificate of Incorporation and shareholder rights plan as previously filed by
the Company with the Securities and Exchange Commission.
GENERAL
The Company's Restated Certificate of Incorporation (the "Company
Certificate") authorizes the issuance of a total of 301,000,000 shares of all
classes of stock, of which 1,000,000 may be shares of preferred stock, without
par value, and 300,000,000 may be shares of Common Stock. At December 10, 1993,
approximately 119,600,000 shares of Common Stock were outstanding. The Company
Certificate provides that the Board is authorized to provide for the issuance
of shares of preferred stock, from time to time, in one or more series, and to
fix any voting powers, full or limited or none, and the designations,
preferences and relative, participating, optional or other special rights,
applicable to the shares to be included in any such series and any
qualifications, limitations or restrictions thereon.
COMMON STOCK
Voting Rights. Each holder of Common Stock is entitled to one vote for each
share registered in his name on the books of the Company on all matters
submitted to a vote of shareholders. Except as otherwise provided by law, the
holders of Common Stock vote as one class. The shares of Common Stock do not
have cumulative voting rights. As a result, subject to the voting rights, if
any, of the holders of any shares of the Company's preferred stock which may at
the time be outstanding, the holders of Common Stock entitled to exercise more
than 50% of the voting rights in an election of directors will be able to elect
100% of the directors to be elected if they choose to do so. In such event, the
holders of the remaining Common Stock voting for the election of directors will
not be able to elect any persons to the Board of Directors. The Company
Certificate provides that the Board of Directors is classified into three
classes, each serving a three year term, with one class to be elected in each
of three consecutive years.
50
<PAGE>
Dividend Rights. Subject to the rights of the holders of any shares of the
Company's preferred stock which may at the time be outstanding, holders of
Common Stock are entitled to such dividends as the Board of Directors may
declare out of funds legally available therefor. The Company intends to retain
future earnings for use in its business and does not currently intend to pay
dividends. In addition, the Credit Agreement contains restrictions on the
payment of dividends on the Common Stock. See "Dividend Policies."
Liquidation Rights and Other Provisions. Subject to the prior rights of
creditors and the holders of any of the Company's preferred stock which may be
outstanding from time to time, the holders of Common Stock are entitled in the
event of liquidation, dissolution or winding up to share pro rata in the
distribution of all remaining assets. The Common Stock is not liable for any
calls or assessments and is not convertible into any other securities. The
Company Certificate provides that the private property of the shareholders
shall not be subject to the payment of corporate debts. There are no redemption
or sinking fund provisions applicable to the Common Stock, and the Company
Certificate provides that there shall be no preemptive rights.
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
RIGHTS AND JUNIOR PREFERRED STOCK
The Company has adopted a shareholder rights plan as set forth in that
certain Rights Agreement dated February 3, 1989, as amended, between the
Company and the Bank of New York, as rights agent (the "Rights Agreement"). The
following is a summary of the terms of the Rights Agreement.
Rights. Following the occurrence of certain events (the "Occurrence Date")
and except as described below, each right (a "Right," and, collectively, the
"Rights") will entitle the registered holder thereof to purchase from the
Company one one-thousandth of a share (a "Unit") of the Company's Series A
Junior Participating Preferred Stock ("Junior Preferred Stock") at a price (the
"Purchase Price") of $150 per Unit, subject to adjustment. The Rights are not
exercisable until the Occurrence Date. The Rights expire on the tenth
anniversary of the adoption of the Rights Agreement, unless exercised in
connection with a transaction of the type described below or unless earlier
redeemed by the Company.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a shareholder of the Company, including, without limitation, the right to
vote or to receive dividends.
Initially, ownership of the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no separate certificates
representing the Rights (the "Rights Certificates") will be distributed. Until
the Occurrence Date (or earlier redemption or expiration of the Rights), the
Rights will be transferable only with the Common Stock, and the surrender or
transfer of any certificate of Common Stock will also constitute the transfer
of the Rights associated with the Common Stock represented by such certificate.
The Rights will separate from the Common Stock and an Occurrence Date will
occur upon the earlier of (i) 10 days following the date (a "Stock Acquisition
Date") of a public announcement that a person or group of affiliates or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding Common Stock
or (ii) 10 business days following the commencement of or announcement of an
intention to make a tender offer or exchange offer, the consummation of which
would result in the Acquiring Person becoming the beneficial owner of 30% or
more of such outstanding Common Stock (such date being called the Occurrence
Date).
For purposes of the Rights Agreement, a person shall not be deemed to
beneficially own "Exempt Shares" which include (i) shares of Common Stock
acquired by such person by gift, bequest and certain other transfers, which
shares were Exempt Shares immediately prior to such transfer and were held by
such person continuously thereafter and (ii) shares acquired by such person in
connection with certain distributions of Common Stock with respect to Exempt
Shares which were held by such person continuously thereafter. In connection
with the Distribution, the Board amended the Rights Agreement to provide that
the shares of
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Common Stock acquired by Marriott International upon exercise of the Marriott
International Purchase Right will be deemed "Exempt Shares" under the Rights
Agreement, such that the exercise of such right by Marriott International will
not cause Marriott International to be deemed an "Acquiring Person" under the
Rights Agreement and thus trigger a distribution of the Rights. See
"Relationship Between the Company and Marriott International--Marriott
International Purchase Right."
As soon as practicable following an Occurrence Date, Rights Certificates will
be mailed to holders of record of Common Stock as of the close of business on
the Occurrence Date. After such time, such separate Rights Certificates alone
will evidence the Rights and could trade independently from the Common Stock.
In the event (i) the Company is the surviving corporation in a merger with an
Acquiring Person and the Common Stock is not changed or exchanged, or (ii) an
Acquiring Person becomes the beneficial owner of 30% or more of the then
outstanding shares of Common Stock (except pursuant to an offer for all
outstanding shares of Common Stock which the Board determines to be fair to and
otherwise in the best interests of the Company and its shareholders), each
holder of a Right will, in lieu of the right to receive one one-thousandth of a
share of Junior Preferred Stock, thereafter have the right to receive, upon
exercise, Common Stock (or, in certain circumstances, cash, property or other
securities of the Company) having a value equal to two times the exercise price
of the Right. Notwithstanding any of the foregoing, following the occurrence of
any of the events set forth in this paragraph, all Rights that are (or, under
certain circumstances specified in the Rights Agreement, were) beneficially
owned by any Acquiring Person will be null and void. However, the Rights are
not exercisable following the occurrence of either of the events set forth
above until such time as the Rights are no longer redeemable by the Company as
set forth below.
For example, at an exercise price of $150 per Right, each Right not owned by
an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase $300
worth of Common Stock (or other consideration, as noted above) for $150.
Assuming that the Common Stock had a per share value of $30 at such time, the
holder of each valid Right would be entitled to purchase 10 shares of Common
Stock for $150.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation (other than a merger
described in the second preceding paragraph or a merger which follows an offer
described in the second preceding paragraph), or (ii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a
Right (except Rights which previously have been voided as set forth above)
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
In general, the Board may redeem the Rights in whole, but not in part, at any
time until 10 days following the Stock Acquisition Date, at a price of $.01 per
Right. After the redemption period has expired, the Company's right of
redemption may be reinstated if an Acquiring Person reduces its beneficial
ownership to 10% or less of the outstanding shares of Common Stock in a
transaction or series of transactions not involving the Company. Immediately
upon the action of the Board ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
$.01 per Right redemption price.
The purchase price payable, and the number of shares of Junior Preferred
Stock or other securities or property issuable upon exercise of the Rights are
subject to adjustment upon the occurrence of certain events with respect to the
Company, including stock dividends, sub-divisions, combinations,
reclassifications, rights or warrants offerings of Junior Preferred Stock at
less than the then current market price and certain distributions of property
or evidences of indebtedness of the Company to holders of Junior Preferred
Stock, all as set forth in the Rights Agreement.
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The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors since the Rights may be redeemed by the Company as set forth
above. See "Purposes and Antitakeover Effects of Certain Provisions of the
Company Certificate and Bylaws and the Marriott International Purchase Right."
JUNIOR PREFERRED STOCK
In connection with the Rights Agreement, 300,000 shares of Junior Preferred
Stock are authorized and reserved for issuance by the Board. No shares of
Junior Preferred Stock are currently outstanding. The following statements with
respect to the Junior Preferred Stock are subject to the detailed provisions of
the Company Certificate and the certificate of designation relating to the
Junior Preferred Stock (the "Junior Preferred Stock Certificate of
Designation"). These statements do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, the terms of the
Company Certificate and the Junior Preferred Stock Certificate of Designation.
Subject to the prior payment of cumulative dividends on any class of
preferred stock ranking senior to the Junior Preferred Stock, a holder of
Junior Preferred Stock will be entitled to cumulative dividends out of funds
legally available therefor, when, as and if declared by the Board, at a
quarterly rate per share of Junior Preferred Stock equal to the greater of (a)
$10.00 or (b) 1000 times (subject to adjustment upon certain dilutive events)
the aggregate per share amount of all cash dividends and 1000 times (subject to
adjustment upon certain dilutive events) the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions (other than
dividends payable in Common Stock or a sub-division of the outstanding shares
of Common Stock) declared on Common Stock, since the immediately preceding
quarterly dividend payment date for the Junior Preferred Stock (or since the
date of issuance of the Junior Preferred Stock if no such dividend payment date
has occurred).
A holder of Junior Preferred Stock will be entitled to 1000 votes (subject to
adjustment upon certain dilutive events) per share of Junior Preferred Stock on
all matters submitted to a vote of shareholders of the Company. Such holders
will vote together with the holders of the Common Stock as a single class on
all matters submitted to a vote of shareholders of the Company.
In the event of a merger or consolidation of the Company which results in
Common Stock being exchanged or changed for other stock, securities, cash
and/or other property, the shares of Junior Preferred Stock shall similarly be
exchanged or changed in an amount per share equal to 1000 times (subject to
adjustment upon certain dilutive events) the aggregate amount of stock,
securities, cash and/or other property, as the case may be, into which each
share of Common Stock has been exchanged or changed.
In the event of liquidation, dissolution or winding up of the Company, a
holder of Junior Preferred Stock will be entitled to receive $1000 per share,
plus accrued and unpaid dividends and distributions thereon, before any
distribution may be made to holders of shares of stock of the Company ranking
junior to the Junior Preferred Stock, and the holders of Junior Preferred Stock
are entitled to receive an aggregate amount per share equal to 1000 times
(subject to adjustment upon certain dilutive events) the aggregate amount to be
distributed per share to holders of Common Stock.
The Junior Preferred Stock is not subject to redemption. The terms of the
Junior Preferred Stock provide that the Company is subject to certain
restrictions with respect to dividends and distributions on and redemptions and
purchases of shares of stock of the Company ranking junior to or on a parity
with the Junior Preferred Stock in the event that payments of dividends or
other distributions payable on the Junior Preferred Stock are in arrears.
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CONVERTIBLE PREFERRED STOCK
The Company has outstanding 292,000 depositary shares of Convertible
Preferred Stock, each having a liquidation preference of $50 per depositary
share plus an amount equal to any accrued and unpaid dividends thereon. The
Distribution did not affect the terms of the Convertible Preferred Stock, which
are set forth in the Company's Certificate of Designation with respect to the
Convertible Preferred Stock (the "Convertible Preferred Stock Certificate of
Designation"). However, pursuant to Section 5(e)(iv) of the Convertible
Preferred Stock Certificate of Designation, the conversion price at which the
Convertible Preferred Stock is convertible into Common Stock after the
Distribution was adjusted from $17.40 per share to $2.61 per share. At the
current conversion price of $2.61 per share, the 292,000 outstanding depositary
shares of the Convertible Preferred Stock are convertible into approximately
5.6 million shares of Common Stock.
Pursuant to Section 6(c) of the Convertible Preferred Stock Certificate of
Designation, if the equivalent of six quarterly dividends payable on the
Convertible Preferred Stock are in arrears, the number of directors of the
Company will be increased by two and the holders of Convertible Preferred Stock
voting separately as a class with the holders of shares of any one or more
other series of preferred stock ranking on a parity with the Convertible
Preferred Stock whether as to payment of dividends or the distribution of
assets and upon which like voting rights have been conferred and are
exercisable, will be entitled to elect two directors for one year terms to fill
such vacancies at the Company's next annual meeting of shareholders. Such right
to elect two additional directors shall continue at each subsequent annual
meeting until all dividends in arrears have been paid or declared and set apart
for payment. Upon payment or declaration and reservation of funds for payment
of all such dividends in arrearage, the term of office of each director elected
shall immediately terminate and the number of directors constituting the entire
Board of Directors of the Company shall be reduced by the number of directors
elected by the holders of the Convertible Preferred Stock and any other series
of preferred stock ranking on a parity with the Convertible Preferred Stock as
discussed above. The Company has failed to pay dividends for one quarterly
period and presently intends to pay preferred stock dividends only to the
extent earnings equal or exceed the amount of such dividends. This policy may
result in an indefinite suspension of dividends on the Convertible Preferred
Stock. See "Dividend Policy." In such case, the holders of the Convertible
Preferred Stock may become entitled to elect two members of the Board of
Directors. The stated quarterly dividend on the outstanding shares of
Convertible Preferred Stock is approximately $300,000, and the Company could
recommence payment of quarterly dividends in order to avoid the election of
additional directors. In addition, commencing January 15, 1996, the outstanding
Convertible Preferred Stock may be redeemed at an aggregate redemption price of
$15 million plus accrued and unpaid dividends.
WARRANTS
As part of the Class Action Settlement, the Company agreed to issue warrants
to purchase up to 7.7 million shares of Common Stock, such warrants to be
exercisable for a period of five years after the Distribution, at $8.00 per
share during the first three years and $10.00 per share during the last two
years. The number of shares issuable under the warrants will be reduced to the
extent that the verified losses of eligible claimants (certain sellers of Old
Notes) are less than $8.7 million (such reduction to be one share for each
dollar by which $8.7 million exceeds the amount of such losses). As of the date
hereof, no such warrants have been issued, and no warrants are expected to be
issued until the appeal of the approval of the Class Action Settlement is
resolved. See "Risk Factors--Pending Litigation."
It is anticipated that the warrants will be evidenced by warrant agreements
that will provide for such matters as (i) the issuance, execution and delivery
of the warrant certificates, (ii) the warrant exercise price, duration and
exercise of warrant certificates, (iii) treatment of fractional shares, (iv)
the transfer and exchange of warrant certificates and (v) other provisions
relating to the rights of the registered holders of the warrants.
The holders of the warrants shall not be entitled to any of the rights of the
holders of Common Stock including, without limitation, the right to vote,
receive dividends and other distributions, to exercise any preemptive right or
to receive any notice of or to attend meetings of shareholders or any other
proceedings.
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PRICE RANGE OF THE COMMON STOCK AND DIVIDENDS
The Common Stock is listed on the New York Stock Exchange and on several
regional exchanges, and since consummation of the Distribution is traded under
the symbol "HMT." The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per share of the Common Stock as
reported on the New York Stock Exchange Composite Tape and traded during such
periods under the symbol "MHS," and the cash dividends paid per share of Common
Stock. Except for the fourth quarter of fiscal 1993, all periods presented in
the table below were prior to the Distribution. Therefore the stock prices and
dividends paid are not indicative of the Company's current stock price or
dividend policies. See "Dividend Policy." As of October 31, 1993, there were
approximately 66,561 holders of record of Common Stock.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
HIGH LOW PAID
---- ---- ---------
<S> <C> <C> <C>
1992
1st Quarter......................................... $19 5/8 $15 3/4 $.07
2nd Quarter......................................... 18 13 3/8 .07
3rd Quarter......................................... 17 1/2 15 1/8 .07
4th Quarter......................................... 21 7/8 16 7/8 .07
1993
1st Quarter......................................... $27 3/8 $20 3/4 $.07
2nd Quarter......................................... 26 5/8 24 .07
3rd Quarter......................................... 29 24 3/8 .07
4th Quarter(1)...................................... 33 3/8 6 1/8 --
1994
1st Quarter (through January 18, 1994).............. 11 3/8 8 3/4 --
</TABLE>
- --------
(1) The high sales price per share of the Common Stock for the fourth quarter
of fiscal 1993 occurred on October 8, 1993, the date of the Distribution.
The low sales price per share of the Common Stock during such period
occurred on October 11, 1993, after the occurrence of the Distribution.
PURPOSES AND ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY
CERTIFICATE AND BYLAWS AND THE MARRIOTT INTERNATIONAL PURCHASE RIGHT
COMPANY CERTIFICATE AND BYLAWS
The Company Certificate contains several provisions that will make difficult
an acquisition of control of the Company, by means of a tender offer, open
market purchases, a proxy fight or otherwise, that is not approved by the
Board. The Company's Bylaws (the "Bylaws") also contain provisions that could
have an antitakeover effect.
The purposes of the relevant provisions of the Company Certificate and Bylaws
are to discourage certain types of transactions, described below, which may
involve an actual or threatened change of control of the Company and to
encourage persons seeking to acquire control of the Company to consult first
with the Board of Directors to negotiate the terms of any proposed business
combination or offer. The provisions are designed to reduce the vulnerability
of the Company to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all outstanding shares or is otherwise unfair to
shareholders of the Company or an unsolicited proposal for the restructuring or
sale of all or part of the Company. The Company believes that, as a general
rule, such proposals would not be in the best interests of the Company and its
shareholders.
There has been a history of the accumulation of substantial stock positions
in public companies by third parties as a prelude to proposing a takeover or a
restructuring or sale of all or part of the company or another similar
extraordinary corporate action. Such actions are often undertaken by the third-
party without advance notice to, or consultation with, the management or board
of directors of the target company. In many cases, the purchaser seeks
representation on the company's board of directors in order to increase the
likelihood that its proposal will be implemented by the company. If the company
resists the efforts of the purchaser to obtain representation on the company's
board, the purchaser may commence a proxy contest to have its
55
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nominees elected to the board in place of certain directors or the entire
board. In some cases, the purchaser may not truly be interested in taking over
the company, but may use the threat of a proxy fight and/or a bid to take over
the company as a means of forcing the company to repurchase its equity position
at a substantial premium over market price.
The Company believes that the imminent threat of removal of the Company's
management or Board in such situations would severely curtail the ability of
management or the Board to negotiate effectively with such purchasers. The
management or the Board would be deprived of the time and information necessary
to evaluate the takeover proposal, to study alternative proposals and to help
ensure that the best price is obtained in any transaction involving the Company
which may ultimately be undertaken. If the real purpose of a takeover bid were
to force the Company to repurchase an accumulated stock interest at a premium
price, management or the Board would face the risk that, if it did not
repurchase the purchaser's stock interest, the Company's business and
management would be disrupted, perhaps irreparably.
Certain provisions of the Company Certificate and Bylaws, in the view of the
Company, will help ensure that the Board, if confronted by a surprise proposal
from a third-party which has acquired a block of stock, will have sufficient
time to review the proposal and appropriate alternatives to the proposal and to
act in what it believes to be the best interests of the shareholders. In
addition, certain other provisions of the Company Certificate are designed to
prevent a purchaser from utilizing two-tier pricing and similar inequitable
tactics in the event of an attempt to take over the Company.
These provisions, individually and collectively, will make difficult and may
discourage a merger, tender offer or proxy fight, even if such transaction or
occurrence may be favorable to the interests of the shareholders, and may delay
or frustrate the assumption of control by a holder of a large block of stock of
the Company and the removal of incumbent management, even if such removal might
be beneficial to the shareholders. Furthermore, these provisions may deter or
could be utilized to frustrate a future takeover attempt which is not approved
by the incumbent Board of Directors, but which the holders of a majority of the
shares may deem to be in their best interests or in which shareholders may
receive a substantial premium for their stock over prevailing market prices of
such stock. By discouraging takeover attempts, these provisions might have the
incidental effect of inhibiting certain changes in management (some or all of
the members of which might be replaced in the course of a change of control)
and also the temporary fluctuations in the market price of the stock which
often result from actual or rumored takeover attempts.
Set forth below is a description of such provisions in the Company
Certificate and Bylaws. Such description is intended as a summary only and is
qualified in its entirety by reference to the Company Certificate and Bylaws
which are exhibits to the Registration Statement on Form S-1 of which this
Prospectus is a part.
Classified Board of Directors. The Company Certificate provides for the Board
to be divided into three classes serving staggered terms so that directors'
current terms will expire either at the 1994, 1995 or 1996 annual meeting of
shareholders. See "Management--Board of Directors."
The classification of directors will have the effect of making it more
difficult for shareholders to change the composition of the Board in a
relatively short period of time. At least two annual meetings of shareholders,
instead of one, will generally be required to effect a change in a majority of
the Board. Such a delay may help ensure that the Board, if confronted by a
holder attempting to force a stock repurchase at a premium above market prices,
a proxy contest or an extraordinary corporate transaction, will have sufficient
time to review the proposal and appropriate alternatives to the proposal and to
act in what it believes are the best interests of the shareholders.
The classified board provision could have the effect of discouraging a third-
party from making a tender offer or otherwise attempting to obtain control of
the Company, even though such an attempt might be beneficial to the Company and
its shareholders. The classified board provision could thus increase the
likelihood that incumbent directors will retain their positions. In addition,
since the classified board provision
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is designed to discourage accumulations of large blocks of the Company's stock
by purchasers whose objective is to have such stock repurchased by the Company
at a premium, the classified board provision could tend to reduce the temporary
fluctuations in the market price of the Company's stock that could be caused by
accumulations of large blocks of such stock. Accordingly, shareholders could be
deprived of certain opportunities to sell their stock at a temporarily higher
market price.
The Company believes that a classified board of directors helps to assure the
continuity and stability of the Board and business strategies and policies as
determined by the Board, because generally a majority of the directors at any
given time will have had prior experience as directors of the Company. The
classified board provision also helps assure that the Board, if confronted with
an unsolicited proposal from a third-party that has acquired a block of the
voting stock of the Company, will have sufficient time to review the proposal
and appropriate alternatives and to seek the best available result for all
shareholders.
Removal; Filling Vacancies. The Company Certificate provides that, subject to
any rights of the holders of preferred stock, only a majority of the Board then
in office shall have the authority to fill any vacancies on the Board,
including vacancies created by an increase in the number of directors. In
addition, the Company Certificate provides that a new director elected to fill
a vacancy on the Board will serve for the remainder of the full term of his or
her class and that no decrease in the number of directors shall shorten the
term of an incumbent. Moreover, the Company Certificate provides that directors
may be removed with or without cause only by the affirmative vote of holders of
at least 66 2/3% of the voting power of the shares entitled to vote at the
election of directors, voting together as a single class. These provisions
relating to removal and filling of vacancies on the Board will preclude
shareholders from enlarging the Board or removing incumbent directors and
filling the vacancies with their own nominees.
Limitations on Shareholder Action By Written Consent; Special Meetings. The
Company Certificate and Bylaws provide that shareholder action can be taken
only at an annual or special meeting of shareholders and prohibit shareholder
action by written consent in lieu of a meeting. The Company Certificate and
Bylaws provide that, subject to the rights of holders of any series of
preferred stock, special meetings of shareholders can be called only by a
majority of the entire Board. Shareholders are not permitted to call a special
meeting or to require that the Board call a special meeting of shareholders.
Moreover, the business permitted to be conducted at any special meeting of
shareholders is limited to the business brought before the meeting by or at the
direction of the Board.
The provisions of the Company Certificate and Bylaws restricting shareholder
action by written consent may have the effect of delaying consideration of a
shareholder proposal until the next annual meeting unless a special meeting is
called by a majority of the entire Board. These provisions would also prevent
the holders of a majority of the voting power of the voting stock from using
the written consent procedure to take shareholder action and from taking action
by consent without giving all the shareholders of the Company entitled to vote
on a proposed action the opportunity to participate in determining such
proposed action. Moreover, a shareholder could not force shareholder
consideration of a proposal over the opposition of the Company Board by calling
a special meeting of shareholders prior to the time the Board believed such
consideration to be appropriate.
The Company believes that such limitations on shareholder action will help to
assure the continuity and stability of the Board and the Company's business
strategies and policies as determined by the Board, to the benefit of all of
the Company's shareholders. If confronted with an unsolicited proposal from
Company shareholders, the Board will have sufficient time to review such
proposal and to seek the best available result for all shareholders, before
such proposal is approved by such shareholders by written consent in lieu of a
meeting or through a special meeting of shareholders.
Nominations of Directors and Shareholder Proposals. The Bylaws establish an
advance notice procedure with regard to the nomination, other than by or at the
direction of the Board, of candidates for election as directors (the
"Nomination Procedure") and with regard to shareholder proposals to be brought
before an annual or special meeting of shareholders (the "Business Procedure").
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<PAGE>
The Nomination Procedure provides that only persons who are nominated by or
at the direction of the Board of Directors, or by a shareholder who has given
timely prior written notice to the Secretary of the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors. The Business Procedure provides that shareholder proposals must be
submitted in writing in a timely manner in order to be considered at any annual
or special meeting. To be timely, notice must be received by the Company (i) in
the case of an annual meeting, not less than 90 days prior to the annual
meeting for a director nomination, and not less than 120 days prior to the
annual meeting for a shareholder proposal or (ii) in the case of a special
meeting not later than the seventh day following the day on which notice of
such meeting is first given to shareholders for both a director nomination and
a shareholder proposal.
Under the Nomination Procedure, notice to the Company from a shareholder who
proposes to nominate a person at a meeting for election as a director must
contain certain information about that person, including age, business and
residence addresses, principal occupation, the class and number of shares of
Common Stock beneficially owned, the consent to be nominated and such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee, and certain information about
the shareholder proposing to nominate that person. Under the Business
Procedure, notice relating to a shareholder proposal must contain certain
information about such proposal and about the shareholder who proposes to bring
the proposal before the meeting, including the class and number of shares of
Common Stock beneficially owned by such shareholder. If the Chairman or other
officer presiding at a meeting determines that a person was not nominated in
accordance with the Nomination Procedure, such person will not be eligible for
election as a director, or if he determines that the shareholder proposal was
not properly brought before such meeting, such proposal will not be introduced
at such meeting. Nothing in the Nomination Procedure or the Business Procedure
will preclude discussion by any shareholder of any nomination or proposal
properly made or brought before an annual or special meeting in accordance with
the above-mentioned procedures.
The purpose of the Nomination Procedure is, by requiring advance notice of
nomination by shareholders, to afford the Board a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Board, to inform shareholders about such
qualifications. The purpose of the Business Procedure is, by requiring advance
notice of shareholder proposals, to provide a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the Board, to provide the Board with a meaningful opportunity
to inform shareholders, prior to such meetings, of any proposal to be
introduced at such meetings, together with any recommendation as to the Board's
position or belief as to action to be taken with respect to such proposal, so
as to enable shareholders better to determine whether they desire to attend
such meeting or grant a proxy to the Board as to the disposition of any such
proposal. Although the Bylaws do not give the Board any power to approve or
disapprove shareholder nominations for the election of directors or of any
other proposal submitted by shareholders, the Bylaws may have the effect of
precluding a nomination for the election of directors or precluding the
conducting of business at a particular shareholder meeting if the proper
procedures are not followed, and may discourage or deter a third-party from
conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company, even if the conduct of
such solicitation or such attempt might be beneficial to the Company and its
shareholders.
Fair Price Provision. Article Fifteenth of the Company Certificate (the "Fair
Price Provision") requires the approval by the holders of 66 2/3% of the voting
power of the outstanding capital stock of the Company entitled to vote
generally in the election of directors (the "Voting Stock") as a condition for
mergers and certain other business combinations ("Business Combinations")
involving the Company and any holder of more than 25% of such voting power (an
"Interested Shareholder") unless the transaction is either (i) approved by a
majority of the members of the Board who are not affiliated with the Interested
Shareholder and who were directors before the Interested Shareholder became an
Interested Shareholder (the "Disinterested Directors") or (ii) certain minimum
price and procedural requirements are met.
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<PAGE>
The Fair Price Provision is designed to prevent a third-party from utilizing
two-tier pricing and similar inequitable tactics in a takeover attempt. The
Fair Price Provision is not designed to prevent or discourage tender offers for
the Company. It does not impede an offer for at least 66 2/3% of the Voting
Stock in which each shareholder receives substantially the same price for his
or her shares as each other shareholder or which the Board has approved in the
manner described herein. Nor does the Fair Price Provision preclude a third-
party from making a tender offer for some of the shares of Voting Stock without
proposing a Business Combination in which the remaining shares of Voting Stock
are purchased. Except for the restrictions on Business Combinations, the Fair
Price Provision will not prevent an Interested Shareholder having a controlling
interest of the Voting Stock from exercising control over the Company or
increasing its interest in the Company. Moreover, an Interested Shareholder
could increase its ownership to 66 2/3% and avoid application of the Fair Price
Provision. However, the separate provisions contained in the Company
Certificate and the Bylaws relating to "Classified Boards of Directors"
discussed above will, as therein indicated, curtail an Interested Shareholder's
ability to exercise control in several respects, including such shareholder's
ability to change incumbent directors who may oppose a Business Combination or
to implement a Business Combination by written consent without a shareholder
meeting. The Fair Price Provision would, however, discourage some takeover
attempts by persons intending to acquire the Company in two steps and to
eliminate remaining shareholder interests by means of a business combination
involving less consideration per share than the acquiring person would propose
to pay for its initial interest in the Company. In addition, acquisitions of
stock by persons attempting to acquire control through market purchases may
cause the market price of the stock to reach levels which are higher than would
otherwise be the case. The Fair Price Provision may thereby deprive some
holders of the Common Stock of an opportunity to sell their shares at a
temporarily higher market price.
Although the Fair Price Provision is designed to help assure fair treatment
of all shareholders vis-a-vis other shareholders in the event of a takeover, it
is not the purpose of the Fair Price Provision to assure that shareholders will
receive a premium price for their shares in a takeover. Accordingly, the Board
is of the view that the adoption of the Fair Price Provision does not preclude
the Board's opposition to any future takeover proposal which it believes would
not be in the best interests of the Company and its shareholders, whether or
not such a proposal satisfies the minimum price criteria and procedural
requirements of the Fair Price Amendment.
In addition, under Section 203 of the Delaware General Corporation Law as
applicable to the Company, certain "business combinations" (defined generally
to include (i) mergers or consolidations between a Delaware corporation and an
interested shareholder (as defined below) and (ii) transactions between a
Delaware corporation and an interested shareholder involving the assets or
stock of such corporation or its majority-owned subsidiaries, including
transactions which increase the interested shareholder's percentage ownership
of stock) between a Delaware corporation, whose stock generally is publicly
traded or held of record by more than 2,000 shareholders, and an interested
shareholder (defined generally as those shareholders, who, on or after December
23, 1987, become beneficial owners of 15 percent or more of a Delaware
corporation's voting stock) are prohibited for a three-year period following
the date that such shareholder became an interested shareholder, unless (i)
prior to the date such shareholder became an interested shareholder, the board
of directors of the corporation approved either the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder, (ii) upon consummation of the transaction that made such
shareholder an interested shareholder, the interested shareholder owned at
least 85 percent of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding voting stock owned by officers who also
are directors and voting stock held in employee benefit plans in which the
employees do not have a confidential right to tender or vote stock held by the
plan), or (iii) the business combination was approved by the board of directors
of the corporation and ratified by two-thirds of the voting stock which the
interested shareholder did not own. The three-year prohibition also does not
apply to certain business combinations proposed by an interested shareholder
following the announcement or notification of certain extraordinary
transactions involving the corporation
59
<PAGE>
and a person who had been an interested shareholder during the previous three
years or who became an interested shareholder with the approval of a majority
of the corporation's directors.
Shareholder Rights Plan. The Company has adopted a shareholder rights plan
which may have anti-takeover effects. See "Description of Capital Stock--Rights
and Junior Preferred Stock."
Amendment of the Company Certificate and Bylaws. The Company Certificate
contains provisions requiring the affirmative vote of the holders of at least
66 2/3 percent of the voting power of the stock entitled to vote generally in
the election of directors to amend certain provisions of the Company
Certificate and Bylaws (including the provisions discussed above). These
provisions make it more difficult for shareholders to make changes in the
Company Certificate or Bylaws, including changes designed to facilitate the
exercise of control over the Company. In addition, the requirement for approval
by at least a 66 2/3 percent shareholder vote will enable the holders of a
minority of the Company's capital stock to prevent holders of a less-than-66
2/3 percent majority from amending such provisions of the Company's Certificate
or Bylaws.
MARRIOTT INTERNATIONAL PURCHASE RIGHT
Pursuant to the terms of the Distribution Agreement, the Company granted to
Marriott International, for a period of ten years following the Distribution,
the right to purchase a number of shares equal in amount of up to 20% of each
class of the Company's outstanding voting stock at the then fair market value
upon the occurrence of certain change of control events involving the Company.
The Marriott International Purchase Right may be exercised for a 30-day period
following the date a person or group of affiliated persons has (i) become the
beneficial owner of 20% or more of the total voting power of the then
outstanding shares of the Company's voting stock or (ii) announced a tender
offer for 30% or more of the total voting power of the then outstanding shares
of the Company's voting stock. These change of control events upon which the
Marriott International Purchase Right becomes exercisable are substantially
identical to those events that cause a distribution of the Rights under the
Rights Agreement (see "Description of Capital Stock--Rights and Junior
Preferred Stock"). Accordingly, certain share ownership of the Company's voting
stock by specified persons that is exempt under the Rights Agreement, and
consequently will not result in a distribution of Rights, also will not cause
the Marriott International Purchase Right to become exercisable.
The Board amended the terms of the Rights Agreement to provide that the
exercise of the Marriott International Purchase Right will not result in a
distribution of the Rights. Accordingly, upon exercise of the Marriott
International Purchase Right, Marriott International will be entitled to
receive the Rights associated with the Common Stock and will not be deemed an
"Acquiring Person" under the Rights Agreement.
The purchase price for the Common Stock to be purchased upon the exercise of
the Marriott International Purchase Right is determined by taking the average
of the closing sale price of the Common Stock during the 30 consecutive trading
days preceding the date the Marriott International Purchase Right becomes
exercisable. The specific terms of the Marriott International Purchase Right
are set forth in the Distribution Agreement.
The Marriott International Purchase Right will have an antitakeover effect.
Any person considering acquiring a substantial or controlling block of Common
Stock would face the possibility that its ability to exercise control would be
impaired by Marriott International's 20% ownership resulting from exercise of
the Marriott International Purchase Right. So long as the Marriott family's
current percentage of ownership of Common Stock continues, the combined
Marriott family (including various trusts established by members of the
Marriott family) and Marriott International ownership following exercise of the
Marriott International Purchase Right would effectively block control by others
(see "Description of Capital Stock"). It is also possible that the exercise
price of the Marriott International Purchase Right would be lower than the
price at which a potential acquiror might be willing to purchase a 20% block of
shares of Common Stock because the purchase price for the Marriott
International Purchase Right is based on the average trading price during a 30-
day period which may be prior to the announcement of the takeover event. This
potential price differential may have a further antitakeover effect by
discouraging potential acquirors of the Company. The antitakeover effect of the
Marriott International Purchase Right will be in addition to the antitakeover
effects of the provisions contained in the Company Certificate and Bylaws.
60
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF
COMMON STOCK
The following is a general summary of certain United States federal income
and estate tax consequences of the ownership, sale or other disposition of
Common Stock by a person (a "non-U.S. holder") that, for United States federal
income tax purposes, is a nonresident alien individual, a foreign corporation,
a foreign partnership or a foreign estate or trust, as such terms are defined
in the Internal Revenue Code of 1986, as amended (the "Code"). This summary
does not address all aspects of United States federal income and estate taxes
that may be relevant to non-U.S. holders in light of their particular facts and
circumstances or to certain types of non-U.S. holders that may be subject to
special treatment under United States federal income tax laws (for example,
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers). Furthermore, this summary does not discuss any aspects of
foreign, state or local taxation. This summary is based on current provisions
of the Code, existing and proposed regulations promulgated thereunder and
administrative and judicial interpretations thereof, all of which are subject
to change, possibly retroactively.
DIVIDENDS
Dividends paid to a non-U.S. holder of Common Stock will generally be subject
to withholding of United States federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty, unless the
dividends are effectively connected with the conduct of a trade or business of
the non-U.S. holder within the United States. In order to claim the benefit of
an applicable tax treaty rate, a non-U.S. holder may have to file with the
Company or its dividend paying agent an exemption or reduced treaty rate
certificate or letter in accordance with the terms of such treaty.
Dividends that are effectively connected with such holder's conduct of a
trade or business in the United States are generally subject to tax on a net
income basis (that is, after allowance for applicable deductions) at rates
applicable to U.S. citizens, resident aliens and domestic U.S. corporations,
and are not generally subject to withholding. Any such effectively connected
dividends received by a non-U.S. corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as may be specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country for purposes of the withholding discussed above (unless the payor has
knowledge to the contrary). Under the current interpretation of United States
Treasury regulations, the same presumption applies for purposes of determining
the applicability of a tax treaty rate; however, under proposed United States
Treasury regulations not currently in effect, a non-U.S. holder of Common Stock
who wishes to claim the benefit of an applicable treaty rate would be required
to satisfy applicable certification and other requirements. Certain
certification and disclosure requirements must be complied with in order to be
exempt from withholding under the effectively connected income exemption
discussed above.
A non-U.S. holder of Common Stock that is eligible for a reduced rate of
United States tax withholding pursuant to an income tax treaty may obtain a
refund of any excess amounts currently withheld by filing an appropriate claim
for refund with the United States Internal Revenue Service.
DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to United States federal
income tax in respect of gain recognized on the disposition of Common Stock
unless (i) the gain is effectively connected with the conduct of a trade or
business of a non-U.S. holder in the United States, (ii) in the case of a non-
U.S. holder who is a nonresident alien individual and holds Common Stock as a
capital asset, such holder is present in the United States for 183 or more days
in the taxable year of the sale and either (a) such individual's "tax home" for
United States federal income tax purposes is in the United States, or (b) the
gain is attributable to an office or
61
<PAGE>
other fixed place of business maintained in the United States by such
individual, or (iii) if the Company is or has been a "U.S. real property
holding corporation" for federal income tax purposes at any time during the
five-year period ending on the date of the disposition or, if shorter, the
period during which the non-U.S. holder held the Common Stock (the "applicable
period") and the non-U.S. holder holds, actually or constructively, at any time
during the applicable period, more than 5% of the Common Stock.
The Company expects to be treated as a U.S. real property holding company for
United States federal tax purposes because of its ownership of substantial real
estate assets in the United States. As a result, a non-U.S. holder who holds,
directly or indirectly, more than 5% of the Common Stock may be subject to
United States federal income taxation on any gain realized from the sale or
other disposition of such stock, unless an exemption is provided under an
applicable tax treaty.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by a holder who is neither a United
States citizen nor a United States resident (as specially defined for United
States federal estate tax purposes) at the time of death will be included in
such holder's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company must report annually to the Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends. These information reporting
requirements apply regardless of whether withholding is required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder
resides under the provisions of an applicable income tax treaty.
United States backup withholding (which generally is imposed at a 31% rate)
generally will not apply to (a) the payment of dividends paid on Common Stock
to a non-U.S. holder at an address outside the United States or (b) the payment
of the proceeds of the sale of Common Stock to or through the foreign office of
a broker. In the case of the payment of proceeds from such a sale of Common
Stock through foreign offices of United States brokers, or foreign brokers with
certain types of relationships to the United States, however, information
reporting (but not backup withholding) is required with respect to the payment
unless the broker has documentary evidence in its files that the owner is a
non-U.S. holder (and has no actual knowledge to the contrary) and certain other
requirements are met or the holder otherwise establishes an exemption. The
payment of the proceeds of a sale of shares of Common Stock to or through a
U.S. office of a broker is subject to information reporting and possible backup
withholding at a rate of 31% unless the owner certifies its non-U.S. status
under penalties of perjury or otherwise establishes an exemption. Any amounts
withheld under the backup withholding rules from a payment to a non-U.S. holder
will be allowed as a refund or a credit against such non-U.S. holder's United
States federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and could be changed by future regulations.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. ACCORDINGLY,
INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION
OF COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
62
<PAGE>
UNDERWRITING
Subject to certain conditions contained in the Underwriting Agreement, the
United States Underwriters named below (the "U.S. Underwriters"), for whom
Donaldson, Lufkin & Jenrette Securities Corporation, Montgomery Securities,
Smith Barney Shearson Inc. and BT Securities Corporation ("BT Securities") are
acting as representatives (the "U.S. Representatives"), and the international
managers named below (the "International Managers" and, together with the U.S.
Underwriters, the "Underwriters"), for whom Donaldson, Lufkin & Jenrette
Securities Corporation, Montgomery Securities, Smith Barney Shearson Inc. and
Bankers Trust International PLC are acting as representatives (the
"International Representatives" and, together with the U.S. Representatives,
the "Representatives"), have severally agreed to purchase from the Company an
aggregate of 17,500,000 shares of Common Stock. The number of shares of Common
Stock that each Underwriter has agreed to purchase is set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...............
Montgomery Securities.............................................
Smith Barney Shearson Inc. .......................................
BT Securities Corporation.........................................
----------
U.S. Offering Subtotal.......................................... 14,000,000
----------
INTERNATIONAL MANAGERS
----------------------
Donaldson, Lufkin & Jenrette Securities Corporation...............
Montgomery Securities.............................................
Smith Barney Shearson Inc. .......................................
Bankers Trust International PLC...................................
----------
International Offering Subtotal................................. 3,500,000
----------
Total......................................................... 17,500,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of Common Stock (other than the shares
of Common Stock covered by the over-allotment option described below) must be
so purchased. The offering price and underwriting discounts and commissions per
share for the U.S. Offering and the International Offering are identical.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
63
<PAGE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public initially at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to
exceed $ per share. The Underwriters may allow, and such dealers may reallow,
discounts not in excess of $ per share to any other Underwriter and certain
other dealers.
The Company has granted to the U.S. Underwriters an option to purchase up to
an aggregate of 2,625,000 additional shares of Common Stock at the initial
public offering price less underwriting discounts and commissions, solely to
cover over-allotments. Such option may be exercised at any time until 30 days
after the date of this Prospectus. To the extent that the U.S. Representatives
exercise such option, each of the U.S. Underwriters will be committed, subject
to certain conditions, to purchase approximately the same percentage of the
option shares that the number of shares of Common Stock to be purchased
initially by the Underwriter bears to the total number of shares to be
purchased initially by such U.S. Underwriters.
The Company and its executive officers have agreed, and its directors are
each expected to agree, subject to certain exceptions, not to sell or otherwise
dispose of shares of Common Stock or sell or grant rights, options or warrants
with respect to Common Stock or securities convertible into Common Stock prior
to the expiration of 90 days from the date of this Prospectus, without prior
written consent of the Representatives.
Pursuant to the Agreement Among U.S. Underwriters and International Managers,
each U.S. Underwriter has represented and agreed that, with certain exceptions,
(a) it is not purchasing any shares of Common Stock for the account of anyone
other than a United States or Canadian Person (as defined below) and (b) it has
not offered or sold, and will not offer or sell, directly or indirectly, any
shares of Common Stock or distribute this Prospectus outside of the United
States or Canada or to anyone other than a United States or Canadian Person.
Pursuant to the Agreement Among U.S. Underwriters and International Managers,
each International Manager has represented and agreed that, with certain
exceptions, (a) it is not purchasing any shares of Common Stock for the account
of any United States or Canadian Person and (b) it has not offered or sold, and
will not offer or sell, directly or indirectly, any shares of Common Stock or
distribute this Prospectus within the United States or Canada or to any United
States or Canadian Person. The foregoing limitations do not apply to
stabilization transactions and to certain other transactions among the
International Managers and the U.S. Underwriters. As used herein, "United
States or Canadian Person" means any national or resident of the United States
or Canada or any corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside the United
States or Canada of any United States or Canadian Person) and includes any
United States or Canadian branch of a person who is not otherwise a United
States or Canadian Person, and "United States" means the United States of
America, its territories, its possessions and all areas subject to its
jurisidiction.
Pursuant to the Agreement Among U.S. Underwriters and International Managers,
sales may be made between the U.S. Underwriters and the International Managers
of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price and
currency of settlement of any shares so sold shall be the public offering price
set forth on the cover page hereof, in United States dollars, less an amount
not greater than the per share amount of the concession to dealers set forth
above.
Pursuant to the Agreement Among U.S. Underwriters and International Managers,
each U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any shares of Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of Common
Stock in Canada will be made only pursuant to an exemption from the requirement
to file a prospectus in the province or territory of Canada
64
<PAGE>
in which such offer is made. Each U.S. Underwriter has further agreed to send
any dealer who purchases from it any shares of Common Stock a notice stating in
substance that, by purchasing such Common Stock, such dealer represents and
agrees that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such Common Stock in Canada in contravention of the
securities laws of Canada or any province or territory thereof and that any
offer of Common Stock in Canada will be made only pursuant to an exemption from
the requirement to file a prospectus in the province or territory of Canada in
which such offer is made, and that such dealer will deliver to any other dealer
to whom it sells any of such Common Stock a notice to the foregoing effect.
BT Securities, and its affiliates, from time to time provide financial
services for the Company and its affiliates and in connection therewith receive
customary fees. In 1993, BT Securities acted as financial advisor and dealer
manager to the Company in connection with the Exchange Offer and received from
the Company fees in connection therewith. Bankers Trust Company, an affiliate
of BT Securities, acted as exchange agent for the Exchange Offer and received
customary compensation for such services.
No document issued in connection with the Offering may be passed on to any
person in the United Kingdom unless that person is of a kind described in
Article 9(3) of the Financial Services Act 1986 (Investment Advertisement)
(Exemptions) Order 1988. In addition, each Underwriter has informed the Company
that: (i) it is not carrying on an investment business in the United Kingdom in
contravention of Section 3 of the Financial Services Act of 1986 (the "UKFSA");
(ii) it has not offered or sold, and it will not offer or sell, in the United
Kingdom, by means of this Prospectus, any amendment or supplement hereto or any
other document, any of the shares of Common Stock offered hereby other than to
persons whose ordinary business it is to buy or sell shares or debentures,
whether as principal or agent (except in circumstances that do not constitute
an offer to the public within the meaning of the Companies Act 1985); (iii)
subject to Part V of the UKFSA, it will not issue or cause to be issued in the
United Kingdom any advertisement offering the shares of Common Stock offered
hereby which is a primary or secondary offer within the meaning of the UKFSA
except in compliance with the provisions applicable under the UKFSA; (iv) it
has not issued or caused to be issued and it will not issue or cause to be
issued in the United Kingdom any investment advertisement within the meaning of
the UKFSA relating to the shares of Common Stock offered hereby except in
compliance with the provisions applicable under the UKFSA, and in particular,
it has not given and will not give copies of this Prospectus, any amendment or
supplement hereto or any other document relating to the offer and sale of the
shares of Common Stock offered hereby to any person in the United Kingdom who
does not fall within Article 9(3) of the Financial Services Act 1986
(Investment Advertisement) (Exemptions) Order 1988, and (v) it has complied and
will comply with all applicable provisions of the UKFSA with respect to
anything done by it in relation to the shares of Common Stock offered hereby
in, from or otherwise involving the United Kingdom.
No action has been taken in any jurisdiction by the Company or the
Underwriters that would permit a public offering of the Common Stock offered
pursuant to the Offering in any jurisdiction where action for that purpose is
required, other than the United States. The distribution of this Prospectus and
the offering or sale of the shares of Common Stock offered hereby in certain
jurisdictions may be restricted by law. Accordingly, the shares of Common Stock
offered hereby may not be offered or sold, directly or indirectly, and neither
this Prospectus nor any other offering material or advertisements in connection
with the Common Stock may be distributed or published, in or from any
jurisdiction, except under circumstances that will result in compliance with
applicable rules and regulations of any such jurisdiction. Such restrictions
may be set out in applicable Prospectus Supplements. Persons into whose
possession this Prospectus comes are required by the Company and the
Underwriters to inform themselves about and to observe any applicable
restrictions. This Prospectus does not constitute an offer of, or an invitation
to subscribe for purchase, any shares of Common Stock and may not be used for
the purpose of an offer to, or solicitation by, anyone in any jurisdiction or
in any circumstances in which such offer or solicitation is not authorized or
is unlawful.
65
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Stephen J. McKenna, Esq., Senior Vice President and General Counsel
of the Company, and certain legal matters with respect to the Common Stock
offered hereby will be passed upon for the Company by Latham & Watkins,
Washington, D.C. and by Potter, Anderson & Corroon, Wilmington, Delaware and
for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Los Angeles,
California.
Mr. McKenna owns Common Stock, and holds stock options, deferred stock and
restricted stock awards under the Comprehensive Stock Plan and may receive
additional awards under the plan in the future.
EXPERTS
The consolidated financial statements and schedules of the Company as
included in this Registration Statement have been audited by Arthur Andersen &
Co., independent public accountants, as indicated in their reports with respect
thereto and have been included herein in reliance upon the authority of said
firm as experts in giving said reports.
66
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Statement of Income for Fiscal Years Ended January 1, 1993,
January 3, 1992 and December 28, 1990.................................... F-3
Consolidated Balance Sheet at January 1, 1993 and January 3, 1992......... F-4
Consolidated Statement of Cash Flows for Fiscal Years Ended January 1,
1993, January 3, 1992 and December 28, 1990.............................. F-5
Consolidated Statement of Shareholders' Equity for Fiscal Years Ended Jan-
uary 1, 1993, January 3, 1992 and December 28, 1990...................... F-6
Notes to Consolidated Financial Statements................................ F-7
Condensed Consolidated Statement of Income for the Thirty-Six Weeks Ended
September 10, 1993 and September 11, 1992 (Unaudited).................... F-22
Condensed Consolidated Balance Sheet at September 10, 1993 (Unaudited).... F-24
Condensed Consolidated Statement of Cash Flows for the Thirty-Six Weeks
Ended September 10, 1993 and September 11, 1992 (Unaudited).............. F-25
Notes to Condensed Consolidated Financial Statements...................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF HOST MARRIOTT CORPORATION:
We have audited the accompanying consolidated balance sheet of Host Marriott
Corporation and subsidiaries (formerly Marriott Corporation) as of January 1,
1993 and January 3, 1992, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended January 1, 1993. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Corporation and subsidiaries as of January 1, 1993 and January 3,
1992, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended January 1, 1993 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN & CO.
Washington, D.C.
March 10, 1993 (except with respect to thematter discussed in the "Special
Dividend--Subsequent Event" note, as to which the date is December 23, 1993)
F-2
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FISCAL YEARS ENDED JANUARY 1, 1993,
JANUARY 3, 1992 AND DECEMBER 28, 1990
<TABLE>
<CAPTION>
1992 1991 1990
-------- -------- --------
(IN MILLIONS, EXCEPT
PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C>
SALES
Lodging
Rooms........................................ $ 2,843 $ 2,699 $ 2,374
Food and beverage............................ 1,190 1,194 1,146
Other......................................... 518 486 422
-------- -------- --------
4,551 4,379 3,942
Contract Services.............................. 4,171 3,952 3,704
-------- -------- --------
8,722 8,331 7,646
-------- -------- --------
OPERATING COSTS AND EXPENSES
Lodging
Departmental direct costs
Rooms........................................ 676 628 554
Food and beverage............................ 917 915 870
Other, including payments to hotel owners and,
in 1990, net restructuring charges of $65
million...................................... 2,620 2,511 2,279
Contract Services, including restructuring
charges of $57 million in 1990................ 4,013 3,799 3,590
-------- -------- --------
8,226 7,853 7,293
-------- -------- --------
OPERATING PROFIT
Lodging........................................ 338 325 239
Contract Services.............................. 158 153 114
-------- -------- --------
Operating profit before corporate expenses and
interest...................................... 496 478 353
Corporate expenses, including restructuring
charges of $21 million in 1992 and $31 million
in 1990....................................... (129) (111) (137)
Interest expense................................. (248) (265) (183)
Interest income.................................. 31 43 47
-------- -------- --------
INCOME BEFORE INCOME TAXES....................... 150 145 80
Provision for income taxes....................... 65 63 33
-------- -------- --------
NET INCOME....................................... 85 82 47
Dividends on preferred stock..................... (17) (1) --
-------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK............ $ 68 $ 81 $ 47
======== ======== ========
EARNINGS PER COMMON SHARE........................ $ .64 $ .80 $ .46
======== ======== ========
</TABLE>
See "Notes to Consolidated Financial Statements."
F-3
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 1, 1993 AND JANUARY 3, 1992
<TABLE>
<CAPTION>
1992 1991
------ ------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents......................................... $ 325 $ 163
Accounts receivable.......................................... 606 527
Inventories, at lower of average cost or market.............. 316 244
Other........................................................ 249 221
------ ------
1,496 1,155
------ ------
Property and Equipment......................................... 3,461 3,847
Investments in Affiliates...................................... 445 457
Intangibles.................................................... 452 477
Notes Receivable and Other..................................... 556 573
------ ------
$6,410 $6,509
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................. $ 710 $ 706
Accrued payroll and benefits................................. 331 313
Other payables and accruals.................................. 434 374
Notes payable and capital leases............................. 21 52
------ ------
1,496 1,445
------ ------
Long-Term Debt................................................. 2,732 2,979
Other Long-Term Liabilities.................................... 401 350
Deferred Income................................................ 183 232
Deferred Income Taxes.......................................... 585 614
Convertible Subordinated Debt.................................. 228 210
Shareholders' Equity
Convertible preferred stock.................................. 200 200
Common stock, 105 million shares issued...................... 105 105
Additional paid-in capital................................... 34 35
Retained earnings............................................ 555 583
Treasury stock, 4.2 million common shares and 9.5 million
common shares, respectively, at cost........................ (109) (244)
------ ------
Total Shareholders' Equity..................................... 785 679
------ ------
$6,410 $6,509
====== ======
</TABLE>
See "Notes to Consolidated Financial Statements."
F-4
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 1, 1993, JANUARY 3, 1992 AND DECEMBER 28, 1990
<TABLE>
<CAPTION>
1992 1991 1990
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 85 $ 82 $ 47
Adjustments to reconcile to cash from operations:
Depreciation and amortization................... 284 272 208
Income taxes.................................... (28) 27 18
Net restructuring charges....................... 21 -- 153
Proceeds from sales of timeshare notes receiv-
able........................................... 41 83 --
Amortization of deferred income................. (19) (38) (50)
Other........................................... 1 6 49
Working capital changes:
Accounts receivable........................... (40) 88 (76)
Inventories................................... (16) 63 (22)
Other current assets.......................... (14) 13 (5)
Accounts payable and accruals................. 106 (47) 63
------- ------- -------
Cash from continuing operations................... 421 549 385
Cash from (used in) discontinued operations....... (11) 3 (10)
------- ------- -------
Cash from operations.............................. 410 552 375
------- ------- -------
INVESTING ACTIVITIES
Proceeds from sales of assets..................... 484 84 990
Less noncash proceeds........................... (97) -- (15)
------- ------- -------
Cash received from sales of assets................ 387 84 975
Capital expenditures.............................. (210) (427) (1,094)
Acquisitions...................................... (47) -- (118)
Other............................................. (82) (126) (129)
------- ------- -------
Cash from (used in) investing activities.......... 48 (469) (366)
------- ------- -------
FINANCING ACTIVITIES
Issuances of long-term and convertible subordi-
nated debt....................................... 917 815 1,317
Issuance of convertible preferred stock........... -- 195 --
Issuances of common stock......................... 7 3 24
Repayment of long-term debt....................... (1,179) (1,316) (846)
Purchases of treasury stock....................... -- -- (294)
Dividends paid.................................... (41) (27) (27)
------- ------- -------
Cash from (used in) financing activities.......... (296) (330) 174
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS......... 162 (247) 183
CASH AND EQUIVALENTS, beginning of year............. 163 410 227
------- ------- -------
CASH AND EQUIVALENTS, end of year................... $ 325 $ 163 $ 410
======= ======= =======
</TABLE>
SEE "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."
F-5
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 1, 1993, JANUARY 3, 1992 AND DECEMBER 28, 1990
<TABLE>
<CAPTION>
COMMON CONVERTIBLE ADDITIONAL
SHARES PREFERRED COMMON PAID-IN RETAINED TREASURY
OUTSTANDING STOCK STOCK CAPITAL EARNINGS STOCK
- -----------------------------------------------------------------------------------------
(IN MILLIONS) (IN MILLIONS)
<C> <S> <C> <C> <C> <C> <C>
102.8 Balance, December 29,
1989................... $-- $125 $78 $1,059 $(634)
-- Net income.............. -- -- -- 47 --
1.2 Common stock issued for
employee stock purchase
and stock option plans. -- -- (3) -- 35
-- Cash dividends on common
stock ($.28 per share). -- -- -- (27) --
.3 Deferred stock
compensation........... -- -- (5) -- 8
-- Foreign currency
translation
adjustments............ -- -- 5 -- --
(10.7) Purchases of treasury
stock.................. -- -- -- -- (281)
-- Retirement of treasury
stock.................. -- (20) (6) (551) 577
- -----------------------------------------------------------------------------------------
93.6 Balance, December 28,
1990................... -- 105 69 528 (295)
-- Net income.............. -- -- -- 82 --
-- Issuance of convertible
preferred stock........ 200 -- (5) -- --
1.5 Common stock issued for
employee stock purchase
and stock option plans. -- -- (22) -- 40
-- Cash dividends ($.28 per
share)................. -- -- -- (27) --
.4 Deferred stock
compensation........... -- -- (2) -- 11
-- Foreign currency
translation
adjustments............ -- -- (5) -- --
- -----------------------------------------------------------------------------------------
95.5 Balance, January 3,
1992................... 200 105 35 583 (244)
-- Net income.............. -- -- -- 85 --
5.0 Common stock issued for
employee stock
purchase, stock option,
and profit sharing
plans.................. -- -- (1) (68) 127
-- Cash dividends on common
stock ($.28 per share). -- -- -- (28) --
-- Cash dividends on
convertible preferred
stock ($4.125 per
share)................. -- -- -- (17) --
.3 Deferred stock
compensation........... -- -- 2 -- 8
-- Foreign currency
translation
adjustments............ -- -- (2) -- --
- -----------------------------------------------------------------------------------------
100.8 Balance, January 1,
1993................... $200 $105 $34 $ 555 $(109)
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
See "Notes to Consolidated Financial Statements."
F-6
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Host Marriott
Corporation (previously, Marriott Corporation) and its subsidiaries and
controlled affiliates (collectively, "the Company"). Investments in 50% or less
owned affiliates over which the Company has the ability to exercise significant
influence are accounted for using the equity method. The Company's equity in
net losses of these affiliates is included in corporate expenses. All material
intercompany transactions and balances have been eliminated. Certain prior year
amounts have been reclassified to conform with the 1992 presentation.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31 for U.S.
operations and on November 30 for most non-U.S. operations. Fiscal 1992 and
1990, which ended January 1, 1993 and December 28, 1990, respectively, include
52 weeks. Fiscal 1991, which ended January 3, 1992, includes 53 weeks.
Managed Hotel Operations
The Company operates 365 hotels under long-term management agreements whereby
payments to owners are based primarily on hotel profits. Working capital and
operating results of managed hotels operated with the Company's employees are
consolidated because the operating responsibilities associated with such hotels
are substantially the same as those for owned and leased hotels. The
consolidated financial statements include the following amounts related to
managed hotels: current assets and current liabilities of $246 million at
January 1, 1993, $269 million at January 3, 1992, and $282 million at December
28, 1990; sales of $2,896 million in 1992, $2,809 million in 1991, and $2,752
million in 1990; and operating expenses, including payments to owners, of
$2,721 million in 1992, $2,616 million in 1991, and $2,553 million in 1990.
International Operations
The consolidated statement of income includes the following amounts related
to non-U.S. subsidiaries and affiliates: sales of $355 million in 1992, $329
million in 1991, and $317 million in 1990; and income before income taxes of
$24 million in 1992, and $26 million in both 1991 and 1990.
Pre-Opening Costs
Costs of an operating nature incurred prior to opening of lodging and senior
living service properties are deferred and amortized over three years.
Profit Sharing 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. Company contributions are determined
annually by the Board of Directors, and totaled $25 million for 1992, $24
million for 1991, and $27 million for 1990.
Self-Insurance Programs
The Company is self-insured for certain levels of general liability, workers'
compensation and employee medical coverage. Estimated costs of these self-
insurance programs are accrued at present values of projected settlements for
known and anticipated claims.
F-7
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings Per Common Share
Earnings per common share is computed on a fully diluted basis by dividing
net income available for common stock by the weighted average number of
outstanding common and common equivalent shares, plus other potentially
dilutive securities, aggregating 106.5 million in 1992, 101.5 million in 1991,
and 101.7 million in 1990.
Cash and Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Postretirement and Postemployment Benefits
The Company provides medical benefits to a limited number of retired
employees meeting restrictive eligibility requirements. The Company's adoption
of Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" during 1992 did not have any
material effect.
The Company is also required to adopt Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits," no
later than its fiscal year ending December 30, 1994. Application of this
statement will not have any material effect.
SPECIAL DIVIDEND
In October 1992, the Board of Directors of Marriott Corporation approved,
subject to approval of final terms and conditions and shareholder ratification,
the distribution to holders of Marriott Corporation common stock (on a share-
for-share basis) of all outstanding shares of common stock of an existing
wholly-owned subsidiary, Marriott International, Inc. ("Marriott
International") (the "Distribution"). Under the proposed plan (the "Plan"),
Marriott International will become a publicly traded company that will include
Marriott Corporation's lodging management, franchising and resort timesharing
operations, senior living service operations, and institutional food service
and facilities management businesses. The Company will retain Marriott
Corporation's airport and tollroad food, beverage and merchandise concession
operations, as well as most of its real estate properties. Additionally, the
Company or its subsidiaries will continue to act as general partner in Marriott
Corporation's lodging partnerships.
The Distribution is conditioned upon, among other things: declaration of the
special dividend by the Company's Board of Directors; ratification of the
Distribution by a majority of the Company shareholders; and receipt of an
affirmative ruling from the Internal Revenue Service that the Distribution will
be tax-free. It is expected that the Distribution will be made in the second
half of 1993, once these conditions are met.
The Company may borrow (i) up to $600 million from Marriott International
under a revolving line of credit available through December 1999, at which time
any outstanding balance will convert to a term loan due December 31, 2001
("Credit Agreement") and (ii) up to $125 million to finance approximately 60%
of the construction and development cost of the Philadelphia Marriott Hotel
under a first mortgage loan due 12 years after completion of construction. If
the proposed exchange offer is effected, the line of credit will be $630
million and final maturity will be 2008. In addition, Marriott International
will assume 90% of the LYONs debt obligations and will guarantee the Company's
performance to certain lenders and other third parties under certain Company
guarantees and other obligations. Fundings by Marriott International pursuant
to such guarantees will constitute loans to the Company.
F-8
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A number of holders of the Company's senior notes instituted legal
proceedings alleging, among other things, that (i) the Distribution, if
effected, would violate the terms of the Indenture under which senior notes
were issued, (ii) federal securities laws (and similar state laws) had been
violated in connection with the sale by the Company of certain series of its
senior notes, (iii) the Distribution, if effected, would be a fraudulent
conveyance as to creditors of the Company, and (iv) the Distribution, if
effected, would constitute a breach of fiduciary duty and a breach of implied
covenants of good faith and fair dealing allegedly owed by the Company to the
holders of the Company's senior notes. All but one of these cases has been
consolidated for all purposes in the United States District Court for the
District of Maryland. The other case has been stayed pending resolution of the
cases in that court. The Company believes these suits to be without merit and
that the ultimate outcome will not have a material effect on the Company's
financial position or results of operations.
The Company has reached agreements in principle--to modify certain terms of
its planned special dividend--with representatives of institutions holding
approximately $400 million of its senior notes, and with representatives of the
plaintiffs who have instituted class action litigation on behalf of
noteholders. Under the terms of the agreements, the Company will make an
exchange offer ("Exchange Offer") prior to the distribution under which holders
of certain series of the notes in the principal amount of approximately $1.5
billion will have the right to exchange their notes for a combination of (i)
cash and/or Marriott International obligations, (ii) Company stock and (iii)
new senior notes to be issued by a new subsidiary of the Company. Interest
rates on the exchange bonds would be 100 basis points higher and maturities on
most of the bonds would be extended by approximately four years, beyond 1998.
Participants in the exchange offer would be required to release any claims and
abandon any litigation related to the special dividend.
The agreement in principle with class action plaintiffs includes a settlement
for the benefit of certain persons who sold senior notes of the Company after
October 5, 1992, the date on which the planned Distribution was publicly
announced, and therefore are not in a position to participate in the Exchange
Offer. The Company has agreed to make available for distribution to this class
of plaintiffs warrants to purchase up to 7.7 million shares of the Company's
common stock, exercisable for five years, at $8.00 per share during the first
three years and $10.00 per share during the last two years.
Marriott has not reached an agreement with several other institutions that
have filed suit against the Company and are said to represent about $120
million of its senior notes.
The Distribution is not conditioned upon the consummation of the Exchange
Offer, and the Board of Directors' intention is to proceed with the
Distribution whether or not the Exchange Offer is consummated. If the Exchange
Offer is consummated, Marriott Corporation will make certain structural
modifications to the composition of the Company and Marriott International and
to the terms of certain arrangements relating to the Distribution. The Exchange
Offer will be made only by means of a prospectus contained in a registration
statement to be filed with the Securities and Exchange Commission (or under an
exemption from registration). Certain anticipated terms and conditions of the
Exchange Offer are described in further detail in the Exchange Offer and
Restructuring section of this Prospectus. The following condensed pro forma
financial information does not reflect the Exchange Offer.
The following condensed unaudited pro forma income statement data of Marriott
International and the Company is presented as if the Distribution had occurred
at the beginning of each period shown and the unaudited pro forma balance sheet
data is presented as if the Distribution had occurred at the end of the
applicable years shown. This pro forma data has been presented for
informational purposes only. It does not purport to be indicative of the
results which may occur in the future.
F-9
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MARRIOTT INTERNATIONAL HOST MARRIOTT
----------------------- --------------
1992 1991 1992 1991
----------- ----------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Sales.................................. $7,787 $7,427 $1,209 $1,137
Operating profit before corporate ex-
penses and interest................... 330 328 153 136
Net income (loss)...................... 137 139 (43) (65)
Total assets........................... 2,787 2,597 3,922 4,153
Long-term debt (including LYONs)....... 583 570 2,590 2,811
Shareholders' equity................... 524 521 261 158
</TABLE>
Subsequent Event
On October 8, 1993, Marriott Corporation distributed, through a special
dividend, to holders of Marriott Corporation's common stock, 116,444,561
outstanding shares of common stock of Marriott International, Inc., and closed
on the Exchange Offer. The Internal Revenue Service has ruled the Distribution
tax free. Also on October 8, 1993, Marriott Corporation changed its name to
Host Marriott Corporation (the "Company"). The Company retained Marriott
Corporation's airport and tollroad food, beverage and merchandise concession
operations, as well as most of its real estate properties. Additionally, Host
Marriott or its subsidiaries continue as general partner in most of Marriott
Corporation's lodging partnerships. Marriott International became a publicly
traded company that includes Marriott Corporation's former lodging management,
franchising and resort timesharing operations, senior living service
operations, and institutional food service and facilities management
businesses. As a result, the assets, liabilities and businesses of the Company
have changed substantially. Accordingly, the accompanying financial statements
and related disclosures do not reflect the financial condition and results of
operations of the Company as it exists subsequent to the Distribution Date. See
"Pro Forma Financial Data" included elsewhere in this registration statement
for the adjustments required to reflect the effect of the Distribution and
Exchange Offer on the Company's financial statements and Notes 6 and 10 of
Notes to Condensed Consolidated Financial Statements for discussion of
conversion of Series A cumulative preferred stock into 10.6 million shares of
common stock and the Exchange Offer, respectively.
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1992 1991
------ ------
(IN MILLIONS)
<S> <C> <C>
Land and land improvements...................................... $ 776 $ 814
Buildings and leasehold improvements............................ 2,550 2,488
Furniture and equipment......................................... 899 901
Construction in progress........................................ 133 424
------ ------
4,358 4,627
Less accumulated depreciation and amortization.................. (897) (780)
------ ------
$3,461 $3,847
====== ======
</TABLE>
Property and equipment is recorded at cost, including interest, rent and real
estate taxes incurred during development and construction. Replacements and
improvements are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
shorter of the asset life or lease term.
Upon the sale of Courtyard hotels, Residence Inns or Fairfield Inns, the
gains and losses with respect to individual properties are aggregated, with the
net gain on the sale recognized as operating profit at the time of sale or
deferred to the extent required by generally accepted accounting principles.
Deferred gains are recognized as income in subsequent periods as conditions
requiring deferral are satisfied or expire without further cost to the Company.
F-10
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company assesses impairment of its property and equipment based on
whether it is probable that undiscounted future cash flows from such properties
will be less than their net book value.
Interest cost capitalized in connection with the Company's development and
construction activities totaled $14 million in 1992, $55 million in 1991, and
$141 million in 1990.
Most hotels developed by the Company since the early 1980s were reported as
Assets Held for Sale prior to 1992. In early 1992, the Company decided it was
no longer appropriate to view sales of lodging properties, subject to operating
agreements, as a primary means of long-term financing. Accordingly, the Company
discontinued classification of these properties (with an aggregate carrying
value of approximately $1,150 million at that time) as Assets Held for Sale.
The Company determined the net realizable value of the Assets Held for Sale on
a property-by-property basis in the case of full-service hotels, resorts and
suites, and on an aggregate basis, by hotel brand, in the case of Courtyard
hotels, Residence Inns and Fairfield Inns. On this basis, the carrying value of
these properties was not in excess of their net realizable value based on
estimated selling prices and, accordingly, no loss was recognized with respect
thereto.
With respect to the Courtyard hotels, Residence Inns and Fairfield Inns
formerly classified as Assets Held for Sale, the Company did not accumulate
data about estimated unrealized gains except to the extent necessary to
determine that they exceeded estimated unrealized losses on an aggregate basis
by hotel brand. The following table presents, for 1991, 1990 and 1989, the
estimated aggregate unrealized losses on those individual properties within
each such brand with a book value in excess of net realizable value (with
parenthetical indication, first, of the number of such properties and, second,
of the total number of properties within such brand classified as held for
sale).
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED LOSSES
-------------------------------------------
1991 1990 1989
-------------- -------------- -------------
($ MILLIONS)
<S> <C> <C> <C>
Courtyard hotels.................... $23 (18 of 64) $19 (15 of 56) $12 (7 of 22)
Residence Inns...................... $17 (7 of 28) $ 8 (4 of 15) --
Fairfield Inns...................... $12 (10 of 30) $ 8 (7 of 23) --
--- --- ---
Total............................... $52 $35 $12
=== === ===
</TABLE>
INVESTMENTS IN AFFILIATES
<TABLE>
<CAPTION>
OWNERSHIP
INTERESTS 1992 1991
--------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Equity investments
Times Square Hotel Company, owner of the New York
Marriott Marquis hotel (foreclosure on 28.7%
additional interest in process)..................... 50% $ 62 $ 58
Other hotel partnerships which own 56 Marriott
hotels, 120 Courtyard hotels, 40 Residence Inns and
50 Fairfield Inns operated by the Company, including
117 properties located on land leased from the
Company as of January 1, 1993....................... 1%-50% 32 58
Other................................................ 20%-50% 57 52
Receivables, net of amounts due currently of $14
million in 1992 and $9 million in 1991................ 294 289
------ ------
$ 445 $ 457
====== ======
</TABLE>
Hotel properties owned by affiliates generally were acquired from the Company
in connection with limited partnership offerings. The Company or its
subsidiaries typically serve as a general partner of the
F-11
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
partnerships and operate the hotels under long-term agreements. Proceeds from
sales of hotels to affiliates totaled $498 million in 1990.
In the 1992 fourth quarter, as a consequence of a partner's default of
certain obligations, the Company recognized an in-substance foreclosure of the
partner's 28.7% interest in the Times Square Hotel Company ("TSHCO"). TSHCO has
not been consolidated because the Company expects its majority ownership to be
temporary. TSHCO total assets and total liabilities of $470 million and $459
million, respectively, and sales and operating expenses (including noncash
charges) of $131 million and $156 million, respectively, are included in the
1992 combined summarized affiliate financial data set forth below.
The Company's equity in four affiliates exceeded its proportionate share of
net assets by $51 million at January 1, 1993. This excess is being amortized
over the estimated useful lives of the related assets.
Receivables from affiliates are reported net of certain deferred income and
reserves for uncollectible amounts of $197 million at January 1, 1993 and $178
million at January 3, 1992. Receivables from affiliates at January 1, 1993
included a $155 million mortgage note at 9% which amortizes through 2003, and
net debt service and other advances totaling $19 million which are generally
secured by subordinated liens on the properties. The Company has committed to
advance additional amounts to affiliates, if necessary, to cover certain debt
service requirements and has accrued $21 million in connection therewith. Such
commitments are limited, in the aggregate, to an additional $328 million at
January 1, 1993. Amounts funded under these commitments totaled $22 million in
1992, $26 million in 1991 and $27 million in 1990.
The Company's pretax income from affiliates includes the following:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Management fees, net of direct costs....................... $ 82 $ 81 $ 76
Ground rental income....................................... 19 18 17
Interest income............................................ 16 19 21
Equity in net losses....................................... (24) (21) (16)
---- ---- ----
$ 93 $ 97 $ 98
==== ==== ====
</TABLE>
Combined summarized balance sheet information for the Company's affiliates
follows:
<TABLE>
<CAPTION>
1992 1991
------ ------
(IN MILLIONS)
<S> <C> <C>
Current assets................................................ $ 204 $ 158
Noncurrent assets............................................. 4,589 4,842
Current liabilities........................................... 1,464 445
Long-term debt, principally mortgages......................... 3,162 4,233
Other long-term liabilities................................... 694 565
</TABLE>
Combined summarized operating results reported by these affiliates follow:
<TABLE>
<CAPTION>
1992 1991 1990
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Sales............................................ $ 1,900 $ 1,855 $ 1,801
Operating expenses, including depreciation and
other noncash charges of $347 million in 1992
and 1991, and $344 million in 1990.............. (2,082) (2,076) (2,053)
------- ------- -------
$ (182) $ (221) $ (252)
======= ======= =======
</TABLE>
During 1990, the Company sold 50 Fairfield Inns and seven Marriott hotels to
affiliates in which it owns equity interests of up to 11%, for an aggregate
price of $461 million. Gains on the sales, aggregating $21 million, were
deferred. The Company continues to operate these properties under long-term
agreements.
F-12
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTANGIBLE ASSETS
<TABLE>
<CAPTION>
1992 1991
------ ------
(IN MILLIONS)
<S> <C> <C>
Marriott Management Services contracts....................... $ 366 $ 366
Hotel management and franchise agreements.................... 107 107
Goodwill..................................................... 147 143
Other........................................................ 14 10
------ ------
634 626
Less accumulated amortization................................ (182) (149)
------ ------
$ 452 $ 477
====== ======
</TABLE>
Intangible assets primarily arose from purchase business combinations and are
being amortized on a straight-line basis over periods of 10 to 40 years.
Amortization expense totaled $33 million in 1992 and 1991, and $34 million in
1990.
DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
1992 1991
------ ------
(IN MILLIONS)
<S> <C> <C>
Accounts receivable
Trade receivables........................................... $ 543 $ 478
Other....................................................... 63 49
------ ------
$ 606 $ 527
====== ======
Other current assets
Current deferred income taxes............................... $ 159 $ 157
Other....................................................... 90 64
------ ------
$ 249 $ 221
====== ======
Other payables and accruals
Casualty insurance.......................................... $ 89 $ 79
Other....................................................... 345 295
------ ------
$ 434 $ 374
====== ======
</TABLE>
INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Current--Federal.......................................... $ 39 $ (2) $ (18)
State................................................... 3 8 (28)
Foreign................................................. 20 10 16
---- ---- -----
62 16 (30)
---- ---- -----
Deferred--Federal......................................... (6) 38 33
State................................................... 10 4 36
Foreign................................................. (1) 5 (6)
---- ---- -----
3 47 63
---- ---- -----
$ 65 $ 63 $ 33
==== ==== =====
</TABLE>
No provision for U.S. income taxes has been made on the cumulative unremitted
earnings of non-U.S. subsidiaries ($61 million as of January 1, 1993) because
management considers these earnings to be permanently invested.
Deferred income taxes result from timing differences in the recognition of
income and expenses for financial and tax reporting purposes. Tax effects of
these differences consist of the following:
F-13
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation............................................... $(15) $ (3) $10
Capitalized interest....................................... 2 13 15
Partnership interests...................................... 41 45 26
Purchased tax lease benefits............................... (4) (2) 4
Asset dispositions......................................... (31) 38 10
Capitalized operations..................................... -- (3) (7)
Casualty claims............................................ (17) (33) (3)
Employee benefit plans..................................... (2) (8) (1)
Restructuring costs........................................ 1 16 (3)
Other, net................................................. 28 (16) 12
---- ---- ---
$ 3 $ 47 $63
==== ==== ===
</TABLE>
A reconciliation of the U.S. statutory tax rate to the Company's effective
income tax rate follows:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
U.S. statutory tax rate.................................... 34.0% 34.0% 34.0%
State income taxes, net of U.S. tax benefit................ 6.4 5.7 7.6
Goodwill amortization...................................... 1.8 1.9 3.5
Tax credits................................................ (2.3) (3.1) (5.7)
Additional tax on foreign source income.................... -- 2.2 --
Other, net................................................. 3.4 2.7 1.9
---- ---- ----
Effective income tax rate.................................. 43.3% 43.4% 41.3%
==== ==== ====
</TABLE>
Cash paid for income taxes, net of refunds received, was $93 million in 1992,
$36 million in 1991, and $49 million in 1990 (including $34 million applicable
to divested discontinued operations).
The Company will adopt Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in the first quarter of fiscal 1993. The
standard will be implemented on a prospective basis and management anticipates
that its application will increase shareholders' equity by approximately $30
million.
LEASES
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
(IN MILLIONS)
<S> <C> <C>
1993..................................................... $ 11 $ 219
1994..................................................... 9 209
1995..................................................... 7 159
1996..................................................... 5 148
1997..................................................... 3 139
Thereafter............................................... 22 1,890
---- ------
Total minimum lease payments............................. 57 $2,764
======
Less amount representing interest........................ (20)
----
Present value of minimum lease payments.................. $ 37
====
</TABLE>
F-14
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Certain of the leases included above relate to facilities used in the
discontinued restaurant business. Most leases contain one or more renewal
options, generally for five or 10-year periods. Future rentals on leases have
not been reduced by aggregate minimum sublease rentals of $135 million payable
to the Company under noncancelable subleases.
The Company remains contingently liable on certain leases relating to
divested properties. Such contingent liabilities aggregated $235 million at
January 1, 1993. However, management considers the likelihood of any
substantial funding related to these leases to be remote.
Rent expense consists of:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rentals on operating leases.......................... $195 $166 $157
Additional rentals based on sales............................ 88 80 79
Payments to owners of managed and leased hotels based primar-
ily on profits.............................................. 607 596 583
---- ---- ----
$890 $842 $819
==== ==== ====
</TABLE>
LONG-TERM DEBT
<TABLE>
<CAPTION>
1992 1991
------ ------
(IN MILLIONS)
<S> <C> <C>
Secured notes, with an average rate of 8.3% at January 1,
1993, maturing through 2010................................ $ 485 $ 527
Unsecured debt
Senior notes, with an average rate of 9.3% at January 1,
1993, maturing through 2012
Debentures, 9.4%, due 2007................................ 1,618 1,323
Revolving loans, with an average rate of 4.3% at January
1, 1993, maturing through 1995........................... 250 250
Other notes, with an average rate of 7.2% at January 1,
1993, maturing through 2023.............................. 175 676
Capital lease obligations
188 193
37 62
------ ------
2,753 3,031
Less current portion........................................ (21) (52)
------ ------
$2,732 $2,979
====== ======
</TABLE>
At January 1, 1993, the Company had total revolving loan commitments of $682
million. Borrowings under these commitments bear interest at variable rates.
The Company's loan agreements require the maintenance of certain financial
ratios and minimum shareholders' equity, and also include, among others,
limitations on additional indebtedness and the pledging of assets. At January
1, 1993, retained earnings of $285 million were unrestricted, and assets with a
net book value of $827 million were pledged or mortgaged.
At January 1, 1993, the Company was party to $627 million aggregate notional
amount of interest rate exchange agreements. Under $600 million of these
agreements, the Company collects interest at fixed rates (average rate of 7.8%
at January 1, 1993), and pays interest based on specified floating interest
rates (average rate of 3.7% at January 1, 1993) through 1997. Under $27 million
of these agreements, the Company collects interest based on a specified
floating interest rate (5.6% at January 1, 1993) and pays interest at a fixed
rate (9.7%) through 1998.
F-15
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate debt maturities, excluding capital lease obligations, are: 1993--
$15 million; 1994--$213 million; 1995--$588 million; 1996--$368 million; 1997--
$258 million; and $1,274 million thereafter. Senior note maturities in 1993 are
classified as noncurrent based on availability of funds under the Company's
revolving loan agreements maturing beyond one year.
Cash paid for interest, net of amounts capitalized, was $209 million in 1992,
$224 million in 1991, and $171 million in 1990.
CONVERTIBLE SUBORDINATED DEBT
In June 1991, the Company issued $675 million (principal amount at maturity)
of zero coupon convertible subordinated debt in the form of Liquid Yield Option
Notes (LYONs) due 2006. Net proceeds from the LYONs issuance approximated $200
million. The LYONs are convertible into the Company's common stock at the rate
of 13.277 shares per $1,000 maturity amount. The issuance price of the LYONs
represents a yield to maturity of 8.25% per annum.
At the option of the holder the Company may be required to purchase the LYONs
in June 1996 and June 2001 for $445.56 (an aggregate of $301 million for all
LYONs) and $667.51 (an aggregate of $451 million for all LYONs) per LYON,
respectively. These redemption values represent the accreted values at those
dates. In such event, the Company may purchase the LYONs for cash, common stock
or any combination thereof. The LYONs are redeemable by the Company prior to
June 1993 only if the closing price of the Company's common stock equals or
exceeds $33.60 per share for at least 20 of 30 consecutive trading days ending
not more than five trading days prior to the date of notice of redemption.
Subject to the foregoing, the LYONs are redeemable for cash at any time at the
option of the Company, at the issue price plus accrued original issue discount
to the date of redemption.
SHAREHOLDERS' EQUITY
Three hundred million shares of common stock, with a par value of $1 per
share, are authorized, of which 105.0 million were issued as of January 1, 1993
and January 3, 1992. One million shares of preferred stock, without par value,
are authorized, of which four thousand (equivalent to four million depositary
shares) were issued as of January 1, 1993.
In December 1991, the Company issued four million non-voting depositary
shares, each representing 1/1,000th share of 8.25% Series A cumulative
convertible preferred stock (no par value) for net proceeds totaling $195
million. Each depositary share is convertible at any time at the option of the
holder into approximately 2.87 shares of common stock. Dividends, if declared,
are payable quarterly, commencing on April 15, 1992. Beginning on January 15,
1996, the Series A preferred stock is redeemable, in whole or in part, at the
Company's option, at $52.48 per depositary share, declining ratably to $50 per
depositary share in 2002, plus accrued and unpaid dividends to the redemption
date.
Additional paid-in capital at January 1, 1993 includes deferred compensation
credits of $48 million and cumulative foreign currency translation charges of
$5 million.
During 1990, the Company retired 20.0 million shares of treasury stock having
an average cost of $28.87 per share.
In February 1989, the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right was distributed
for each outstanding share of the Company's common stock to shareholders of
record on February 20, 1989. Each right entitles the holder to buy 1/1,000th of
a share of a newly issued series of junior participating preferred stock of the
Company at an exercise price of
F-16
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$150 per share. The rights will be exercisable 10 days after a person or group
acquires beneficial ownership of 20% or more of the Company's common stock, or
begins a tender or exchange offer for 30% or more of the Company's common
stock. Shares owned by a person or group on February 3, 1989 and held
continuously thereafter are exempt for purposes of determining beneficial
ownership under the rights plan. The rights are nonvoting and will expire on
February 2, 1999, unless exercised or previously redeemed by the Company for
$.01 each. If the Company is involved in a merger or certain other business
combinations not approved by the Board of Directors, each right entitles its
holder, other than the acquiring person or group, to purchase common stock of
either the Company or the acquirer having a value of twice the exercise price
of the right.
EMPLOYEE STOCK PLANS
Total shares of common stock reserved under employee stock plans at January
1, 1993 are (in millions):
<TABLE>
<S> <C>
Employee stock option plan............................................ 16.9
Deferred stock incentive plan......................................... 6.5
Restricted stock plan................................................. 1.5
Employee stock purchase plan.......................................... 2.1
----
27.0
====
</TABLE>
Under the terms of the employee stock option plan, options to purchase shares
of common stock may be granted to officers and key employees at not less than
fair market value on the date of grant. Options granted before May 11, 1990
expire 10 years after the date of grant and nonqualified options granted on or
after May 11, 1990 expire up to 15 years after the date of grant. Most options
are exercisable in cumulative installments of one-fourth at the end of each of
the first four years. No charges to income are made for options granted under
the employee stock option plan. Activity under the plan is summarized below:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Balance at December 29, 1989...................... 9.5 $ 5-39
Granted......................................... 4.6 9-26
Exercised....................................... (.6) 5-32
Canceled........................................ (.6) 15-37
----
Balance at December 28, 1990...................... 12.9 7-39
Granted......................................... 3.3 16
Exercised....................................... (.5) 7-20
Canceled........................................ (1.2) 9-39
----
Balance at January 3, 1992........................ 14.5 7-39
Granted......................................... 3.2 15-19
Exercised....................................... (.8) 7-18
Canceled........................................ (1.2) 8-37
----
Balance at January 1, 1993........................ 15.7 8-39
====
Exercisable at January 1, 1993.................... 7.5
====
</TABLE>
Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. Deferred stock incentive plan shares granted
in 1990 and prior years generally vest in annual installments commencing one
year after the date of grant and continuing
F-17
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
until retirement. Employees also could elect to forfeit one-fourth of their
deferred stock incentive plan award in exchange for accelerated vesting over a
10-year period. The Company accrues compensation expense for the fair market
value of the shares on the date of grant, less estimated forfeitures. In 1992,
1991 and 1990, 671,000, 1,180,000 and 361,000 shares were granted,
respectively, under this plan. At January 1, 1993, 760,000 shares were
available for additional grants.
Restricted stock plan shares are issued to officers and key employees and
distributed over 10 years in annual installments, subject to certain prescribed
conditions including continued employment. The Company recognizes compensation
expense over the restriction period equal to the fair market value of the
shares on the date of issuance. The Company issued 32,000, and 40,000 shares
under this plan in 1992 and 1991, respectively, and canceled 59,000 shares in
1990.
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.
BUSINESS RESTRUCTURING AND WRITEOFFS
During 1992, the Company accrued pretax costs of $21 million related to the
Plan (see "Special Dividend"). During 1990, the Company incurred pretax
restructuring charges and writeoffs, net of $42 million of nonrecurring gains,
aggregating $153 million associated principally with the: delay or cancellation
of construction starts on most new lodging and senior living services projects;
reduction of 1991 capital expenditures to less than $500 million; and,
implementation of comprehensive reorganizations and downsizings within each
business unit and at the corporate staff level.
DISPOSITIONS
In February 1992, the Company sold 13 Courtyard hotels for $146 million in a
sale/leaseback transaction. The Company also sold seven full-service hotels in
1992, for total proceeds of $200 million. Pretax gains on these full-service
hotel sales of approximately $15 million were offset by adjustments to
previously established reserves, resulting in no net gain or loss.
In 1992 and 1991, the Company sold with recourse certain timeshare notes
receivable taken by its vacation resorts division in connection with the sale
of timesharing units. Net proceeds from these transactions totaled $34 million
in 1992 and $73 million in 1991. At January 1, 1993 the unpaid balance of all
timeshare notes sold with recourse was $93 million.
During 1991, the Company sold four Courtyard hotels to the Marriott
Corporation Employees' Profit Sharing, Retirement and Savings Plan and Trust
for total proceeds of $33 million. The Company continues to operate these
hotels under a long-term agreement.
In December 1989, the Company announced a decision to sell its fast food and
family restaurant operations. A pretax provision of $61 million was recorded at
that time to reduce restaurant assets to net realizable value, and to provide
for other costs related to the discontinuance of these businesses. In April
1990, the Company sold its Roy Rogers fast food restaurant division to Hardee's
Food Systems, Inc. for $365 million in cash, plus the assumption of certain
liabilities by the buyer. Sale proceeds were reported as a reduction of the
Company's remaining investment in restaurant properties held for sale. The
Company sold 203 family restaurants in 1992 and 138 in 1991 for total proceeds
of $84 million and $52 million, respectively. The Company expects to sell many
of the remaining 50 family restaurants in 1993.
F-18
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of noncurrent financial assets and liabilities and other
financial instruments are shown below. The fair values of current assets and
current liabilities are assumed to be equal to their reported carrying amounts.
<TABLE>
<CAPTION>
AS OF JANUARY 1, 1993
-------------------------
CARRYING FAIR
AMOUNT VALUE
-------------- ----------
(IN MILLIONS)
<S> <C> <C>
NONCURRENT FINANCIAL ASSETS
Long-term receivables from affiliates............. $ 263 $ 185
Notes receivable and other........................ 316 423
NONCURRENT FINANCIAL LIABILITIES
Long-term debt.................................... 2,701 2,628
Convertible subordinated debt..................... 228 226
OTHER FINANCIAL INSTRUMENTS
Affiliate debt service commitments................ 328 44
Interest rate swap agreements..................... 627 24
</TABLE>
Receivables from affiliates, notes and other financial assets are valued
based on the expected future cash flows discounted at risk adjusted rates.
Valuations for secured long-term debt are determined based on the expected
future payments discounted at risk adjusted rates. The fair value of revolving
loans and other notes are assumed to be equal to their carrying value. Long-
term senior notes and convertible subordinated debt are valued based on quoted
market prices.
The fair value of affiliate debt service commitments is based on the expected
future payments discounted at risk adjusted rates. A value was not assigned to
commitments with no expected fundings. The carrying amount represents the
Company's remaining unfunded commitments at January 1, 1993.
The fair value of interest rate swap agreements is based on the estimated
amount the Company would receive to terminate the swap agreements. The carrying
amount represents the aggregate notional amount of the agreements at January 1,
1993.
F-19
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
1992 1991 1990
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Identifiable assets
Lodging........................................... $ 3,600 $ 3,952 $ 4,234
Contract Services................................. 1,886 1,839 1,819
Corporate......................................... 880 592 797
------- ------- -------
6,366 6,383 6,850
Discontinued operations........................... 44 126 184
------- ------- -------
$ 6,410 $ 6,509 $ 7,034
======= ======= =======
Capital expenditures
Lodging........................................... $ 86 $ 256 $ 804
Contract Services................................. 118 159 231
Corporate......................................... 4 7 45
------- ------- -------
208 422 1,080
Discontinued operations........................... 2 5 14
------- ------- -------
$ 210 $ 427 $ 1,094
Depreciation and amortization
Lodging........................................... 131 $ 130 $ 75
Contract Services................................. 139 125 119
Corporate......................................... 14 17 14
------- ------- -------
$ 284 $ 272 $ 208
======= ======= =======
</TABLE>
The Company is a diversified hospitality company with continuing operations
in two business segments. The Lodging segment includes Marriott hotels, resorts
and suites, Courtyard hotels, Residence Inns, Fairfield Inns and vacation
ownership resorts. The Contract Services segment consists of: food and
facilities management services for clients in business, healthcare and
education; food, beverage and merchandise operations at airports, on tollroads
and at stadiums, arenas and other attractions; development and operation of
retirement communities; and distribution of food and related products.
The results of operations of the Company's business segments are reported in
the consolidated statement of income. Segment operating expenses include
selling, general and administrative expenses directly related to the operations
of the businesses, aggregating $457 million in 1992 and 1991, and $394 million
in 1990. Gains and losses resulting from the disposition of assets identified
with each segment are included in segment operating profit.
F-20
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERLY FINANCIAL DATA
(unaudited, in millions, except per common share amounts)
<TABLE>
<CAPTION>
1992
------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Sales.................................. $1,953 $2,036 $1,948 $2,785 $8,722
Operating profit before corporate ex-
penses and interest................... 95 125 124 152 496
Net income............................. 11 29 26 19 85
Dividends on preferred stock........... (4) (4) (4) (5) (17)
Net income available for common stock.. 7 25 22 14 68
Fully diluted earnings per common
share................................. .07 .24 .21 .13 .64
</TABLE>
<TABLE>
<CAPTION>
1991
--------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Sales................................... $1,827 $1,940 $1,835 $2,729 $8,331
Operating profit before corporate ex-
penses and interest.................... 93 123 109 153 478
Net income.............................. 10 27 18 27 82
Fully diluted earnings per common share. .10 .27 .18 .25 .80
</TABLE>
The first three quarters consist of 12 weeks each. The fourth quarter
includes 16 weeks in 1992 and 17 weeks in 1991.
Fourth quarter 1992 results include pretax costs of $21 million related to
the Company's plan to divide its present operations into two separate companies
(see "Special Dividend" note to consolidated financial statements).
The sum of the earnings per common share for the four quarters in 1992
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.
F-21
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 10, SEPTEMBER 11,
1993 1992
------------- -------------
(IN MILLIONS, EXCEPT PER
COMMON SHARE AMOUNTS)
<S> <C> <C>
SALES
Lodging
Rooms........................................... $ 2,037 $ 2,004
Food and beverage............................... 802 809
Other........................................... 413 353
------- -------
3,252 3,166
Contract Services................................ 3,011 2,771
------- -------
6,263 5,937
------- -------
OPERATING COSTS AND EXPENSES
Lodging
Departmental direct costs
Rooms.......................................... 492 474
Food and beverage.............................. 625 629
Other operating expenses, including payments to
hotel owners................................... 1,868 1,820
------- -------
2,895 2,923
Contract Services................................ 2,985 2,670
------- -------
5,880 5,593
------- -------
OPERATING PROFIT
Lodging.......................................... 267 243
Contract Services................................ 116 101
------- -------
Operating profit before corporate expenses and
interest....................................... 383 344
Corporate expenses................................. (80) (74)
Interest expense................................... (166) (171)
Interest income.................................... 21 20
------- -------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES.................. 158 119
Provision for income taxes......................... 76 53
------- -------
</TABLE>
See "Notes to Condensed Consolidated Financial Statements."
F-22
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME--(CONCLUDED)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 10, SEPTEMBER 11,
1993 1992
------------- -------------
(IN MILLIONS, EXCEPT PER
COMMON SHARE AMOUNTS)
<S> <C> <C>
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES............................. 82 66
Cumulative effect of a change in accounting for in-
come taxes........................................ 30 --
Cumulative effect of a change in accounting for as-
sets held for sale (net of income taxes of $22
million).......................................... (32) --
----- -----
NET INCOME......................................... 80 66
Dividends on preferred stock....................... 12 12
----- -----
NET INCOME AVAILABLE FOR COMMON STOCK.............. $ 68 $ 54
===== =====
EARNINGS PER COMMON SHARE
Income before cumulative effect of changes in ac-
counting principles............................. $ .65 $ .51
Cumulative effect of a change in accounting for
income taxes.................................... .27 --
Cumulative effect of a change in accounting for
assets held for sale (net of income taxes)...... (.29) --
----- -----
Net income....................................... $ .63 $ .51
===== =====
CASH DIVIDENDS PER COMMON SHARE.................... $ .21 $ .21
===== =====
</TABLE>
See "Notes to Condensed Consolidated Financial Statements."
F-23
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 10,
1993
-------------
(IN MILLIONS)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents........................................ $ 322
Accounts receivable......................................... 612
Other current assets........................................ 499
-------
1,433
-------
PROPERTY AND EQUIPMENT........................................ 4,412
Accumulated depreciation.................................... (1,013)
-------
3,399
-------
INVESTMENTS IN AFFILIATES..................................... 463
INTANGIBLES................................................... 442
NOTES RECEIVABLE AND OTHER.................................... 604
-------
$ 6,341
-------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................ $ 754
Other current liabilities................................... 755
-------
1,509
-------
LONG-TERM DEBT................................................ 2,614
OTHER LONG-TERM LIABILITIES................................... 467
DEFERRED INCOME............................................... 161
DEFERRED INCOME TAXES......................................... 473
CONVERTIBLE SUBORDINATED DEBT................................. 241
SHAREHOLDERS' EQUITY
Convertible preferred stock................................. 200
Common stock................................................ 105
Additional paid-in capital.................................. 41
Retained earnings........................................... 581
Treasury stock, 1.9 million common shares and 4.2 million
common shares, respectively, at cost....................... (51)
-------
Total Shareholders' Equity................................ 876
-------
$ 6,341
=======
</TABLE>
See "Notes to Condensed Consolidated Financial Statements."
F-24
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 10, SEPTEMBER 11,
1993 1992
------------- -------------
(IN MILLIONS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 80 $ 66
Adjustments to reconcile to cash from operations:
Depreciation and amortization.................... 200 196
Proceeds from sale of timeshare notes receivable. -- 41
Cumulative effect of a change in accounting for
income taxes.................................... (30) --
Cumulative effect of a change in accounting for
assets held for sale............................ 32 --
Income taxes and other........................... 30 --
Working capital changes.......................... 77 72
----- -------
Cash from operations............................... 389 375
----- -------
INVESTING ACTIVITIES
Proceeds from sales of assets...................... 44 429
Less noncash proceeds............................ (3) (89)
Cash received from sales of assets................. 41 340
Capital expenditures............................... (184) (152)
Other.............................................. (103) (27)
----- -------
Cash (used in) from investing activities........... (246) 161
----- -------
FINANCING ACTIVITIES
Issuances of long-term debt........................ 159 885
Issuances of common stock.......................... 10 3
Repayment of long-term debt........................ (281) (1,016)
Dividends paid..................................... (34) (30)
----- -------
Cash used in financing activities.................. (146) (158)
----- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS........ $ (3) $ 378
===== =======
</TABLE>
See "Notes to Condensed Consolidated Financial Statements."
F-25
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Subsequent to the date of the accompanying condensed consolidated
financial statements, on October 8, 1993 (the "Distribution Date"), Marriott
Corporation distributed, through a special dividend (the "Distribution"), to
holders of Marriott Corporation's common stock (on a share-for-share basis),
116,444,561 outstanding shares of common stock of an existing wholly-owned
subsidiary, Marriott International, Inc. ("Marriott International"), resulting
in the division of Marriott Corporation's present operations into two separate
companies. The Internal Revenue Service has ruled the Distribution tax free.
Also on the Distribution Date, Marriott Corporation changed its name to Host
Marriott Corporation (the "Company"). The Company retained Marriott
Corporation's airport and tollroad food, beverage and merchandise concession
operations, as well as most of its real estate properties. Additionally, the
Company or its subsidiaries continue as general partner in most of Marriott
Corporation's lodging partnerships. Marriott International became a publicly
traded company that includes Marriott Corporation's former lodging management,
franchising and resort timesharing operations, senior living service
operations, and institutional food service and facilities management
businesses. As a result, the assets, liabilities and businesses of the Company
have changed substantially. Accordingly, the financial disclosures herein do
not reflect the financial condition and results of operations of the Company as
it now exists. See "Pro Forma Financial Data" for pro forma information of the
Company. As a result of the completion of the Distribution, the Company will
expense approximately $13 million in the fourth quarter of 1993 related to
costs of the transaction.
2. The accompanying condensed consolidated financial statements of the
Company have been prepared by the Company without audit. Certain information
and footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been condensed or
omitted. The Company believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in this Prospectus.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position of Host Marriott Corporation and subsidiaries as of September 10, 1993
and the results of operations for the thirty-six weeks ended September 10, 1993
and September 11, 1992, and cash flows for the thirty-six weeks ended September
10, 1993 and September 11, 1992. Interim results are not necessarily indicative
of fiscal year performance because of the impact of seasonal and short-term
variations. Additionally, the Distribution referred to in Note 1 has materially
altered the constitution of the Company. Therefore, operations occurring after
the Distribution Date will not be comparable to those prior to the Distribution
Date.
3. Earnings per common share is computed on a fully diluted basis by dividing
net income available for common stock by the weighted average number of
outstanding common and common equivalent shares, plus other potentially
dilutive securities, aggregating 109.8 million and 105.3 million for the
thirty-six weeks ended September 10, 1993 and September 11, 1992, respectively,
the Company issued 1.8 million common shares to former holders of certain
senior notes and debentures of the Company as part of the Exchange
Consideration (see note 10, below). Additionally, subsequent to September 10,
1993 the Company issued 10.6 million common shares to former holders of the
Company's preferred stock. Supplemental earnings per share, giving effect to
these transactions as if they had occurred as of the first day of the period
presented, was $0.67 and $0.57 for the thirty-six weeks ended September 10,
1993 and September 11, 1992, respectively. Weighted average shares outstanding
for supplemental earnings per share were 122.3 million and 117.6 million for
the thirty-six weeks ended September 10, 1993 and September 11, 1992,
respectively. Supplemental earnings per share, giving effect to the
transactions discussed above and the potential LYONs conversion (discussed in
F-26
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Note 11) as if they had occurred as of the first day of the period presented,
was $0.68 and $0.59 for the thirty-six weeks ended September 10, 1993 and
September 11, 1992, respectively. Weighted average shares outstanding, giving
effect to the transactions discussed above and the potential LYONs conversions
(discussed in Note 11) as if they had occurred as of the first day of the
period presented, were 131.3 million and 126.6 million for the thirty-six weeks
ended September 10, 1993 and September 11, 1992, respectively.
4. The Company has minority interests in 37 affiliates, most of which own
hotels operated by Marriott International or its subsidiaries under long-term
agreements. The Company's equity in net losses of affiliates of $21 million and
$17 million for the thirty-six weeks then ended September 10, 1993 and
September 11, 1992 respectively, is included in corporate expenses.
Combined summarized operating results reported by affiliates follow:
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------
SEPTEMBER 10, SEPTEMBER 11,
1993 1992
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Sales........................................... $ 1,377 $ 1,325
Operating expenses, including depreciation and
other noncash charges of $227 million and $240
million for the thirty-six week periods then
ended September 10, 1993 and September 11,
1992, respectively............................. (1,478) (1,473)
------- -------
$ (101) $ (148)
======= =======
</TABLE>
5. Beginning in the second fiscal quarter of 1993, under a new accounting
policy adopted by the Company, net realizable value of assets held for sale are
determined on a property-by-property basis as to all lodging properties,
whereas, formerly such determination was made on an aggregate basis, by hotel
brand, as to Courtyard hotels, Fairfield Inns and Residence Inns. The after-tax
cumulative effect of this change on years prior to 1993 of $32 million was
recorded in the quarter ended June 18, 1993 and is reflected in the
accompanying condensed consolidated statement of income for the thirty-six
weeks ended September 10, 1993. The reduction in the annual depreciation charge
as a result of this change has not had a material effect on 1993 results of
operations.
6. In September 1993, approximately 92% or 3,673,634 depositary shares
representing the Company's 8.25% Series A cumulative convertible preferred
stock (no par value) were converted into 10.6 million shares of Company common
stock. As a result, holders of the common shares issued upon conversion
participated in the Distribution. On October 1, 1993, the Company's Board of
Directors adjusted the conversion rate of the Company's remaining 326,366
depositary shares to reflect the special dividend. Each depositary share is
currently convertible at any time at the option of the holder into 19.16 shares
of common stock of the Company.
7. The Company adopted Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("SFAS 109"), during the first quarter of 1993.
Prior to such adoption, the Company deferred the past tax effects of timing
differences between amounts recorded for financial reporting purposes and
taxable income. SFAS 109 requires the recognition of deferred tax assets and
liabilities equal to the expected future tax consequences of the temporary
differences. The $30 million cumulative credit resulting from this change in
accounting principle is included in the Company's condensed consolidated
statement of income for the thirty-six weeks ended September 10, 1993. In the
1993 third quarter, as a result of recent tax legislation which increased the
federal income tax rate retroactively to the beginning of fiscal year 1993, the
Company increased the provision for income taxes by approximately $6 million as
a result of non-cash income tax adjustments as required by SFAS 109.
F-27
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
8. As described in "Risk Factors--Pending Litigation," the Company is
involved in legal proceedings related to the Distribution. The Company believes
that the ultimate outcome of these legal proceedings will not have a material
effect on the financial position or results of operations of the Company.
9. The Company is required to adopt Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," for
fiscal years beginning after December 15, 1994, and Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," for fiscal years beginning after December 15, 1993.
Management anticipates that application of these statements will not have a
material effect on the Company's financial statements.
10. The Company began exchange offers on July 19, 1993 for certain of its
senior notes and debentures (the "Exchange Offer") with an aggregate principal
amount of approximately $1.5 billion (the "Old Notes"). On October 8, 1993, the
Exchange Offer closed, leaving approximately $283 million principal amount of
the Old Notes outstanding, exclusive of (1) the Series F Senior Notes, (2) the
remaining amount of notes which have been called for redemption and (3) the
Series G Senior Notes which have been defeased.
Under the Exchange Offer, holders of the Company's Series B, C, D, E, K, L
and M senior notes and the Company's debentures received $950.74 principal
amount of new notes (the "New Notes") of a wholly-owned indirect subsidiary of
the Company, Host Marriott Hospitality, Inc. ("Hospitality") and $49.26 market
value of Company common stock for each $1,000 principal amount held
(collectively, the "Exchange Consideration").
The coupon and maturity date for each series of New Notes was 100 basis
points higher and four years later, respectively, than the series of existing
notes for which it was exchanged (except the maturity of the New Notes
exchanged for Series L Senior Notes, which was shortened by five years).
The New Notes contain various new covenants and are secured by the stock of
Hospitality and certain of its subsidiaries. All of Hospitality's material
subsidiaries guarantee the New Notes. Hospitality's parent, HMH Holdings, Inc.,
also guarantees the New Notes, and is the borrower under a $630 million line of
credit provided by Marriott International. See "Risk Factors--Substantial
Leverage; Restrictive Covenants" for a more detailed discussion of restrictive
covenants.
As part of the Exchange Offer, the Company solicited consents for certain
proposed amendments to the Indenture under which the Old Notes were issued, a
waiver of any claims, rights or defaults under such Indenture, and a release
and discharge of all legal or equitable claims or exchanging noteholders
relating to the Distribution (collectively the "Consents and Releases"). It was
a condition to participation of each holder in the Exchange Offer that such
holder have delivered the Consents and Releases.
Since the Company did not receive tenders representing more than 50 percent
of the aggregate principal amount of the Series F Senior Notes, the Company
elected to call for redemption on October 8, 1993, at par plus accrued
interest, all of the Series F Senior Notes which where not tendered
(approximately $51 million principal amount). Also, since the Company did not
receive tenders representing more than 50 percent of the aggregate principal
amount of the Series I Senior Notes as of October 8, 1993, the Company elected
to modify the provisions of the Indentures governing, respectively, the Series
I Senior Notes and the notes issued by Hospitality in connection with the
Exchange Offer. These modifications of the two indentures secured the Series I
Senior Notes equally and ratably with the New Notes issued in the Exchange. In
addition, the Company defeased the Series G Senior Notes due February 1, 1994
($100 million aggregate principal amount outstanding).
The exchange will be treated as an extinguishment of debt and the Company
will recognize an extraordinary pre-tax loss of approximately $9 million in the
1993 fourth quarter, equal to the difference between the carrying amount of the
Company's Old Notes and the market value of the Exchange Consideration.
F-28
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(UNAUDITED)
11. In connection with the Distribution, the Company entered into an
agreement with Marriott International pursuant to which Marriott International
assumed 90% of the debt obligations evidenced by the Company's convertible
subordinated Liquid Yield Option Notes due 2006 (the "LYONs") and caused the
LYONs indenture (the "Indenture") to be amended to reflect such assumptions by
Marriott International.
On December 13, 1993, the Company and Marriott International jointly
announced that they will redeem LYONs for $367.60 per $1,000 principal amount
on January 25, 1994. The aggregate redemption price as of the redemption date
of all LYONs outstanding on December 13, 1993 will be approximately $197
million, of which $177 million is payable by Marriott International. The
Company's share of this LYONs obligation is $20 million. If the LYONs
outstanding at September 10, 1993 are converted prior to January 25, 1994,
shares outstanding for the Company as of September 10, 1993 will increase by
approximately nine million.
F-29
<PAGE>
ANNEX A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
As a result of the Distribution, the assets, liabilities and businesses of
the Company have changed substantially. Accordingly, the discussion and
analysis set forth below are not reflective of the Company as it now exists.
See "Management's Discussion and Analysis of Pro Forma Financial Data."
RESULTS OF OPERATIONS
Thirty-Six Weeks Ended September 10, 1993 Compared to Thirty-Six Weeks Ended
September 11, 1992
Total sales increased 5% in 1993, primarily due to lodging unit growth,
occupancy gains and increased timeshare sales, new food service and facilities
management accounts, and expansion of management services to existing clients,
the acquisition of the Dobbs airport concession operations in the 1992 fourth
quarter and sales at new senior living services properties. Income before the
cumulative effect of changes in accounting principles increased 24% in 1993.
Net income in 1993 reflects (i) an after-tax charge of $32 million (29 cents
per common share) resulting from a change in accounting for assets held for
sale, (ii) an increase in non-cash income tax expense of $6 million as required
by SFAS 109 to reflect the impact of recent tax legislation, partially offset
by (iii) $30 million (27 cents per common share) credit resulting from the
change in accounting for income taxes to comply with SFAS 109. Excluding these
accounting changes and the impact of the income tax adjustments as well as
lodging dispositions in both years, the Company posted 38% higher net income.
Lodging operations reported sales growth of 3% in 1993, as comparable unit
sales rose in all four of the Company's hotel brands. Operating profit rose
10%, including profit realized in connection with the disposition of the equity
interest in an international hotel. Lodging operations benefited from the net
addition of 70 hotels (9,300 rooms) since the beginning of 1992, including 22
hotels (3,500 rooms) during 1993, and higher occupancy for all four of the
Company's lodging brands. Room sales grew by 2%. Food and beverage sales
decreased 1%, primarily due to restaurant closings during non-peak hours at
certain limited service units. The Company had 768 hotels, totaling
approximately 171,000 rooms, at September 10, 1993, in the Marriott hotel
system.
Marriott Hotels, Resorts and Suites, the Company's full-service lodging
product, posted an increase in occupancy for comparable units of more than
three percentage points for 1993--to the upper 70s. Average room rates for 1993
were in line with year-earlier levels. Higher room sales and food and beverage
sales reflected increased demand in the transient and group meeting segments.
Courtyard, the Company's moderately priced lodging product, achieved
increases in occupancy for comparable units of over two percentage points for
1993--to the mid-80s, aided by strong weekend business. Growth in average room
rates exceeded inflation for 1993.
Residence Inn, the Company's extended stay product, posted over three
percentage points higher occupancy for comparable units for 1993--to the high
80s. Average room rates were up slightly while occupancy benefited from
continuing emphasis on promoting weekend business.
Fairfield Inn, the Company's economy lodging product, reported one percentage
point higher occupancy for comparable units for 1993--to the upper 80s while
average room rate growth exceeded inflation. Comparable unit sales were up
solidly, reflecting strong response to a complimentary continental breakfast
program rolled out across the system in the spring of 1993.
A-1
<PAGE>
Marriott Ownership Resorts, the Company's timeshare division, posted
substantial increases in sales and operating profits in the 1993 third quarter,
benefiting from strong sales at existing timesharing projects and the impact of
new national marketing programs.
Contract Services reported increases in operating profit of 15% for 1993
reflecting earnings growth for three of the four major businesses in the group.
Sales grew by 9% year-to-date.
Marriott Management Services posted slightly higher sales and strong overall
profit growth in 1993. Results benefited from a profit increase in the health
care product line due to growth in comparable units and new business. Results
for other key product lines, including corporate services, higher education and
school services, were slightly lower than the prior year.
The Host/Travel Plazas division reported higher sales in 1993, while
operating profits were down moderately. Sales benefited from the third quarter
1992 acquisition of the former Dobbs airport operations, but 1993 profit
comparisons for airport food, beverage and merchandise operations were hurt by
a decrease in U.S. enplanements and higher rent at one key airport. Airport
traffic, which had been boosted by airline "fare wars" in 1992, continued to be
affected by route cutbacks by major carriers in 1993. Increased sales for
travel plazas business reflected completion of several units on a major
tollroad, while operating profits were flat due to unit remodeling on one
tollroad and reduced traffic on two other key tollroad systems.
Marriott Senior Living Services reported substantially higher sales and
profits in 1993. Results benefited from the maturing of three properties opened
in 1992, including a condominium retirement community which continued to have
strong sales in the first three quarters of 1993. Comparable occupancy
increased nearly seven percentage points for the 1993 third quarter--to the low
90s.
Marriott Distribution Services, which supplies food and related products to
Company operations and external clients, posted increased sales and slightly
higher operating profits in 1993. Sales benefited from the opening of two
distribution centers since mid-1992 and the start of service to a large
regional restaurant chain during the 1993 third quarter.
Corporate expenses increased 8% over 1992, primarily due to reduced joint
venture results. Interest expense decreased 3% from 1992, reflecting lower
rates and lower average debt balances.
The Company's effective tax rate increased to 48.1% compared to 44.5% in the
comparable prior year period, primarily due to the 1993 third quarter income
tax adjustments cited above.
1992 Compared to 1991
Net income totaled $85 million in 1992, compared to $82 million in 1991, on a
5% increase in sales. The Company's earnings per common share were $.64, down
from $.80 in 1991. Comparisons of 1992 earnings to the preceding year were
affected by several noncomparable items, including operating results and
financing costs for recently opened lodging and senior living services
properties, reduced gain amortization from earlier asset sales, lodging
dispositions in both years, the issuance of preferred stock in late 1991, and
approximately $21 million of costs related to the Distribution.
Excluding the impact of these items, the Company's operating profit and net
income increased by 11% and 56%, respectively, principally due to strong
improvement in four of the Company's five lodging divisions and growth in its
senior living services operations.
A-2
<PAGE>
Lodging sales and operating profit both increased 4% in 1992. Excluding the
impact of the noncomparable items cited above, lodging profits were up 14%
compared to the preceding year. Lodging sales growth was generated primarily by
the net addition of 107 hotels (16,750 rooms) since the beginning of 1991, and
higher occupancy rates. Average room rates across the Marriott system increased
slightly. Food and beverage sales were flat with the prior year due to more
rapid expansion of product lines with limited food service facilities, and the
closing of certain low volume restaurants. At year-end 1992, the Company's
lodging business encompassed 746 hotels with over 167,000 rooms, including the
net addition of 48 hotels (5,800 rooms) during 1992.
Marriott Hotels, Resorts and Suites, the full-service lodging division,
posted increases in occupancy for comparable U.S. hotels of two percentage
points for the 1992--to the mid-70s--while the average room rate was unchanged.
Profits were flat excluding the impact of the aforementioned noncomparable
items.
Courtyard, the moderate price lodging product, posted strong increases in
sales and profits for 1992. Occupancy for comparable units advanced nearly
eight percentage points for 1992 to the upper 70s. Average room rates were
slightly lower, reflecting the division's strategy of increasing occupancy and
total revenues. Reduced administrative expenses also aided results.
Residence Inn, the extended stay lodging product, reported solid sales and
profit growth for 1992. Occupancy for comparable units increased nearly three
percentage points--to the low 80s--as business travel and weekend leisure
business improved from 1991 levels. Average room rates were slightly higher.
Fairfield Inn, the economy lodging product, generated higher sales and
profits for 1992 on occupancy growth of more than three percentage points--to
the upper 70s--for comparable units. Average room rate growth matched
inflation.
Marriott Ownership Resorts, the timeshare division, posted higher sales and
profits in 1992 due to increased sales at existing timesharing properties, the
addition of two new properties, and greater cost efficiencies in marketing and
product development.
Contract Services reported increases in sales and operating profit of 6% and
3% respectively, compared to 1991, largely due to significant growth for
Marriott Senior Living Services, although all four divisions in the group
reported higher sales.
Marriott Management Services, benefited from increased profits in its health
care, higher education and school services division. Overall results increased
only modestly due to the offsetting effect of losses at a west coast laundry
facility and lower profits for Canadian operations.
Host/Travel Plazas results were helped by operating efficiencies, and the
increased travel resulting from low summer airfares, the September 1992
acquisition of the Dobbs airport concessions, and improved performance in
stadiums and arenas. However, lower profits reflected reduced results on
several major tollroads served by the Company, and at merchandise operations in
Las Vegas and Atlantic City.
Marriott Senior Living Services reported strong sales and profit increases in
1992, aided by the sale of condominium units at a new retirement community in
the Washington, D.C. area, and the maturing of units opened in prior years.
Occupancy for comparable units increased by more than nine percentage points to
nearly 90 percent.
Marriott Distribution Services had higher sales in 1992. Profits were
slightly lower due to costs associated with new distribution center openings,
and reduced volume at certain distribution centers resulting from the Company's
disposition of its family restaurant division.
Corporate expenses increased 16% in 1992 due to $21 million of costs
associated with the planned special dividend. Corporate expenses decreased 3%
in 1992 excluding these costs, following a 19% decline in the preceding year.
After a major administrative downsizing program conducted in 1990-91, the
Company eliminated additional administrative staff positions in 1992.
A-3
<PAGE>
Interest expense declined 6% in 1992 due to lower average borrowings as well
as lower interest rates, which were partially offset by reduced interest
capitalization. Interest income was down 28% primarily as a result of lower
temporary cash investments. The Company's effective tax rate was 43.3% in 1992
compared to 43.4% in the preceding year.
During 1992, the Company sold thirteen Courtyard hotels for $146 million in a
sale/leaseback transaction. The Company also sold seven full service hotels in
1992 for total proceeds of $200 million. Pre-tax gains on these full-service
hotel sales of approximately $15 million were offset by adjustments to
previously established reserves, resulting in no net gain or loss. Most of the
reserve adjustment was a valuation allowance, related to the in-substance
foreclosure of a 28.7% interest in the Times Square Hotel Company, equal to the
difference between the estimated fair value of the in-substance foreclosed
ownership interest and carrying the amount of the receivable.
1991 Compared to 1990
Income from continuing operations increased 74% to $82 million in 1991
compared to $47 million in 1990. The Company's earnings per share from
continuing operations was $.80 in 1991, up from $.46 in 1990. Reported results
reflected the impact of several noncomparable items, including: operating
results and financing costs for recently opened hotels and other assets held
for sale in both years; lower deferred gain amortization in 1991; and writeoffs
and reserves in 1990 primarily related to overhead cost reductions and the
cancellation of new unit development. Excluding these noncomparable items in
both years, operating profit was down 3% in 1991 and net income decreased 10%.
Lodging operations reported an 11% sales gain and 36% higher operating profit
in fiscal 1991. Excluding the noncomparable items, sales increased 4% and
profits were flat. Rooms sales increased 14% from the prior year, benefiting
from the net addition of 159 hotels (27,000 rooms) since the beginning of 1990.
Food and beverage sales increased at the lower rate of 4% for 1991, primarily
due to more rapid expansion of product lines with limited food service
facilities. Despite industry overcapacity in many U.S. markets, and the impact
of the recession and the Gulf war, sales and occupancy for comparable units
increased in three of the Company's four major lodging product lines. Operating
margins declined slightly in 1991 primarily due to lower average room rates.
Overall, lodging room rates declined about 2%. At year-end 1991, the Company's
lodging business encompassed 698 properties with over 161,000 rooms, including
the net addition of 59 hotels during 1991.
Marriott Hotels, Resorts and Suites reported 1991 occupancy rates for
comparable units in the mid-70s, down one percentage point from 1990, while
room rates declined approximately 2%. Courtyard, the Company's moderate price
lodging product, posted occupancy rates for comparable units in the low 70s--
nearly one percentage point higher than 1990 levels--while room rates declined
less than 1%. Residence Inn, the extended stay product, reported a gain of more
than one percentage point in occupancy, remaining in the upper 70s--while room
rates declined nearly 2%. Fairfield Inn, Marriott's economy lodging product,
reported an operating profit in 1991, compared to a loss for the prior year.
Occupancy for comparable Fairfield Inns rose more than five percentage points--
to the upper 70s--while room rates declined approximately 3%.
Marriott Ownership Resorts posted a 44% increase in sales and a 32% increase
in profits due to the successful roll-out of several new timesharing resorts.
Contract Services reported 7% higher sales and 34% higher operating profit
for 1991. Excluding the impact of restructuring charges and writeoffs in 1990,
operating profit declined 8%. Operating margin percentages declined due to
start-up losses associated with the new stadiums and arenas operations and a
new centralized laundry facility on the West Coast.
Marriott Management Services' sales and profits increased, benefiting from
solid gains in its health care and school food service operations and reduced
administrative costs. Profits for higher education operations were slightly
below the 1990 levels, while corporate services profits were hurt by the
recession. Profits for facilities management declined primarily due to lower
results for laundry operations.
A-4
<PAGE>
Sales for Host/Travel Plazas were up slightly, but profits declined because
of lower U.S. airline enplanements and highway travel due to the recession and
the Gulf war. Results also were affected by start-up losses for the new
stadiums and arenas operations.
Marriott Senior Living Services reported a solid sales increase and posted
its first profitable year, helped by strong gains at several Company-developed
retirement communities. Comparable occupancy for the Company's retirement
communities rose by more than six percentage points, into the mid-80s.
Corporate expenses decreased 19% in 1991, reflecting savings from downsizing
most administrative functions during the past two years. Staffing has been
reduced by approximately 17% since the beginning of 1990. Interest expense
increased 45% in 1991 due to financing costs for recently opened lodging
properties and other assets held for sale, which exceeded the impact of lower
interest rates. Interest income declined 9%, largely due to collection of
affiliate notes receivable. The Company's effective income tax rate increased
to 43.4% in 1991, compared to 41.3% in 1990, primarily due to higher foreign
taxes.
1990 Compared to 1989
Income from continuing operations declined to $47 million in 1990 compared to
$181 million in 1989. The Company's earnings per share from continuing
operations was $.46 in 1990, down from $1.62 in 1989. Excluding noncomparable
items (primarily divestitures, restructuring write-offs and reserves in both
years, and 1990 start-up losses for new hotels) income from continuing
operations declined 7%. Comparisons of operating results between the two years
are affected by the following items:
. In 1990 the Company recorded pretax restructuring charges and writeoffs
of $153 million, net of $42 million of previously deferred hotel
disposition gains. The 1990 charges principally related to reductions in
new unit development for lodging and senior living services, and
implementation of overhead cost reduction programs throughout the
Company. Restructuring charges of $256 million (pretax) associated with
continuing operations were recognized in 1989.
. Delays in the Company's asset disposition program due to difficult market
conditions in 1990 resulted in the recognition of start-up losses for
many new hotels. By contrast, the Company generated pretax gains of $34
million on hotel development and related activities in 1989.
. The Company's airline catering business was divested in December 1989 and
its fast food division was sold in April 1990. Fiscal 1989 results of
continuing operations include an after-tax gain of $136 million related
to the airline catering divestiture, and discontinued operations include
an after-tax $39 million charge related to the Company's decision to exit
the fast food and family restaurant businesses.
Lodging operations reported a 9% sales gain and 4% higher operating profit in
fiscal 1990, excluding the noncomparable items discussed above. Room sales
increased 13% from the prior year, benefiting from the addition of over 16,000
rooms added during the year. Food and beverage sales for the Lodging segment
increased at the lower rate of 6% for 1990, primarily due to more rapid
expansion of product lines with limited food service facilities.
Lodging results reflected the addition of 100 properties during 1990. Despite
weak industry conditions, all four major product lines--Marriott Hotels,
Resorts and Suites; Courtyard hotels; Residence Inn; and Fairfield Inn--posted
sales gains for comparable units in 1990. Average room rates for comparable
units across the Marriott lodging system advanced nearly in line with
inflation, while occupancy was down less than 1%, remaining in the mid-70s. At
year-end 1990, the Company's lodging group encompassed 639 properties with over
150,000 rooms.
Marriott Hotels, Resorts and Suites reported 1990 occupancy rates for
comparable hotels in the mid-70s, down less than one percentage point from the
prior year. Increased group business was offset by a decline in transient
business due to the recession and the Middle East situation.
A-5
<PAGE>
Courtyard hotels, the Company's moderate price product line, posted a
comparable unit occupancy increase of over one percentage point, remaining in
the low 70s. Residence Inn, the extended stay product, experienced a decline of
about two percentage points in occupancy for comparable units, which remained
in the upper 70s.
Fairfield Inn, Marriott's economy lodging product line, posted a reduced
operating loss from the year-earlier level as it achieved greater national
distribution. Occupancy for comparable Fairfield Inn units was up slightly,
remaining in the mid-70s, and increases in average room rates were well ahead
of inflation.
Marriott Ownership Resorts reported higher sales, but profits declined due to
marketing and start-up costs for new timeshare developments.
Net lodging restructuring charges and writeoffs, totaling $65 million
(pretax) in 1990, reflected costs associated with management's decisions to
delay construction starts on most new lodging units and cancel certain
development projects, and to implement comprehensive reorganizations and
administrative staff downsizings within each business unit.
Contract Services reported a 19% sales gain and 15% higher operating profit
for fiscal 1990, excluding noncomparable items. Operating margins declined due
to 1990 restructuring charges in excess of those recorded in 1989 and lower
profits for Host/Travel Plaza operations as a result of declines in air and
highway travel.
Marriott Management Services sales increases reflected strong new account
growth, including acquisitions, and expansion of services to existing clients.
Excluding noncomparable items, solid sales and profit growth was experienced in
all five major segments of the division--business, healthcare, higher
education, schools, and facilities management.
Sales increased in airport and travel plaza operations, but profits were down
slightly due to reduced operating margins. Senior living services posted strong
sales gains, and start-up losses narrowed in 1990 as a result of profit
contributions from the initial retirement communities developed by the Company.
Contract Services restructuring charges and writeoffs, totaling $57 million
(pretax) in 1990, included costs related to management's decisions to delay or
cancel most new senior living service units and several Host development
projects, and to reorganize and downsize division organizations. Restructuring
charges and writeoffs also included a $14 million pretax, special charge
recorded in the third quarter by the Marriott Management Services division.
Corporate expenses rose 5% in 1990, excluding restructuring charges in both
years and the impact of the Corporate headquarters building sale/leaseback in
mid-1989. Corporate restructuring charges, totaling $31 million (pretax) in
1990, primarily related to decisions to reorganize and downsize various
corporate staff functions. Corporate staffing levels were trimmed by nearly
15%.
Interest expense was 1% lower in 1990 as financing costs associated with new
units placed in service and share repurchases were offset by the impact of
business divestitures, property sales and lower interest rates. The Company
sold nearly $1 billion of assets in 1990. Interest income declined 15% largely
due to tax refund interest earned in 1989 and interest income on cash balances
maintained in 1989 for tax purposes. The Company's effective income tax rate
increased to 41.3%, compared to 39.3% in 1989, due to the effect of goodwill
amortization and other nondeductible items on lower pretax income.
Special Dividend and Exchange Offer
In October 1992, the Board of Directors of the Company approved, subject to
approval of final terms and conditions and shareholder ratification, the
distribution to holders of Common Stock (on a share-for-share basis) of all
outstanding shares of common stock of an existing wholly-owned subsidiary,
Marriott
A-6
<PAGE>
International, Inc. ("Marriott International") (the "Distribution"). Subsequent
to the Distribution on October 8, 1993, the Company changed its name to Host
Marriott Corporation ("Host Marriott"). Host Marriott retained Marriott
Corporation's airport and tollroad food, beverage and merchandise concession
operations, as well as most of its real estate properties. Additionally, Host
Marriott retained a major portion of Marriott Corporation's long-term debt
obligations, and it or its subsidiaries continue to act as general partner in
Marriott Corporation's lodging partnerships. As part of the Distribution,
Marriott International became a publicly traded company that includes
substantially all of lodging management, franchising and resort timesharing
operations, senior living service operations, and institutional food service
and facilities management businesses.
The Company began exchange offers and consent solicitation (the "Exchange
Offer") on July 19, 1993, pursuant to which holders of its senior notes (the
"Old Notes") in aggregate principal amount of approximately $1.5 billion were
offered the right to exchange Old Notes for a combination of (i) cash, (ii)
Common Stock and (iii) new notes issued by Host Marriott Hospitality, Inc.
("Hospitality"), an indirect wholly-owned subsidiary of the Company. The
purpose of the Exchange Offer was to (i) extend the maturities of its
outstanding debt and (ii) resolve the objections of, and settle litigation and
potential litigation with, holders of Old Notes relating to the Distribution.
As described in the Notes to Condensed Consolidated Financial Statements, on
October 8, 1993, the Exchange Offers closed.
As a result of the Distribution, the Company is substantially more leveraged
than it was prior to the Distribution. However, the Company believes that
financial resources for ongoing operations as well as funds available under a
$630 million line of credit from Marriott International will be sufficient to
enable it to meet its debt service needs and finance its capital expenditures.
Since the transaction is completed, Marriott International will have
operations in 50 states and 19 foreign countries, and approximately 172,000
employees. Host Marriott will have operations or properties in 43 states and
six countries, with approximately 23,000 employees. The Special Dividend
footnote to the consolidated financial statements and the Notes to Condensed
Consolidated Financial Statements contain additional data related to the
Distribution.
Sources and Uses of Capital
The Company has funded its capital requirements with a combination of cash
flow from operations, proceeds from sales of hotels and other properties, and
debt and equity financing.
Cash from operations. Cash from operations is significantly greater than net
income due to depreciation, deferred taxes and other items. As expected, cash
from continuing operations decreased $128 million in 1992, primarily due to
higher income tax payments, lower sales of timeshare notes and reduced cash
flow from working capital. Income tax payments were higher in 1992 due to
settlement of certain prior year tax liabilities. The Company has provided
financing for qualified purchasers of timeshare intervals, and periodically
packaged and sold the buyers' notes to financial institutions. Lower operating
working capital was a significant source of cash for the Company in 1991, and
additional reductions were achieved in 1992.
Cash from operations increased to $389 million in the first three quarters of
1993 compared to $375 million in 1992, primarily due to higher pretax income in
1993 partially offset by proceeds from the sale of timeshare notes receivable
and lower cash taxes in 1992.
Lodging properties formerly held for sale. Historically, the Company
developed and sold lodging frequently to syndicated limited partnerships, while
continuing to operate the properties under long-term agreements. Those
agreements provided the Company with specified percentages of sales and
operating profits as compensation for operating the properties for the owners.
A-7
<PAGE>
Most lodging properties developed by the Company since the early 1980s were
reported as assets held for sale prior to 1992. The Company used this
classification because the sale of newly-developed lodging properties, subject
to long-term operating agreements, was a principal method of financing the
Company's lodging property development during this period. Sales of such
properties also enabled the Company to transfer the risks of real estate
ownership. Most of these properties were in the Company's Courtyard, Fairfield
Inn and Residence Inn brands, and were sold in large groups with a balanced
geographical mix of properties of the same brand.
In 1990, deterioration in the real estate and financing markets slowed the
Company's property disposition program. While the Company continued to explore
possibilities for sales of properties to syndicated partnerships, both
domestically and internationally, the scarcity of real property debt financing
made such sales difficult. Nevertheless, the Company completed $600 million of
lodging property sales, including the sale of six full service hotels and 50
Fairfield Inns to affiliated partnerships. In 1990, the Company also
discontinued virtually all of its lodging property development, thus limiting
its future financing needs and providing it with flexibility to hold its
lodging properties until market conditions improved. At the end of 1990, the
Company's assets held for sale included one full service hotel, 56 Courtyard
hotels, 15 Residence Inns and 23 Fairfield Inns, nearly all of which had opened
in 1989 and 1990.
In 1991, persistent weak conditions in the hotel industry and in the real
estate and capital markets continued to hamper the Company's efforts to sell
lodging properties. Because such properties generated solid cash flow for the
Company, the Company was unwilling to sacrifice value to expedite sales
transactions. For this reason, the Company increased its focus on other sources
of financing, including senior and subordinated debt and preferred stock, and
decreased its efforts to sell properties. The only sale of lodging properties
by the Company in 1991 was of four Courtyard hotels to the Company's profit
sharing plan. The Company also negotiated a sale/leaseback of an additional 13
Courtyard hotels (for $146 million), which closed in the first quarter of 1992.
At the end of 1991, the Company's assets held for sale included one full
service hotel, 64 Courtyard hotels, 28 Residence Inns and 30 Fairfield Inns,
consisting of unsold properties held since year-end 1990 and units which opened
during 1991.
In April 1992, as a result of continuing unfavorable conditions in the real
estate markets and the fact that during 1991 and 1992 the Company had completed
$925 million in long-term corporate debt and equity financings (thus
eliminating the need to raise capital through sales of properties), the Company
decided it was no longer appropriate to view sales of lodging properties,
subject to operating agreements, as a primary means of long-term financing.
Accordingly, the Company discontinued classification of these properties
(consisting of one full service hotel, 51 Courtyard hotels, 28 Residence Inns
and 30 Fairfield Inns, with an aggregate carrying value of approximately $1,150
million at that time) as assets held for sale. In addition to the Courtyard
sale/leaseback transaction noted above, the Company sold seven full-service
hotels to other chains in 1992, for total proceeds of $200 million, in two
separate transactions negotiated in the first quarter of 1992.
During the period the Company classified lodging properties as assets held
for sale, it determined the net realizable value of such assets on a property-
by-property basis in the case of full-service hotels, resorts and suites, and
on an aggregate basis, by brand, in the case of its limited service (i.e.,
Courtyard, Fairfield Inn and Residence Inn) lodging properties. On this basis,
carrying value of these properties was not in excess of their net realizable
value based on estimated selling prices, although, as a result of the
deteriorating market conditions referenced above, certain individual properties
within a limited service brand had carrying values in excess of their estimated
selling prices. The "Property and Equipment" note to the consolidated financial
statements included herein provides data as to the estimated unrealized losses
of certain properties within each brand which had a book value in excess of net
realizable value (determined based on estimated selling prices). In certain
cases, these unrealized losses related to properties constructed during 1990
and 1991 where total development and construction costs exceeded net realizable
value. Following the reclassification of these properties, the Company assesses
impairment of its owned real estate properties based on whether it is probable
that undiscounted future cash flows from such properties will be less than
their net book value.
A-8
<PAGE>
Beginning in the second fiscal quarter of 1993, under a new accounting policy
adopted by the Company, net realizable value of assets held for sale are
determined on a property-by-property basis as to all lodging properties,
whereas formerly such determination was made on an aggregate basis by hotel
brand as to Courtyard hotels, Fairfield Inns and Residence Inns. The after-tax
cumulative effect of this change on years prior to 1993 of $32 million was
recorded in the quarter ended June 18, 1993 and is reflected in the
accompanying condensed consolidated statement of income for the thirty-six
weeks ended September 10, 1993. The reduction in the annual depreciation charge
as a result of this change did not have a material effect on 1993 results of
operations.
Capital expenditures and acquisitions. The Company's 1992 capital
expenditures and acquisitions were reduced to $257 million, compared to $427
million in 1991 and over $1.2 billion in 1990. The 1992 outlays largely
represented refurbishments of existing properties and completion of
construction on new lodging and senior living services projects started prior
to 1991. Capital expenditures of approximately $350 million are planned for
1993, including construction costs for three hotels and two Senior Living
Services properties.
The Company acquired Dobbs House concessions at 19 airports in September 1992
for approximately $47 million. The acquired units are contributing to earnings
and cash flows in their first full year of operations.
Capital expenditures increased to $184 million in the first three quarters of
1993, compared to $152 million in 1992. The 1993 outlays were primarily for
refurbishment of existing properties, and construction of two full-service
hotels, two retirement communities and several units on two major tollroads.
Proceeds from sales of assets totaled $44 million in the first three quarters
of 1993, compared to $429 million in 1992. Asset dispositions during the first
three quarters of 1992 included the sale of 13 Courtyard hotels for $146
million in a sale/leaseback transaction, 149 family restaurants for total
proceeds of $74 million and seven full-service hotels for total proceeds of
$200 million.
The Company continues to renovate its properties to maintain their
competitive position. Such renovation outlays totaled $163 million in 1992,
including $123 million financed by hotel owners.
Partnership Activities. The Company serves as the managing general partner of
numerous limited partnerships which own hotels. Debt of the hotel limited
partnerships is typically secured by first mortgages on the properties and
generally is nonrecourse to the partners. However, the Company has committed to
advance amounts to affiliates, if necessary, to cover certain future debt
service requirements. Such commitments were limited, in the aggregate, to $296
million at October 8, 1993.
Other investing activities of $103 million for the first three quarters of
1993 included $20 million invested in a joint venture which acquired the 339-
room Duna Hotel in Budapest, Hungary, and $32 million in net advances for
certain hotel joint ventures. Other investing activities in the first three
quarters of 1992 also included $18 million in fundings for certain hotel joint
ventures.
Divestitures. The Company disposes of businesses that no longer meet its
financial return or growth objectives. In 1989, the Company divested its
airline catering business for over $500 million. In 1990, the Company sold its
fast food restaurant division for more than $365 million. In 1991, 138 family
restaurants were sold for total proceeds of approximately $52 million. The
Company sold an additional 203 family restaurants for total proceeds of $84
million in 1992 and expects to sell many of its remaining 50 family restaurants
by year-end 1993.
Debt financing. The Company utilizes both fixed and variable rate debt to
minimize interest costs and provide flexibility while protecting against the
impact of short-term interest rate fluctuations. During 1992 the Company issued
$200 million of Series L senior notes due in 2012 and $200 million of Series M
senior notes due in 2002. Proceeds from these transactions primarily were used
to repay other senior notes and revolving bank debt, which declined from $676
million at year-end 1991 to $175 million at January 1, 1993. Fixed rate debt
was 65% of total debt at January 1, 1993 (compared to 64% at January 3, 1992),
after consideration of interest rate exchange agreements.
A-9
<PAGE>
Cash flow coverage of interest (defined as operating cash flow before
interest expense, income taxes, proceeds from sales of timeshare notes and
changes in working capital; divided by total interest, including amounts
capitalized) was 2.6 times for 1992 and 2.0 times for 1991, and substantially
exceeded the requirements of the Company's lenders.
Liquidity
The Company believes it has adequate financial resources to support ongoing
operations, meet debt service requirements and finance its capital expenditure
program. In addition, the Company structured the Distribution to provide each
of the separate companies with sufficient financial resources to meet their
business objectives:
. Marriott International will have strong operating cash flows from its
lodging, food and facilities management operations. This cash flow is
expected to exceed the annual capital needed for its management and
franchise programs by a comfortable margin.
. Host Marriott Corporation will have substantial cash flows both from its
portfolio of recently-developed real estate, and its airport and
tollroads concession business. The real estate owned is largely
unencumbered, and can be sold or mortgaged to meet capital needs going
forward. In addition, Marriott International will provide Host Marriott
with a $630 million revolving line of credit to provide financial
flexibility and a $125 million mortgage loan to finance up to 60% of the
construction and development costs of the Philadelphia Convention Center
Marriott Hotel, scheduled for completion in January 1995.
Financial Position
Working Capital. The Company's ratio of current assets to current liabilities
increased to 1.0 at January 1, 1993, compared to .80 at year-end 1991,
primarily due to higher temporary cash investments, and new inventories of
retirement condominiums and resort timeshares pending sale at year end 1992.
In 1991, the Company generated over $117 million of cash through an
aggressive working capital reduction program which included tightened credit
policies, intensified receivable collection efforts and lower inventory levels.
The program was continued in 1992, however, as expected, accounts receivable,
inventories and other current assets increased due to business growth. The 1992
working capital cash flow of $36 million was primarily due to a low level of
payables at year end 1991, due in part, to the 53 week fiscal year.
Working capital and operating results of managed hotels operated with the
Company's employees are consolidated because the operating responsibilities
associated with such hotels are substantially the same as those for owned
hotels. The consolidated financial statements include the following amounts
related to managed hotels: current assets and current liabilities of $246
million at January 1, 1993, $269 million at January 3, 1992, and $282 million
at December 28, 1990; sales of $2,896 million in 1992, $2,809 million in 1991
and $2,752 million in 1990; and operating expenses, including payments to
owners, of $2,721 million in 1992, $2,616 million in 1991 and $2,553 million in
1990.
Property and Equipment. Property and equipment, net of depreciation, declined
by $386 million in 1992, reflecting the sale of 20 lodging properties during
the year, depreciation expense, and a lower level of new unit construction for
the Company's lodging and senior living services businesses.
Debt. Long-term debt, including convertible subordinated debt, decreased $229
million in 1992 primarily due to repayment of the Company's revolving bank debt
from cash generated from operations and asset sales, which significantly
exceeded capital expenditures, and from the issuance of $400 million of long-
term senior notes. The Company repaid $501 million of revolving bank debt and
also prepaid $100 million of senior notes during 1992.
A-10
<PAGE>
In the first three quarters of 1993, the Company repaid its 8 3/4% Series H
Senior Notes ($100 million) and its 9 1/8% Series J Senior Notes ($150
million). In 1992, the Company issued $200 million of 10% Series L Senior Notes
due May 2012 and $200 million of 9 1/2% Series M Senior Notes due May 2002.
Proceeds from the 1992 issuances were used primarily to repay other
indebtedness, including $100 million of 11 1/8% Series A Senior Notes.
In response to the Company's announcement of the Distribution, the Company's
senior notes have been downgraded below investment grade by two debt ratings
agencies, Moody's Investor Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P"). Moody's currently rates the Old Notes at B2 and the New
Notes at B1, while S&P currently rates the Old Notes at B and the New Notes at
BB-.
The Company's existing loan agreements contain certain restrictive covenants
including, among others, limitations on additional indebtedness and the
pledging of assets. At the present time, the Company expects it will remain in
compliance with all debt covenants.
Shareholders' Equity. Shareholders' equity increased by $106 million in 1992
primarily as a result of earnings reinvested in the business and the issuance
of common stock under various employee plans.
Shareholders' equity increased $91 million in the first three quarters of
1993, principally due to earnings retained in the business and common stock
issuances under employee plans.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in the first quarter of fiscal 1993. The
standard was implemented on a prospective basis. Its application increased
shareholders' equity by approximately $30 million.
Deferred income taxes decreased $112 million in the first three quarters of
1993, primarily due to the impact of implementing SFAS 109 and certain
reclassifications.
Inflation
The rate of inflation has been moderate in recent years and, accordingly, has
not had a significant impact on the Company's businesses.
A-11
<PAGE>
--------------------------------------------
BRAND AFFILIATIONS*
* The Company's properties are operated under the brands "Marriott
Hotels, Resorts and Suites," "Courtyard by Marriott," "Residence Inn"
and "Fairfield Inn" pursuant to management agreements with Marriott
International, Inc. These brand names, and the logos reproduced above,
are registered trademarks of Marriott International, Inc.
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITA-
TION OF AN OFFER TO BUY, THE SHARES OFFERED HEREBY BY ANYONE IN ANY JURISDIC-
TION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN IMPLI-
CATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
The Company............................................................... 12
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Pro Forma Capitalization.................................................. 14
Pro Forma Financial Data.................................................. 15
Management's Discussion and Analysis of Pro Forma Financial Data.......... 21
Selected Historical Financial Data........................................ 23
Business and Properties................................................... 24
Legal Proceedings......................................................... 28
The Distribution.......................................................... 29
The Exchange Offer and Restructuring...................................... 29
Financing................................................................. 31
Relationship Between the Company and Marriott International............... 33
Management................................................................ 40
Certain Transactions...................................................... 48
Ownership of Company Securities........................................... 49
Description of Capital Stock.............................................. 50
Price Range of the Common Stock and Dividends............................. 55
Purposes and Antitakeover Effects of
Certain Provisions of the Company
Certificate and Bylaws and the Marriott International Purchase Right..... 55
Certain United States Federal Tax Consequences To Non-United States Hold-
ers of Common Stock...................................................... 61
Underwriting.............................................................. 63
Legal Matters............................................................. 66
Experts................................................................... 66
Index to Financial Statements............................................. F-1
Management's Discussion and Analysis of Results of Operations and Finan-
cial Condition........................................................... A-1
</TABLE>
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17,500,000 SHARES
[LOGO]
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY SHEARSON INC.
BT SECURITIES CORPORATION
JANUARY , 1994
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED JANUARY 19, 1994
PROSPECTUS JANUARY , 1994
17,500,000 SHARES
(LOGO TO COME)
COMMON STOCK
Of the 17,500,000 shares of Common Stock offered by the Company, 3,500,000
shares are being offered for sale outside the United States and Canada by the
International Managers (the "International Offering") and 14,000,000 shares are
being offered for sale in the United States and Canada in a concurrent offering
by the U.S. Underwriters (the "U.S. Offering" and, together with the
International Offering, the "Offerings"), subject to transfers between the U.S.
Underwriters and the International Managers. See "Underwriting."
The Common Stock of the Company is traded on the New York Stock Exchange and
on the Chicago Stock Exchange, the Pacific Stock Exchange and the Philadelphia
Stock Exchange under the symbol "HMT". On January 18, 1994, the last reported
sale price of the Common Stock, as reported on the New York Stock Exchange
Composite Tape, was $11.25 per share. See "Price Range of the Common Stock and
Dividends."
SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
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- -
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
- -
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total (3)...................................... $ $ $
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- -
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option to purchase up to
2,625,000 additional shares of Common Stock, on the same terms and conditions
as set forth above, at the Price to the Public, less the Underwriting
Discounts and Commissions, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to the Public,
Underwriting Discounts and Commissions, and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares are offered by the several Underwriters when, as and if delivered
to and accepted by the Underwriters and subject to various prior conditions,
including the right of the Underwriters to reject any order in whole or in
part. It is expected that delivery of the shares will be made in New York, New
York on or about January , 1994.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY SHEARSON INC.
BANKERS TRUST INTERNATIONAL PLC
<PAGE>
[ALTERNATE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THE SHARES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAK-
ING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
The Company............................................................... 12
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Pro Forma Capitalization.................................................. 14
Pro Forma Financial Data.................................................. 15
Management's Discussion and Analysis of Pro Forma Financial Data.......... 21
Selected Historical Financial Data........................................ 23
Business and Properties................................................... 24
Legal Proceedings......................................................... 28
The Distribution.......................................................... 29
The Exchange Offer and Restructuring...................................... 29
Financing................................................................. 31
Relationship Between the Company and Marriott International............... 33
Management................................................................ 40
Certain Transactions...................................................... 48
Ownership of Company Securities........................................... 49
Description of Capital Stock.............................................. 50
Price Range of the Common Stock and Dividends............................. 55
Purposes and Antitakeover Effects of
Certain Provisions of the Company
Certificate and Bylaws and the Marriott International Purchase Right..... 55
Certain United States Federal Tax Consequences To Non-United States Hold-
ers of Common Stock...................................................... 61
Underwriting.............................................................. 63
Legal Matters............................................................. 66
Experts................................................................... 66
Index to Financial Statements............................................. F-1
Management's Discussion and Analysis of Results of Operations and Finan-
cial Condition........................................................... A-1
</TABLE>
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17,500,000 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
---------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY SHEARSON INC.
BANKERS TRUST INTERNATIONAL PLC
JANUARY , 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of all expenses in connection with the
issuance and distribution of the securities registered hereby. The information
is subject to future contingencies.
<TABLE>
<S> <C>
Registration Fee................................................... $ 58,988
NASD Fees.......................................................... $ 17,607
Blue Sky Fees and Expenses......................................... $ 15,000
Stock Exchange Fees................................................ $ 86,688
Legal Fees......................................................... $200,000
Accounting Fees.................................................... $100,000
Printing........................................................... $350,000
Miscellaneous...................................................... $ 21,717
--------
$850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article Eleventh and Article Sixteenth of the Company's Certificate and
Section 7.7 of the Bylaws limit the personal liability of directors to the
Company or its shareholders for monetary damages for breach of fiduciary duty.
These provisions of the Company Certificate and Bylaws are collectively
referred to herein as the "Director Liability and Indemnification Provisions."
The Company Certificate and the Bylaws are included as exhibits to the
Registration Statement on Form S-1 of which this Prospectus is a part.
The Director Liability and Indemnification Provisions define and clarify the
rights of certain individuals, including Company directors and officers, to
indemnification by the Company in the event of personal liability or expenses
incurred by them as a result of certain litigation against them. Such
provisions are consistent with Section 102(b)(7) of the Delaware General
Corporation Law, which is designed, among other things, to encourage qualified
individuals to serve as directors of Delaware corporations by permitting
Delaware corporations to include in their articles or certificates of
incorporation a provision limiting or eliminating directors' liability for
monetary damages and with other existing Delaware General Corporation Law
provisions permitting indemnification of certain individuals, including
directors and officers. The limitations of liability in the Director Liability
and Indemnification Provisions may not affect claims arising under the federal
securities laws.
In performing their duties, directors of a Delaware corporation are obligated
as fiduciaries to exercise their business judgment and act in what they
reasonably determine in good faith, after appropriate consideration, to be the
best interests of the corporation and its shareholders. Decisions made on that
basis are protected by the so-called "business judgment rule." The business
judgment rule is designed to protect directors from personal liability to the
corporation or its shareholders when business decisions are subsequently
challenged. However, the expense of defending lawsuits, the frequency with
which unwarranted litigation is brought against directors and the inevitable
uncertainties with respect to the outcome of applying the business judgment
rule to particular facts and circumstances mean that, as a practical matter,
directors and officers of a corporation rely on indemnity from, and insurance
procured by, the corporation they serve, as a financial backstop in the event
of such expenses or unforeseen liability. The Delaware legislature has
recognized that adequate insurance and indemnity provisions are often a
condition of an individual's willingness to serve as director of a Delaware
corporation. The Delaware General Corporation Law has for some time
specifically permitted corporations to provide indemnity and procure insurance
for its directors and officers.
Recent changes in the market for directors and officers liability insurance
have resulted in the unavailability for directors and officers of many
corporations of any meaningful liability insurance coverage. Insurance carriers
have in certain cases declined to renew existing directors and officers
liability policies, or have increased premiums to such an extent that the cost
of obtaining such insurance becomes prohibitive. Moreover, current policies
often exclude coverage for areas where the service of qualified independent
II-1
<PAGE>
directors is most needed. For example, many policies do not cover liabilities
or expenses arising from directors' and officers' activities in response to
attempts to take over a corporation. Such limitations on the scope of insurance
coverage, along with high deductibles and low limits of liability, have
undermined meaningful directors and officers liability insurance coverage.
The unavailability of meaningful directors and officers liability insurance
is attributable to a number of factors, many of which are affecting the
liability insurance industry generally, including granting of unprecedented
damages awards and reduced investment income on insurance company investments.
According to published sources, the inability of corporations to provide
meaningful directors and officers liability insurance has had a damaging effect
on the ability of public corporations to recruit and retain corporate
directors. Although the Company has not directly experienced this problem, the
Company believes it is necessary to take every possible step to ensure that it
will be able to attract the best possible officers and directors.
Set forth below is a description of the Director Liability and
Indemnification Provisions. Such description is intended as a summary only and
is qualified in its entirety by reference to the Company Certificate and the
Bylaws.
Elimination of Liability in Certain Circumstances. Article Sixteenth of the
Company Certificate protects directors against monetary damages for breaches of
their fiduciary duty of care, except as set forth below. Under the Delaware
General Corporation Law, absent such limitation of liability provisions as are
provided in Article Sixteenth, directors could generally be held liable for
gross negligence for decisions made in the performance of their duty of care
but not for simple negligence. Article Sixteenth eliminates liability of
directors for negligence in the performance of their duties, including gross
negligence. In a context not involving a decision by the directors (i.e., a
suit alleging loss to the Company due to the directors' inattention to a
particular matter) a simple negligence standard might apply. Directors remain
liable for breaches of their duty of loyalty to the Company and its
shareholders, as well as acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law and transactions from
which a director derives improper personal benefit. Article Sixteenth does not
eliminate director liability under Section 174 of the Delaware General
Corporation Law, which makes directors personally liable for unlawful dividends
or unlawful stock repurchases or redemptions and expressly sets forth a
negligence standard with respect to such liability.
While the Director Liability and Indemnification Provisions provide directors
with protection from awards of monetary damages for breaches of the duty of
care, they do not eliminate the directors' duty of care. Accordingly, these
provisions will have no effect on the availability of equitable remedies such
as an injunction or rescission based upon a director's breach of the duty of
care. The provisions of Article Sixteenth, which eliminates liability as
described above, will apply to officers of the Company only if they are
directors of the Company and are acting in their capacity as directors, and
will not apply to officers of the Company who are not directors. The
elimination of liability of directors for monetary damages in the circumstances
described above may deter persons from bringing third-party or derivative
actions against directors to the extent such actions seek monetary damages.
Indemnification and Insurance. Under Section 145 of the Delaware General
Corporation Law, directors and officers as well as other employees and
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action") if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard of
care is applicable in the case of the derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred
in connection with defense or settlement of such an action, and
II-2
<PAGE>
the Delaware General Corporation Law requires court approval before there can
be any indemnification where the person seeking indemnification has been found
liable to the corporation.
Section 7.7 of the Bylaws provides that the Company shall indemnify any
person to whom, and to the extent, indemnification may be granted pursuant to
Section 145 of the Delaware General Corporation Law.
Article Eleventh of the Company Certificate provides that a person who was or
is made a party to, or is involved in, any action, suit or proceeding by reason
of the fact that he is or was a director, officer or employee of the Company
will be indemnified by the Company against all expenses and liabilities,
including counsel fees, reasonably incurred by or imposed upon him, except in
such cases where the director, officer or employee is adjudged guilty of
willful misconduct or malfeasance in the performance of his duties. Article
Eleventh also provides that the right of indemnification shall be in addition
to and not exclusive of all other rights to which such director, officer or
employee may be entitled.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
***1. Form of Underwriting Agreement between the Company and the
Representatives of the Underwriters.
2.(i) Memorandum of Understanding between Marriott Corporation and
Certain Bondholders dated as of March 10, 1993
(incorporated by reference to Current Report on Form 8-K
dated March 17, 1993).
2.(ii) Stipulation and Agreement of Compromise and Settlement
(incorporated by reference to Registration Statement No.
33-62444).
3.1 Restated Certificate of Incorporation of Host Marriott
Corporation (incorporated by reference to Current Report on
Form 8-K dated October 23, 1993).
3.2 Amended Host Marriott Corporation Bylaws (incorporated by
reference to Current Report on Form 8-K dated October 23,
1993).
4.1(i) Indenture between Marriott Corporation and The First
National Bank of Chicago dated as of March 1, 1985
(incorporated by reference to Registration Statement No. 2-
97034).
4.1(ii) Second Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of February
1, 1986 (incorporated by reference to Current Report on
Form 8-K dated February 4, 1986).
4.1(iii) Third Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of December
1, 1986 (incorporated by reference to Current Report on
Form 8-K dated December 10, 1986).
4.1(iv) Fourth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of May 1,
1987 (incorporated by reference to Current Report on Form
8-K dated May 7, 1987).
4.1(v) Fifth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of June 12,
1987 (incorporated by reference to Current Report on Form
8-K dated June 18, 1987).
4.1(vi) Sixth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of October
23, 1987 (incorporated by reference to Current Report on
Form 8-K dated October 30, 1987).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.1(vii) Seventh Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of January
15, 1988 (incorporated by reference to Current Report on
Form 8-K dated January 26, 1988).
4.1(viii) Eighth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of
February 1, 1988 (incorporated by reference to Current
Report on Form 8-K dated February 8, 1988).
4.1(ix) Ninth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of May 1,
1988 (incorporated by reference to Current Report on Form
8-K dated May 9, 1988).
4.1(x) Tenth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of May 2,
1988 (incorporated by reference to Current Report on Form
8-K dated May 24, 1988).
4.1(xi) Eleventh Supplemental Indenture between Marriott
Corporation and The First National Bank Chicago dated as
of August 27, 1990 (incorporated by reference to Current
Report on Form 8-K dated September 4, 1990).
4.1(xii) Twelfth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of July
11, 1991 (incorporated by reference to Current Report on
Form 8-K dated July 19, 1991).
4.1(xiii) Thirteenth Supplemental Indenture between Marriott
Corporation and The First National Bank of Chicago dated
as of April 22, 1992 (incorporated by reference to Current
Report on Form 8-K dated April 29, 1992).
4.1(xiv) Fourteenth Supplemental Indenture between Marriott
Corporation and The First National Bank of Chicago dated
as of April 28, 1992 (incorporated by reference to Current
Report on Form 8-K dated May 5, 1992).
4.1(xv) Fifteenth Supplemental Indenture between Marriott
Corporation and Bank One, Columbus, NA. dated as of
October 8, 1993 (incorporated by reference to Current
Report on Form 8-K dated October 23, 1993).
4.2(i) Indenture between Marriott Corporation and Chemical Bank
dated as of June 5, 1991 (incorporated by reference to
Registration Statement No. 33-39858).
4.2(ii) First Supplemental Indenture dated as of September 30, 1993
among Marriott Corporation, Chemical Bank and Marriott
International, Inc. (incorporated by reference to Current
Report on Form 8-K dated October 23, 1993).
4.3(i) Marriott Corporation Certificate of Designation of the
Series A Cumulative Convertible Preferred Stock dated
December 17, 1991 (incorporated by reference to Current
Report on Form 8-K dated December 23, 1991).
4.3(ii) Marriott Corporation Certificate of Designation,
Preferences and Rights of Series A Junior Participating
Preferred Stock (incorporated by reference to Registration
Statement No. 33-39858).
4.4(i) Rights Agreement between Marriott Corporation and the Bank
of New York as Rights Agent dated February 3, 1989
(incorporated by reference to Registration Statement No.
33-62444).
***4.4(ii) First Amendment to Rights Agreement between Marriott
Corporation and Bank of New York as Rights Agent dated as
of October 8, 1993.
4.5 Indenture by and among Host Marriott Hospitality, Inc., as
Issuer, HMH Holdings, Inc., as Parent Guarantor, HMH
Properties, Inc., Host Marriott Travel Plazas, Inc.,
Gladieux Corporation, Host International, Inc., Marriott
Family Restaurants, Inc., Marriott Financial Services,
Inc., HMH Courtyard Properties, Inc., and Marriott
Retirement Communities, Inc. and certain of their
Subsidiaries as Subsidiary Guarantors and Marine Midland
Bank, N.A., as Trustee, with respect to the New Notes
(including the Form of New Notes) (incorporated by
reference to Current Report on Form 8-K dated October 23,
1993).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
***5 Opinion of Stephen J. McKenna, Esq. as to legality of
securities being registered.
***7 Opinion of Potter, Anderson & Corroon as to liquidation
preference of Series A Cumulative Convertible Preferred
Stock.
10.1 Marriott Corporation Executive Deferred Compensation plan
dated as of December 6, 1990 (incorporated by reference to
Exhibit 19(i) of the Annual Report on Form 10-K for the
fiscal year ended December 28, 1991).
10.2 Host Marriott Corporation 1993 Comprehensive Stock
Incentive Plan effective as of October 8, 1993
(incorporated by reference to Current Report on Form 8-K
dated October 23, 1993).
10.3 Distribution Agreement dated as of September 15, 1993
between Marriott Corporation and Marriott International,
Inc. (incorporated by reference to Current Report on Form
8-K dated October 23, 1993).
10.4 Tax Sharing Agreement dated as of October 5, 1993 by and
between Marriott Corporation and Marriott International,
Inc. (incorporated by reference to Current Report on Form
8-K dated October 23, 1993).
10.5 Assignment and License Agreement dated as of October 8,
1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference to Current
Report on Form 8-K dated October 23, 1993).
10.6 Corporate Services Agreement dated as of October 8, 1993 by
and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference to Current
Report on Form 8-K dated October 23, 1993).
10.7 Procurement Services Agreement dated as of October 8, 1993
by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference to Current
Report on Form 8-K dated October 23, 1993).
10.8 Supply Agreement dated as of October 8, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Current Report on Form 8-K
dated October 23, 1993).
10.9 Casualty Claims Administration Agreement dated as of
October 8, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Current Report on Form 8-K dated October 23, 1993).
10.10 Employee Benefits Administration Agreement dated as of
October 8, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Current Report on Form 8-K dated October 23, 1993).
10.11 Tax Administration Agreement dated as of October 8, 1993 by
and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference to Current
Report on Form 8-K dated October 23, 1993).
10.12 Employee Benefits and Other Employment Matters Allocation
Agreement dated as of October 8, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Current Report on Form 8-K
dated October 23, 1993).
10.13 Noncompetition Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International,
Inc. (incorporated by reference to Current Report on Form
8-K dated October 23, 1993).
+*10.14(i) Host Marriott Lodging Management Agreement--Marriott
Hotels, Resorts and Suites by and between Marriott
Corporation and Marriott International, Inc. dated
September 25, 1993.
+***10.14(ii) Host Marriott Lodging Management Agreement--Courtyard
Hotels by and between Marriott Corporation and Marriott
International, Inc. dated September 25, 1993.
+***10.14(iii) Host Marriott Lodging Management Agreement--Residence Inns
by and between Marriott Corporation and Marriott
International, Inc. dated September 25, 1993.
+***10.14(iv) Host Marriott Lodging Management Agreement--Fairfield Inns
by and between Marriott Corporation and Marriott
International, Inc. dated September 25, 1993.
***10.15(i) Consolidation Letter Agreement pertaining to Courtyard
Hotels dated September 25, 1993 between a subsidiary of
Marriott International, Inc. and a subsidiary of the
Company.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
***10.15(ii) Consolidation Letter Agreement pertaining to Residence Inns
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company.
***10.15(iii) Consolidation Letter Agreement pertaining to Fairfield Inns
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company.
+***10.16 Marriott Senior Living Services Facilities Lease by and
between Marriott Corporation and Marriott International,
Inc.
10.17(i) Line of Credit and Guarantee Reimbursement Agreement by and
among HMH Holdings, Inc. as borrower, Marriott
International, Inc. as lender and Host Marriott Corporation
and certain subsidiaries as guarantors dated as of October
8, 1993 (incorporated by reference to Current Report on
Form 8-K dated October 23, 1993).
***10.17(ii) Form of Amendment No. 1 to Line of Credit and Guarantee
Reimbursement Agreement among HMH Holdings, Inc. as
Borrower, Marriott International, Inc. as Lender and Host
Marriott Corporation; HMC Acquisitions, Inc.; Host Marriott
GTN Corporation; Host La Jolla, Inc.; Marriott Properties,
Inc. and Willmar Distributors, Inc. as Guarantors.
*10.18 Philadelphia Convention Center Hotel Mortgage dated as of
October 8, 1993 by and between Philadelphia Market Street
Marriott Hotel Limited Partnership and Marriott
International, Inc.
10.19 LYONs Allocation Agreement dated as of September 30, 1993 by
and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference to Current
Report on Form 8-K dated October 23, 1993)
10.20 Host Consulting Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International,
Inc. (incorporated by reference to Current Report on Form
8-K dated October 23, 1993)
10.21 Architecture and Construction Services Agreement dated as of
October 8, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Current Report on Form 8-K dated October 23, 1993)
10.22 Marriott/Host Marriott Employees' Profit Sharing Retirement
and Savings Plan and Trust (incorporated by reference to
Registration Statement No. 33-62444).
***10.23 Working Capital Agreement by and between Host Marriott
Corporation and Marriott International, Inc. dated as of
September 25, 1994.
*11. Statement re: Computation of Per Share Earnings
*22. Subsidiaries of Host Marriott Corporation.
***23.1 Consent of Arthur Andersen & Co.
***23.2 Consent of Stephen J. McKenna, Esq. (included in his opinion
filed as exhibit 5).
***23.3 Consent of Potter, Anderson & Corroon (included in its
opinion filed as exhibit 7).
24 Powers of Attorney (included on the signature pages on II-8
and II-9).
</TABLE>
- --------
* Filed on December 23, 1993
** Filed on January 4, 1994
*** Filed herewith
+ Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
II-6
<PAGE>
(B) FINANCIAL STATEMENTS SCHEDULES
The following consolidated financial statement schedules of Host Marriott
Corporation are included:
Schedule V--Property, plant and equipment
Schedule VI--Accumulated depreciation and depletion of property, plant
and equipment
Schedule X--Supplementary Income Statement Information
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
ITEM 17: UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of registrant pursuant to the provisions described under Item 14 above,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of such registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA,
STATE OF MARYLAND, ON JANUARY 19, 1994.
Host Marriott Corporation
/s/ Matthew J. Hart
By___________________________________
MATTHEW J. HART
Executive Vice President and
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
* President, Chief
- ------------------------------------- Executive Officer January 19,
STEPHEN F. BOLLENBACH (Principal 1994
Executive Officer)
and Director
/s/ Matthew J. Hart Executive Vice
- ------------------------------------- President and Chief January 19,
MATTHEW J. HART Financial Officer 1994
(Principal
Financial Officer)
Senior Vice
* President--Finance January 19,
- ------------------------------------- and Corporate 1994
JEFFREY P. MAYER Controller
(Principal
Accounting Officer)
II-8
<PAGE>
SIGNATURES TITLE DATE
* Chairman of the
- ------------------------------------- Board of Directors January 19,
RICHARD E. MARRIOTT 1994
* Director
- ------------------------------------- January 19,
R. THEODORE AMMON 1994
* Director
- ------------------------------------- January 19,
J.W. MARRIOTT, JR. 1994
Director
- ------------------------------------- January 19,
ANNE DORE MCLAUGHLIN 1994
* Director
- ------------------------------------- January 19,
HARRY L. VINCENT 1994
* Director
- ------------------------------------- January 19,
ANDREW J. YOUNG 1994
/s/ Matthew J. Hart
*By: ________________________________ January 19,
MATTHEW J. HART 1994
Attorney-in-fact
II-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
TO HOST MARRIOTT CORPORATION:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Host Marriott Corporation and
subsidiaries (formerly Marriott Corporation), included in this registration
statement and have issued our report thereon dated March 10, 1993. Our audits
were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The schedules appearing on pages S-2
through S-5 are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in
our opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen & Co.
Washington, D.C.
March 10, 1993
S-1
<PAGE>
SCHEDULE V
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
PROPERTY AND EQUIPMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS AT COST
----------------------
BALANCE BALANCE
BEGINNING OTHER RETIREMENTS TRANSFERS AT END OF
CLASSIFICATION OF YEAR ACQUISITIONS ADDITIONS OR SALES AND OTHER YEAR
-------------- --------- ------------ --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
For Fiscal Year Ended
December 28, 1990
Land and Land Improve-
ments................ $ 730 $ 20 $ 106 $ (61) $ (6) $ 789
Buildings and Lease-
hold Improvements.... 1,184 79 817 (396) 510 2,194
Furniture and Equip-
ment................. 631 14 180 (120) 132 837
Construction in Proc-
ess.................. 1,213 -- -- -- (582) 631
------- ---- ------ ----- ----- ------
Total Property and
Equipment.......... $ 3,758 $113 $1,103 $(577)(1) $ 54 (2) $4,451
======= ==== ====== ===== ===== ======
For Fiscal Year Ended
January 3, 1992
Land and Land Improve-
ments................ $ 789 $-- $ 69 $ (44) $ -- 814
Buildings and Lease-
hold Improvements.... 2,194 -- 256 (51) 89 2,488
Furniture and Equip-
ment................. 837 -- 83 (52) 33 901
Construction in Proc-
ess.................. 631 -- -- (13) (194) 424
------- ---- ------ ----- ----- ------
Total Property and
Equipment.......... $ 4,451 $-- $ 408 $(160)(3) $ (72) $4,627
======= ==== ====== ===== ===== ======
For Fiscal Year Ended
January 1, 1993
Land and Land Improve-
ments................ $ 814 $-- $ 29 $ (69) $ 2 $ 776
Buildings and Lease-
hold Improvements.... 2,488 28 112 (264) 186 2,550
Furniture and Equip-
ment................. 901 12 44 (113) 55 899
Construction in Proc-
ess.................. 424 -- -- (6) (285) 133
------- ---- ------ ----- ----- ------
Total Property and
Equipment.......... $ 4,627 $ 40 $ 185 $(452)(4) $ (42) $4,358
======= ==== ====== ===== ===== ======
</TABLE>
- --------
(1) Principally sale to investors of 63 hotels that the Company continued to
operate under long-term agreements, and sale of the fast food restaurant
division.
(2) Principally excess of proceeds from sale of fast food restaurant division
over net book value.
(3) Principally sale of family restaurants and four Courtyard hotels that the
Company continued to operate under a long-term agreement.
(4) Principally sale of seven full service hotels and sale/leaseback of
thirteen Courtyard hotels.
S-2
<PAGE>
SCHEDULE VI
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
ACCUMULATED DEPRECIATION AND AMORTIZATION
PROPERTY AND EQUIPMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT INCREASES
BEGINNING CHARGED TO RETIREMENTS TRANSFERS BALANCE AT
CLASSIFICATION OF YEAR INCOME OR SALES AND OTHER END OF YEAR
-------------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
For Fiscal Year Ended
December 28, 1990
Buildings and Lease-
hold Improvements... $225 $ 68 $(12) $ -- $281
Furniture and Equip-
ment................ 276 104 (39) -- 341
---- ---- ---- ----- ----
Total Accumulated
Depreciation and
Amortization...... $501 $172 $(51) $ -- $622
==== ==== ==== ===== ====
For Fiscal Year Ended
January 3, 1992
Buildings and Lease-
hold Improvements... $281 $ 91 $ (8) $ -- $364
Furniture and Equip-
ment................ 341 120 (42) (3) 416
---- ---- ---- ----- ----
Total Accumulated
Depreciation and
Amortization...... $622 $211 $(50) $ (3) $780
==== ==== ==== ===== ====
For Fiscal Year Ended
January 1, 1993
Buildings and Lease-
hold Improvements... $364 $ 96 $(32) $ (3) $425
Furniture and Equip-
ment................ 416 121 (64) (1) 472
---- ---- ---- ----- ----
Total Accumulated
Depreciation and
Amortization...... $780 $217 $(96) $ (4) $897
==== ==== ==== ===== ====
</TABLE>
S-3
<PAGE>
SCHEDULE IX
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
SHORT-TERM BORROWINGS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
WEIGHTED
MAXIMUM AVERAGE AVERAGE
AMOUNT AMOUNT INTEREST
WEIGHTED OUTSTANDING OUTSTANDING RATE
CATEGORY OF AGGREGATE BALANCE AT AVERAGE DURING DURING DURING
SHORT-TERM BORROWINGS(A) END OF YEAR INTEREST RATE THE YEAR THE YEAR THE YEAR
- ------------------------ ----------- ------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
For Fiscal Year Ended
December 28, 1990
Primarily Commercial
Paper................ $61 8.7% $1,646 $1,194 8.7%
For Fiscal Year Ended
January 3, 1992
Primarily Commercial
Paper................ $-- --% $ 95 $ 12 8.0%
For Fiscal Year Ended
January 1, 1993
Primarily Commercial
Paper................ $-- --% $ -- $ -- -- %
</TABLE>
- --------
(a) The Company classifies short-term borrowings as noncurrent indebtedness to
the extent funds are available under its revolving loan agreements maturing
beyond one year.
S-4
<PAGE>
SCHEDULE X
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
ITEM 1992 1991 1990
---- ---- ---- ----
<S> <C> <C> <C>
Maintenance, repairs and minor replacements...................... $253 $243 $224
Real and personal property taxes, licenses, etc.................. 193 183 149
Advertising expenses............................................. 256 253 228
</TABLE>
S-5
<PAGE>
GRAPHICS APPENDIX LIST
EDGAR Version Typeset Version
- ------------- ---------------
Inside Front Cover - Photo of a Residence Inn with a
Six-photo layout with captions caption: "Residence Inns have
(clockwise from top left): approximately 120 suites and
resemble garden apartments. They
are designed for the extended
stay market."
Photo of a Courtyard by Marriott
hotel with a caption: "Courtyard
by Marriott hotels are moderately
priced for the business transient
market. Each Courtyard has approx-
imately 150 guestrooms."
Photo of the New York Marriott Mar-
quis with a caption: "The New York
Marriott Marquis has 1,871 guest-
rooms and over 80,000 square feet of
meeting space."
Photo of a Fairfield Inn with a
caption: "Fairfield Inns are
designed for the economy minded
traveler and have approximately 120
guestrooms."
Photo of the San Francisco Marriott
with a caption: "The San Francisco
Marriott has 1,500 guestrooms and
is directly adjacent to the Moscone
Convention Center."
Photo of the Fort Lauderdale Marina
Marriott with a caption: "The Fort
Lauderdale Marina Marriott has 580
guestrooms. The Company recently
acquired this property.
Inside back cover - Layout of the Host Marriott Cor-
poration logo with the caption
"Brand Affiliations" centered over
the following logos: starting from
top left: Marriott Hotels, Resorts
and Suites; Courtyard by Marriott;
Residence Inn and Fairfield Inn.
Underneath, a caption reads as
follows: "The Company's properties
are operated under the brands
"Marriott Hotels, Resorts and
Suites," "Courtyard by Marriott,"
"Residence Inn" and "Fairfield Inn"
pursuant to management agreements
with Marriott International, Inc.
These brand names, and the logos
reproduced above, are registered
trademarks of Marriott Internation-
al, Inc."
<PAGE>
Exhibit 1
17,500,000 Shares
Host Marriott Corporation
Common Stock
($1.00 Par Value)
UNDERWRITING AGREEMENT
----------------------
January __, 1994
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY SHEARSON INC.
BT SECURITIES CORPORATION
As representatives of the several
U.S. Underwriters named in
Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
140 Broadway
New York, New York 10005
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY SHEARSON INC.
BANKERS TRUST INTERNATIONAL PLC
As representatives of the several
international managers named in
Schedule II hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
Moorgate Hall
155 Moorgate
London EC2M 6XB
England
Ladies and Gentlemen:
<PAGE>
Host Marriott Corporation, a Delaware corporation (the "Company"),
confirms its agreement with the several Underwriters (as defined below) as
follows:
1. The Shares. Subject to the terms and conditions herein set forth,
----------
the Company proposes to sell to the Underwriters an aggregate of 17,500,000
shares (the "Firm Shares") of common stock, $1.00 par value per share, of the
Company (the "Common Stock").
It is understood that, subject to the conditions hereinafter stated,
14,000,000 Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S.
Underwriters named in Schedule I hereto (the "U.S. Underwriters") in connection
with the offering and sale of such U.S. Firm Shares in the United States and
Canada to United States and Canadian Persons (as such terms are defined in the
Agreement Between U.S. Underwriters and International Managers of even date
herewith), and 3,500,000 Firm Shares (the "International Shares") will be sold
to the several International Managers named in Schedule II hereto (the
"International Managers") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), Montgomery Securities, Smith Barney Shearson Inc. and BT
Securities Corporation shall act as representatives (the "U.S. Representatives")
of the several U.S. Underwriters, and DLJ, Montgomery Securities, Smith Barney
Shearson Inc. and Bankers Trust International PLC shall act as representatives
(the "International Representatives" and, together with the U.S.
Representatives, the "Representatives") of the several International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively referred to as the "Underwriters."
The Company also proposes to sell to the several U.S. Underwriters an
aggregate of not more than 2,625,000 additional shares of Common Stock (the
"Additional Shares"), if requested by the U.S. Underwriters as provided in
Section 3 hereof. The Firm Shares and the Additional Shares are herein
collectively called the "Shares."
2. Registration Statement and Prospectus. The Company has prepared and
-------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (No. 33-51707), including a
prelimi-
2
<PAGE>
nary prospectus, subject to completion, relating to the Shares. The
registration statement contains two prospectuses to be used in connection with
the offering and sale of the Shares: the U.S. prospectus, to be used in
connection with the offering and sale of Shares in the United States and Canada
to United States and Canadian Persons, and the international prospectus, to be
used in connection with the offering and sale of Shares outside the United
States and Canada to persons other than United States and Canadian Persons. The
international prospectus is identical to the U.S. prospectus except for the
outside front and back cover pages. The registration statement, as amended at
the time it becomes effective or, if a post-effective amendment is filed with
respect thereto, as amended by such post-effective amendment at the time of its
effectiveness, including in each case financial statements and exhibits, and the
information (if any) contained in a prospectus subsequently filed with the
Commission pursuant to Rule 424(b) under the Act and deemed to be a part of the
registration statement at the time of its effectiveness pursuant to Rule 430A
under the Act, is hereinafter referred to as the "Registration Statement;" and
the U.S. prospectus and the international prospectus in the respective forms
used to confirm sales of the Shares, whether or not filed with the Commission
pursuant to Rule 424(b) under the Act, are hereinafter referred to as the
"Prospectus."
3. Agreements to Sell and Purchase. On the basis of the
-------------------------------
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Company agrees to issue and sell to each of the U.S.
Underwriters, and each of the U.S. Underwriters agrees, severally and not
jointly, to purchase from the Company, at a price per share of $_______ (the
"Purchase Price") the aggregate number of Firm Shares set forth opposite the
name of such U.S. Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company hereby agrees to
issue and sell the International Shares to the International Managers, and each
of the International Managers agrees, severally and not jointly, to purchase
from the Company at the Purchase Price the aggregate number of Firm Shares set
forth opposite the name of such International Manager in Schedule II hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to the terms and conditions hereof, the Company agrees to
issue and sell to the U.S. Underwriters up to 2,625,000 Additional Shares, and
the U.S. Underwriters shall have a right to purchase, severally and not jointly,
from time to time, up to an aggregate of 2,625,000 Additional Shares at the
Pur-
3
<PAGE>
chase Price. Additional Shares may be purchased as provided in Section 4
hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each U.S. Underwriter, severally and not jointly, agrees to purchase
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as the U.S. Representatives may determine) which bears the
same proportion to the total number of Additional Shares to be purchased as the
number of U.S. Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto bears to the total number of U.S. Firm Shares.
The Company hereby agrees, and the Company shall, concurrently with the
execution of this Agreement, deliver an agreement executed by each of the
directors and executive officers of the Company pursuant to which each such
person will agree, not to, without the prior written consent of DLJ, directly or
indirectly, offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock, or any securities convertible
into or exercisable or exchangeable for, or warrants, options or rights to
purchase or acquire, Common Stock or enter into any agreement to do any of the
foregoing, for a period of 90 days after the date of the Prospectus, except (A)
pursuant to this Agreement, (B) pursuant to stock options or stock option plans
referred to in the Prospectus or (C) warrants or convertible securities, and
Common Stock issuable upon exercise of warrants, issued or to be issued in
connection with the settlement of the Class Action Lawsuits (as defined in the
Prospectus).
The Company is advised by you that the Underwriters propose (i) to make
a public offering of their respective portions of the Shares as soon after the
effective date of the Registration Statement as in your judgment is advisable
and (ii) initially to offer the Shares upon the terms set forth in the
Prospectus.
Each U.S. Underwriter hereby makes to the Company the representations
and agreements of such U.S. Underwriter contained in the fifth paragraph of
Section 3 of the Agreement Between U.S. Underwriters and International Managers
of even date herewith. Each International Manager hereby makes to the Company
the representations and agreements of such International Underwriter contained
in the seventh, eighth, ninth and tenth paragraphs of Section 3 of such
Agreement.
4. Delivery and Payment. Delivery to you of and payment for the Firm
--------------------
Shares shall be made at 9:00 A.M., New York City time, on the fifth
4
<PAGE>
business day (such time and date being referred to as the "Closing Date")
following the date of the initial public offering of the Firm Shares as advised
by DLJ to the Company, at such place as you shall reasonably designate. The
Closing Date and the location of delivery of the Firm Shares may be varied by
agreement between DLJ and the Company.
Delivery to the U.S. Underwriters of and payment for any Additional
Shares to be purchased by the U.S. Underwriters shall be made at such place as
DLJ shall designate, at 9:00 A.M., New York City time, on such date or dates
(individually, an "Option Closing Date"), which may be the same as the Closing
Date but shall in no event be earlier than the Closing Date and shall in no
event be later than ten business days after the giving of the notice hereinafter
referred to, as shall be specified in a written notice from DLJ to the Company
of the U.S. Underwriters' determination to purchase a number, specified in said
notice, of Additional Shares. Any such notice may be given at any time within
30 days after the date of this Agreement. Any Option Closing Date and the
location of delivery of and payment for the Additional Shares may be varied by
agreement among DLJ and the Company.
Certificates for the Shares shall be registered in such names and issued
in such denominations as you shall request in writing not later than two full
business days prior to the Closing Date or the applicable Option Closing Date,
as the case may be, and shall be made available to you at the offices of DLJ (or
such other place as shall be acceptable to you) for inspection not later than
9:30 A.M., New York City time, on the business day next preceding the Closing
Date or the applicable Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or the applicable Option Closing Date, as the case may be, with any
transfer taxes payable upon initial issuance thereof duly paid by the Company,
for the respective accounts of the Underwriters against payment of the Purchase
Price by check or checks payable in New York Clearing House or similar next day
funds, to the order of the Company.
5. Agreements of the Company. The Company agrees with each
-------------------------
Underwriter that:
(a) It will, if the Registration Statement has not heretofore become
effective under the Act, file an amendment to the Registration Statement
or, if necessary pursuant to Rule 430A under the Act, a post-effective
amendment to the Registration Statement, in each case as soon as
practica-
5
<PAGE>
ble after the execution and delivery of this Agreement, and will use its
reasonable best efforts to cause the Registration Statement or such
post-effective amendment to become effective at the earliest possible time.
The Company will comply fully and in a timely manner with the applicable
provisions of Rule 424 and Rule 430A under the Act.
(b) It will advise you promptly and, if requested by any of you,
confirm such advice in writing, (i) when the Registration Statement has
become effective, if and when the Prospectus is sent for filing pursuant to
Rule 424 under the Act and when any post-effective amendment to the
Registration Statement becomes effective, (ii) of the receipt of any
comments from the Commission or any state securities commission or
regulatory authority that relate to the Registration Statement or requests
by the Commission or any state securities commission or regulatory
authority for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information, (iii) of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement, or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction, or the initiation of any
proceeding for such purpose by the Commission or any state securities
commission or other regulatory authority, and (iv) of the happening of any
event during such period as in your reasonable judgment you are required to
deliver a prospectus in connection with sales of the Shares by you which
makes any statement of a material fact made in the Registration Statement
untrue or which requires the making of any additions to or changes in the
Registration Statement (as amended or supplemented from time to time) in
order to make the statements therein not misleading or that makes any
statement of a material fact made in the Prospectus (as amended or
supplemented from time to time) untrue or which requires the making of any
additions to or changes in the Prospectus (as amended or supplemented from
time to time) in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If at any time
the Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption of the Shares under any state securities or Blue Sky laws, the
Company shall use its reasonable efforts to obtain the withdrawal or
lifting of such order at the earliest possible time.
6
<PAGE>
(c) It will furnish to you without charge two (2) signed copies (plus
one (1) additional signed copy to your legal counsel) of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits filed therewith, and will furnish to you such number
of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(d) It will not file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or
make any amendment or supplement to the Prospectus, of which you shall not
previously have been advised and provided a copy within a reasonable period
of time prior to the filing thereof or to which you shall, after being so
advised, reasonably object in writing, unless, in the reasonable judgment
of the Company and its counsel, such amendment or supplement is necessary
to comply with law; and it will prepare and file with the Commission,
promptly upon your reasonable request, any amendment to the Registration
Statement or supplement to the Prospectus which may be necessary or
advisable in connection with the distribution of the Shares by you, and
will use its reasonable best efforts to cause the same to become effective
as promptly as possible.
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period in your reasonable judgment as
a prospectus is required to be delivered in connection with sales of the
Shares by you, it will furnish to each Underwriter and dealer without
charge as many copies of the Prospectus (and of any amendment or supplement
to the Prospectus) as such Underwriters and dealers may reasonably request
for the purposes contemplated by the Act. The Company consents to the use
of the Prospectus and any amendment or supplement thereto by any
Underwriter or any dealer, both in connection with the offering or sale of
the Shares and for such period of time thereafter as the Prospectus is
required by the Act to be delivered in connection therewith.
(f) If during such period as in your reasonable judgment you are
required to deliver a prospectus in connection with sales of the Shares by
you any event shall occur as a result of which it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances existing as of the date the Pro-
7
<PAGE>
spectus is delivered to a purchaser, not misleading, or if it is necessary
to amend or supplement the Prospectus to comply with any law, it will as
promptly as practicable prepare and file with the Commission an appropriate
amendment or supplement to the Prospectus so that the statements in the
Prospectus, as so amended or supplemented, will not, in the light of the
circumstances existing as of the date the Prospectus is so delivered, be
misleading, and will comply with applicable law, and will furnish to each
Underwriter and dealer without charge such number of copies thereof as such
Underwriter or dealer may reasonably request.
(g) Prior to any public offering of the Shares, it will cooperate
with you and your counsel in connection with the registration or
qualification of the Shares for offer and sale by you under the state
securities or Blue Sky laws of such jurisdictions as you may reasonably
request (provided, that the Company shall not be obligated to qualify as a
foreign corporation in any jurisdiction in which it is not so qualified or
to take any action that would subject it to general consent to service of
process in any jurisdiction in which it is not now so subject). The
Company will continue such qualification in effect so long as required by
law for distribution of the Shares.
(h) It will make generally available to its security holders as soon
as reasonably practicable a consolidated earning statement covering a
period of at least twelve months beginning after the "effective date" (as
defined in Rule 158 under the Act) of the Registration Statement (but in no
event commencing later than 90 days after such date) which shall satisfy
the provisions of Section 11(a) of the Act and Rule 158 thereunder.
(i) It will timely complete all required filings and otherwise fully
comply in a timely manner with all provisions of the Securities Exchange
Act of 1934, as amended, including the rules and regulations thereunder
(collectively, the "Exchange Act") in connection with the public offering
of the Shares.
(j) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the
Company mailed to shareholders or filed with the Commission, and (ii) from
time to time such other information concerning the Company as you may
reasonably request.
8
<PAGE>
(k) Whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, it will pay and be responsible
for all costs, expenses, fees and taxes in connection with or incident to
(i) the printing, processing, filing, distribution and delivery under the
Act of the Registration Statement, each preliminary prospectus, the
Prospectus and all amendments or supplements thereto, (ii) the printing,
processing, execution, distribution and delivery of this Agreement, any
memoranda describing state securities or Blue Sky laws and all other
agreements, memoranda, correspondence and other documents printed,
distributed and delivered in connection with the offering of the Shares,
(iii) the registration with the Commission and the issuance and delivery of
the Shares, (iv) the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of the jurisdictions
referred to in paragraph (g) above (including, in each case, the reasonable
fees and disbursements of counsel relating to such registration or
qualification and memoranda relating thereto and any filing fees in
connection therewith), (v) furnishing such copies of the Registration
Statement, Prospectus and preliminary prospectus, and all amendments and
supplements to any of them, as may be reasonably requested by you for use
in connection with the offering or sale of the Shares by the Underwriters
or the dealers to whom the Shares may be sold, (vi) filing, registration
and clearance with the National Association of Securities Dealers, Inc.
(the "NASD") in connection with the offering of the Shares (including any
filing fees in connection therewith and the fees and disbursements of
counsel relating thereto), (vii) the listing of the Shares on the New York
Stock Exchange, (viii) any "qualified independent underwriter" if and as
required by Schedule E of the Bylaws of the NASD (including fees and
disbursements of counsel for such qualified independent underwriter) and
(ix) the performance by the Company of its other obligations under this
Agreement, the cost of its personnel and other internal costs, the cost of
printing and engraving the certificates representing the Shares, and all
expenses and taxes incident to the sale and delivery of the Shares to you
(provided that the Company shall not be obligated pursuant to this
paragraph to pay the fees and disbursements of your counsel, except to the
extent set forth in clauses (iv) and (vi) above).
(l) It will use the proceeds from the sale of the Shares in the
manner described in the Prospectus under the caption "Use of Proceeds."
9
<PAGE>
(m) It will cause the Shares to be listed on the New York Stock
Exchange and will use its reasonable best efforts to maintain such listing
while any of the Shares are outstanding.
(n) It will use its reasonable best efforts to do and perform all
things required to be done and performed under this Agreement by it prior
to or after the Closing Date and to satisfy all conditions precedent on its
part to the delivery of the Shares.
6. Representations and Warranties. The Company represents and
------------------------------
warrants to each Underwriter that:
(a) When the Registration Statement becomes effective, including at
the date of any post-effective amendment, at the date of the Prospectus (if
different) and at the Closing Date, the Registration Statement will comply
in all material respects with the provisions of the Act, and will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; the Prospectus and any supplements or
amendments thereto will not at the date of the Prospectus, at the date of
any such supplements or amendments and at the Closing Date contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties contained in this paragraph (a) shall not
apply to statements in or omissions from the Registration Statement or the
Prospectus (or any supplement or amendment to them) made in reliance upon
and in conformity with information relating to any Underwriter furnished to
the Company in writing by or on behalf of any Underwriter through you
expressly for use therein. The Company acknowledges for all purposes under
this Agreement that the statements with respect to price and underwriting
discount and the last paragraph all as set forth on the cover page and
under the caption "Underwriting" in the Prospectus (or any amendment or
supplement) constitute the only written information furnished to the
Company by any Underwriter expressly for use in the Registration Statement
or the Prospectus (or any amendment or supplement to them) and that the
Underwriters shall not be deemed to have provided any other information
(and therefore are not responsible for any such statement or omission).
10
<PAGE>
(b) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act.
(c) The Company and each of its "significant subsidiaries" (as
defined under Regulation S-X promulgated by the Commission) (each, a
"Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized, is validly existing as a corporation in good standing under the
laws of its jurisdiction of organization and has the requisite corporate
power and authority to carry on its business as it is currently being
conducted, to own, lease and operate its properties; and the Company has
the requisite power and authority to authorize the offering of the Shares,
to execute, deliver and perform this Agreement, and to issue, sell and
deliver the Shares; and each of the Company and the Subsidiaries is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction where the operation, ownership or leasing of
property or the conduct of its business requires such qualification, except
where the failure to be so qualified would not, singly or in the aggregate,
have a material adverse effect on the properties, business, results of
operations, condition (finincial or otherwise), business affairs or
prospects of the Company and its subsidiaries taken as a whole (a "Material
Adverse Effect").
(d) All of the issued and outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary have been duly and validly
authorized and issued, and all of the shares of capital stock of, or other
ownership interests in, each Subsidiary are owned, directly or through
Subsidiaries, by the Company. All such shares of capital stock are fully
paid and nonassessable, and are owned free and clear of any security
interest, mortgage, pledge, claim, lien or encumbrance (each, a "Lien"),
except for (i) security interests relating to the New Notes (as defined in
the Prospectus) granted pursuant to the New Note Indenture (as defined in
the Prospectus), (ii) security interests relating to the Old Series I Notes
(as defined in the Prospectus) granted pursuant to the Old Note Indenture
(as defined in the Prospectus) and (iii) security interests granted to
Marriott International, Inc. pursuant to the Credit Agreement (as defined
in the Prospectus). There are no outstanding subscriptions, rights,
warrants, options, calls, convertible securities, commitments of sale or
Liens related to
11
<PAGE>
or entitling any person to purchase or otherwise to acquire any shares of
the capital stock of, or other ownership interest in, any Subsidiary.
(e) The authorized, issued and outstanding capital stock of the
Company was, as of the date of the Prospectus, as set forth in the
Prospectus under "Pro Forma Consolidated Balance Sheet" and "Description of
Capital Stock;" all the shares of issued and outstanding Common Stock have
been duly authorized and validly issued and are fully paid, nonassessable
and not subject to any preemptive or similar rights except for the Marriott
International Purchase Right (as defined in the Prospectus); the Shares
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set forth
herein, will be validly issued and fully paid and nonassessable; the
capital stock of the Company, including the Common Stock, conforms in all
material respects to all statements relating thereto in the Prospectus and
the Registration Statement; and the issuance of the Shares by the Company
will not be subject to preemptive or other similar rights.
(f) Neither the Company nor any of its subsidiaries is in violation
of its respective charter or bylaws or in default in the performance of any
bond, debenture, note or any other evidence of indebtedness or any
indenture, mortgage, deed of trust or other contract, lease or other
instrument to which the Company or any of its subsidiaries is a party or by
which any of them is bound, or to which any of the property or assets of
the Company or any of its subsidiaries is subject except for such
violations or defaults which could not reasonably be expected to have a
Material Adverse Effect.
(g) This Agreement has been duly authorized and validly executed and
delivered by the Company and constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance
with its terms (assuming the due execution and delivery hereof by you).
(h) The execution and delivery of this Agreement by the Company, the
issuance and sale of the Shares, the performance of this Agreement and the
consummation of the transactions contemplated by this Agreement will not
(i) conflict with or result in a breach or violation of any of the
respective charters or bylaws of the Company or any of its subsidiaries or
12
<PAGE>
any of the terms or provisions of, or (ii) constitute a default or cause an
acceleration of any obligation under or result in the imposition or
creation of (or the obligation to create or impose) a Lien with respect to,
any material bond, note, debenture or other evidence of indebtedness or any
material indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any of the Subsidiaries is a party or by
which it or any of them is bound, or to which any properties of the Company
or any of the Subsidiaries is or may be subject, or (iii) contravene any
order of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties, or
violate or conflict with any statute, rule or regulation or administrative
or court decree applicable to the Company or any of its subsidiaries, or
any of their respective properties except in the case of clause (iii)
above, for such conflicts, or violations which would not have a Material
Adverse Effect.
(i) Except as set forth in the Prospectus, there is no action, suit
or proceeding before or by any court or governmental agency or body,
domestic or foreign, pending against or affecting the Company or any of the
Subsidiaries, or any of their respective properties, which is required to
be disclosed in the Registration Statement or the Prospectus, or which
could reasonably be expected to result, singly or in the aggregate, in a
Material Adverse Effect or which could reasonably be expected to materially
and adversely affect the consummation of this Agreement or the transactions
contemplated hereby, and to the best of the Company's knowledge, no such
proceedings are contemplated or threatened. No contract or document of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement is
not so described or filed.
(j) To the best knowledge of the Company, no action has been taken
and no statute, rule or regulation or order has been enacted, adopted or
issued by any governmental agency or body which prevents the issuance of
the Shares, suspends the effectiveness of the Registration Statement,
prevents or suspends the use of any preliminary prospectus or suspends the
sale of the Shares in any jurisdiction referred to in Section 5(g) hereof;
and no injunction, restraining order or order of any nature by a Federal or
state court of competent jurisdiction has been issued with respect to the
Company or any of its Subsidiaries which would prevent or suspend the
issuance or sale of the Shares, the effectiveness of the Regis-
13
<PAGE>
tration Statement, or the use of any preliminary prospectus in any
jurisdiction referred to in Section 5(g) hereof. Every request of the
Commission or any securities authority or agency of any jurisdiction for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with in all material respects.
(k) Except as would not, singly or in the aggregate, have a Material
Adverse Effect, neither the Company nor any of its subsidiaries is in
violation of any environmental, safety or similar law or regulation
applicable to its business relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), lacks any permits,
licenses or other approvals required of them under applicable Environmental
Laws or is violating any terms and conditions of any such permit, license
or approval.
(l) No labor dispute with the employees of the Company which is or
could reasonably be expected to become material to the Company exists or,
to the knowledge of the Company, is imminent; and the Company is not aware
of any existing or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers or contractors, or of Marriott
International, which would have a Material Adverse Effect.
(m) (i) The Company and each of its Subsidiaries has good and
marketable title, free and clear of all Liens, to all property and assets
described in the Registration Statement as being owned by it, except for
Liens described or reflected in the Prospectus (including all Liens
relating to mortgages reflected on the financial statements included in the
Prospectus) or Liens that would not have a Material Adverse Effect and (ii)
all liens, charges, encumbrances, claims, or restrictions on or affecting
the properties and assets of the Company or any of its subsidiaries that
are required to be disclosed in the Prospectus are disclosed therein.
(n) The firm of accountants that has certified or shall certify the
applicable consolidated financial statements and supporting schedules of
the Company filed or to be filed with the Commission as part of the
Registration Statement and the Prospectus are independent public
accountants with respect to the Company and its subsidiaries, as required
by the Act. The consolidated historical and pro forma financial
--- -----
statements,
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together with related schedules and notes, set forth in the Prospectus and
the Registration Statement comply as to form in all material respects with
the requirements of the Act. Such historical financial statements fairly
present the consolidated financial position of the Company and its
subsidiaries at the respective dates indicated and the results of their
operations and their cash flows for the respective periods indicated, in
accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout such periods. Such pro forma financial
--- -----
statements have been prepared on a basis consistent with such historical
statements, except for the pro forma adjustments specified therein, and
--- -----
give effect to assumptions made on a reasonable basis and present fairly
the transactions reflected thereby as indicated in the Prospectus. The
other financial and statistical information and data included in the
Prospectus and in the Registration Statement, historical and pro forma,
--- -----
are, in all material respects, accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Company.
(o) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and up to the
Closing Date, neither the Company nor any of the Subsidiaries has incurred
any liabilities or obligations, direct or contingent, which are material to
the Company and its subsidiaries taken as a whole, nor entered into any
transaction not in the ordinary course of business and there has not been,
singly or in the aggregate, any material adverse change, or any development
which would involve a material adverse change, in the properties, business,
results of operations, condition (financial or otherwise), business
affairs or prospects of the Company and its subsidiaries taken as a whole
(a "Material Adverse Change").
(p) No authorization, approval or consent or order of, or filing
with, any court or governmental body or agency is necessary in connection
with the transactions contemplated by this Agreement, except such as may be
required by the NASD or have been obtained and made under the Act, the
Exchange Act or state securities or Blue Sky laws or regulations. Neither
the Company nor any of its affiliates is presently doing business with the
government of Cuba or with any person or affiliate located in Cuba.
(q) (i) Each of the Company and its subsidiaries has all
certificates, consents, exemptions, orders, permits, licenses,
authorizations, or
15
<PAGE>
other approvals (each, an "Authorization") of and from, and has made all
declarations and filings with, all Federal, state, local and other
governmental authorities, all self-regulatory organizations and all courts
and other tribunals, necessary or required to own, lease, license and use
its properties and assets and to conduct its business in the manner
described in the Prospectus, and all such Authorizations are in full force
and effect, except to the extent that the failure to obtain or file or
cause to remain in effect would not, singly or in the aggregate, have a
Material Adverse Effect and (ii) the Company and its subsidiaries are in
compliance in all material respects with the terms and conditions of all
such Authorizations and with the rules and regulations of the regulatory
authorities and governing bodies having jurisdiction with respect thereto.
(r) Neither the Company nor any of the Subsidiaries is an "investment
company" or a company "controlled" by an investment company within the
meaning of the Investment Company Act of 1940, as amended.
(s) No holder of any security of the Company has or will have any
right to require the registration of such security by virtue of any
transaction contemplated by this Agreement.
(t) The Shares have been approved for listing on the New York Stock
Exchange, subject to notice of issuance.
(u) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters pursuant to
Section 8 shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters covered thereby.
(v) The Company and each of its consolidated subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability; (3) access to
assets is permitted only in accordance with management's general or
specific authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
16
<PAGE>
(w) The Company has not taken, directly or indirectly, any action
designed to cause or to result in, or that has constituted or which could
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale
of the Shares.
(x) Neither the Company nor any of its subsidiaries is in violation
of any statute, law, ordinance, governmental rule or regulation or any
judgment, decree, rule or order of any court or governmental agency or
authority applicable to the Company or any of its subsidiaries or any of
their properties or assets, except such violations as would not, singly or
in the aggregate, have a Material Adverse Effect.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless (i) each of the
Underwriters and (ii) each person, if any, who controls (within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act) any of the
Underwriters (any of the persons referred to in this clause (ii) being
hereinafter referred to as a "controlling person"), and (iii) the
respective officers, directors, partners, employees, representatives and
agents of any of the Underwriters or any controlling person (any person
referred to in clause (i), (ii) or (iii) may hereinafter be referred to as
an "Indemnified Person") to the fullest extent lawful, from and against any
and all losses, claims, damages, liabilities, judgments, actions and
expenses (including, without limitation, and as incurred, reimbursement of
all reasonable costs of investigating, preparing, pursuing or defending any
claim or action, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, including the reasonable fees and
expenses of counsel to any Indemnified Person) directly or indirectly
caused by, related to, based upon, arising out of or in connection with any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement (or any amendment thereto), including the
information deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) promulgated under the Act, if applicable, or the Prospectus
(including any amendment or supplement thereto) or any preliminary
prospectus, or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the circumstances under
which they were made) not misleading; provided, however, that (i) this
-------- -------
17
<PAGE>
indemnity agreement shall not apply to such losses, claims, damages,
liabilities or expenses are caused by an untrue statement or omission or
alleged untrue statement or omission that is made in reliance upon and in
conformity with information relating to any of the Underwriters furnished
in writing to the Company by any of the Underwriters expressly for use in
the Registration Statement (or any amendment thereto) or the Prospectus (or
any amendment or supplement thereto) or any preliminary prospectus and (ii)
the foregoing indemnity agreement with respect to any untrue statement
contained in or omission from a preliminary prospectus shall not inure to
the benefit of the Underwriter from whom the person asserting any such
losses, liabilities, claims, damages or expenses purchased Shares, or any
person controlling such Underwriter, if a copy of the Prospectus (as then
amended or supplemented, if the Company shall have furnished any amendments
or supplements thereto) was not sent or given by or on behalf of the
Underwriters to such person, if such is required by law, at or prior to the
written confirmation of the sale of such Shares to such person and the
untrue statement contained in or omission from such preliminary prospectus
was corrected in the Prospectus (or the Prospectus as amended or
supplemented). The Company shall notify you promptly of the institution,
threat or assertion of any claim, proceeding (including any governmental
investigation) or litigation in connection with the matters addressed by
this Agreement which involves the Company or an Indemnified Person.
(b) In case any action or proceeding (including any governmental
investigation) shall be brought or asserted against any of the Indemnified
Persons with respect to which indemnity may be sought against the Company,
the applicable Underwriter with respect to such Indemnified Person shall
promptly notify the Company in writing (provided, that the failure to give
such notice shall not relieve the Company of its obligations pursuant to
this Agreement unless and only to the extent that such omission results in
the loss or compromise of any material rights or defenses by the Company,
as determined by a court of competent jurisdiction by final judgment). The
Company shall not, in connection with any one such action or proceeding or
separate but substantially similar or related actions or proceedings in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) at any time
for such Indemnified Persons, which firm shall be designated in writing by
the Representatives. The Company shall not be liable for any
18
<PAGE>
settlement of any such action or proceeding effected without the Company's
prior written consent, and the Company agrees to indemnify and hold
harmless any Indemnified Person from and against any loss, claim, damage,
liability or expense by reason of any settlement of any action effected
with the written consent of the Company. The Company shall not, without
the prior written consent of each Indemnified Person affected thereby
(which consent will not unreasonably be withheld), settle or compromise or
consent to the entry of judgment in or otherwise seek to terminate any
pending or threatened action, claim, litigation or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether or
not any Indemnified Person is a party thereto), unless such settlement,
compromise, consent or termination includes an unconditional release of
each Indemnified Person affected thereby from all liability arising out of
such action, claim, litigation or proceeding.
(c) Each of the Underwriters agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement, any person controlling (within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act) the Company,
and the officers, directors, partners, employees, representatives and
agents of each such person, to the same extent as the foregoing indemnity
from the Company to each of the Indemnified Persons, but only with respect
to claims and actions based on information relating to such Underwriter
furnished in writing by such Underwriter expressly for use in the
Prospectus. In case any action or proceeding (including any governmental
investigation) shall be brought or asserted against the Company, any of its
directors, any such officer, or any such controlling person based on the
Registration Statement, the Prospectus or any preliminary prospectus in
respect of which indemnity may be sought against any Underwriter pursuant
to the foregoing sentence, the Underwriter shall have the rights and duties
given to the Company by Section 7(b) above (except that if the Company
shall have assumed the defense thereof, such Underwriter shall not be
required to do so, but may employ separate counsel therein and participate
in the defense thereof but the fees and expenses of such counsel shall be
at the expense of such Underwriter), and the Company, its directors, any
such officers, and each such controlling person shall have the rights and
duties given to the Indemnified Person by Section 7(b) above.
19
<PAGE>
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or expenses referred to herein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, liabilities and expenses (i) in such proportion as
is appropriate to reflect the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other
hand from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the indemnifying parties
and the indemnified party, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one
hand, and any of the Underwriters, on the other hand, shall be deemed to be
in the same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by such Underwriter, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the
Company and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact related
to information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The indemnity and
contribution obligations set forth herein shall be in addition to any
liability or obligation such party may otherwise have to any indemnified
party.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
--- ----
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities or expenses referred
to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
20
<PAGE>
provisions of this Section 7, none of the Underwriters (and its related
Indemnified Persons) shall be required to contribute, in the aggregate, any
amount in excess of the amount by which the total underwriting discount
applicable to the Shares purchased by such Underwriter exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 7(d) are
several in proportion to the respective number of Shares purchased by each
of the Underwriters hereunder and not joint.
8. Conditions of Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters to purchase the Shares under this Agreement are subject to the
satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the
same force and effect as if made on and as of the Closing Date. The Company
shall have performed or complied with all of its obligations and agreements
herein contained and required to be performed or complied with by it at or
prior to the Closing Date.
(b) (i) The Registration Statement shall have become effective (or,
if a post-effective amendment is required to be filed pursuant to Rule 430A
promulgated under the Act, such post-effective amendment shall have become
effective) not later than 5:00 p.m., New York City time, on the date of
this Agreement or at such later date and time as you may approve in
writing, (ii) at the Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission and every request for additional
information on the part of the Commission shall have been complied with in
all material respects, and (iii) no stop order suspending the sale of the
Shares in any jurisdiction referred to in Section 5(g) shall have been
issued and no proceeding for that purpose shall have been commenced or
shall be pending or threatened.
21
<PAGE>
(c) No action shall have been taken and no statute, rule, regulation
or order shall have been enacted, adopted or issued by any governmental
agency which would, as of the Closing Date, prevent the issuance of the
Shares; no injunction, restraining order or order of any nature by a
Federal or state court of competent jurisdiction shall have been issued as
of the Closing Date which would prevent the issuance of the Shares and on
the Closing Date, no action, suit or proceeding shall be pending against,
or, to the knowledge of the Company threatened against the Company or any
of its subsidiaries before any court or arbitrator or any governmental
body, agency or official which, if adversely determined, would interfere
with or adversely affect the issuance of the Shares or could reasonably be
expected to have a Material Adverse Effect, or in any manner invalidate
this Agreement or the Shares.
(d) (i) Since the date hereof, there shall not have been any Material
Adverse Change, and (ii) except as set forth in the Prospectus, since the
date of the latest balance sheet included in the Registration Statement and
the Prospectus, there shall not have been any material change in the
capital stock or long-term debt, or material increase in short-term debt,
of the Company or any of its consolidated subsidiaries.
(e) You shall have received a certificate of the Company, dated the
Closing Date, executed on behalf of the Company, by the President or any
[Vice President] and a principal financial or accounting officer of the
Company confirming, as of the Closing Date, the matters set forth in
paragraphs (a), (b), (c) and (d) of this Section 8.
(f) On the Closing Date, you shall have received:
(1) an opinion (satisfactory to you and your counsel), dated the
Closing Date, of Latham & Watkins, counsel for the Company, to the effect
that:
(i) the Company and each of the Subsidiaries is a validly
existing corporation in good standing under the laws of its
jurisdiction of incorporation and has the requisite corporate power
and authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and the
Prospectus, and to execute, deliver and perform this Agreement;
22
<PAGE>
(ii) the Company has full corporate power and authority to
execute, deliver and perform this Agreement and to issue, sell and
deliver the Shares as contemplated by this Agreement;
(iii) this Agreement has been duly authorized, executed and
delivered by the Company;
(iv) the Shares have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued
and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth herein, will be validly issued
and fully paid and nonassessable; and the issuance of the Shares is
not subject to any preemptive or, to the best knowledge of such
counsel, any other similar rights that entitle or will entitle any
person to acquire any shares of Common Stock from the Company upon the
issuance of the Shares by the Company;
(v) the Registration Statement has become effective under the
Act; any required filing of the Prospectus, and any supplements
thereto, pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); and to the best
knowledge of such counsel no stop order suspending the effectiveness
of the Registration Statement or any part thereof has been issued and
no proceedings therefor have been instituted or are pending or
contemplated under the Act; and
(vi) at the time it became effective and on the Closing Date,
the Registration Statement complied as to form in all material
respects with the Act; and
(2) an opinion (satisfactory to you and your counsel), dated the
Closing Date, of Christopher Townsend, Vice President and Deputy General
Counsel of the Company, to the effect that:
(i) the Company and each of the Subsidiaries is a duly
organized and validly existing corporation in good standing under the
laws of its jurisdiction of incorporation, has the requisite corporate
power and authority to own, lease and operate
23
<PAGE>
its properties and to conduct its business as described in the
Registration Statement and the Prospectus, and to execute, deliver and
perform this Agreement, and is duly qualified as a foreign corporation
and in good standing in each jurisdiction where the ownership, leasing
or operation of property or the conduct of its business requires such
qualification, except where the failure to be so qualified would not
have, singly or in the aggregate, a Material Adverse Effect;
(ii) (A) the authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus under "Pro Forma
Consolidated Balance Sheet" and "Description of Capital Stock" and
conforms in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus; and (B)
the shares of issued and outstanding Common Stock have been duly
authorized and are validly issued and are fully paid and
nonassessable;
(iii) all of the issued and outstanding shares of capital
stock of, or other ownership interests in, each Subsidiary have been
duly and validly authorized and issued, and the shares of capital
stock of, or other ownership interests in, each Subsidiary are owned,
directly or through Subsidiaries, by the Company, are fully paid and
nonassessable, and, to the best knowledge of such counsel, are owned
free and clear of any Lien, except for Liens relating to the Old
Series I Notes, the New Notes or the Credit Agreement or as otherwise
disclosed in the Prospectus;
(iv) to the best knowledge of such counsel, there are no
outstanding subscriptions, rights, warrants, options, calls,
convertible securities, commitments of sale or Liens related to or
entitling any person to purchase or otherwise to acquire any shares of
the capital stock of, or other ownership interest in, any Subsidiary;
(v) neither the Company nor any of the Subsidiaries is an
"investment company" or a company "controlled" by an investment
company within the meaning of the Investment Company Act of 1940, as
amended;
24
<PAGE>
(vi) to the best knowledge of such counsel, no holder of any
security of the Company has any right to require registration of
shares of Common Stock or any other security of the Company;
(vii) to the best knowledge of such counsel, there is no
current, pending or threatened action, suit or proceeding before any
court or governmental agency, authority or body or any arbitrator
involving the Company or any Subsidiary or to which any of their
respective properties is subject of a character required to be
disclosed in the Registration Statement which is not adequately
disclosed in the Prospectus;
(viii) no authorization, approval, consent or order of, or
filing with, any court or governmental body or agency is required for
the issuance and sale of the Shares pursuant to this Agreement, except
such as have been obtained and made under the Act, the Exchange Act,
state securities or Blue Sky laws or regulations or such as may be
required by the NASD; the execution and delivery of this Agreement,
the issuance and sale of the Shares and the performance of this
Agreement will not result in a breach or violation of (A) any of the
respective charters or bylaws of the Company or any of the
Subsidiaries or (B) any of the terms or provisions of any agreement or
instrument which is filed as an exhibit to the Registration Statement
and to which the Company or any of the Subsidiaries is a party or by
which any of them is bound, or to which any of the properties of the
Company or any of the Subsidiaries is subject, or (C) to the best
knowledge of such counsel, constitute a default under, any statute,
rule or regulation to which the Company or any Subsidiary is bound or
to which any of the properties of the Company or any Subsidiary is
subject or (D) to the best knowledge of such counsel any order of any
court or governmental agency or body having jurisdiction over the
Company or any of the Subsidiaries or any of their properties which
conflict, breach or default in each of the cases described in clauses
(B), (C) and (D) would have a Material Adverse Effect;
(ix) to the best knowledge of such counsel, (A) there are no
franchises, contracts, indentures, mortgages, loan
25
<PAGE>
agreements, notes, leases or other instruments to which the Company or
any Subsidiary is a party or by which any of them may be bound that
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
other than those described therein or filed as exhibits thereto and
the descriptions thereof are accurate in all material respects and
present fairly the information required to be shown, (B) no default
exists in the due performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument so described
or filed, or any agreement identified on a schedule attached to the
opinion, except for defaults which would not have a Material Adverse
Effect and (C) the statements in the Prospectus under the caption
"Description of Capital Stock," "Purposes and Anti-takeover Effects of
Certain Provisions of the Company Certificate and Bylaws and the
Marriott International Purchase Right," "Risk Factors - Pending
Litigation," "Financing" and "Relationship Between the Company and
Marriott International" insofar as such statements constitute a
summary of legal matters, documents or proceedings referred to
therein, are accurate in all material respects.
In addition, Latham & Watkins and Christopher Townsend shall state that
although such counsel has not undertaken to investigate or verify independently,
and is not passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus included therein (except to the extent expressly
referred to in clause (xv)(C) above), during the course of such counsel's
participation in conferences with officers and other representatives of the
Company, representatives of the independent public accountants for the Company
and you, at which the contents of the Registration Statement and the Prospectus
were discussed (relying as to materiality to a large extent upon the statements
of officers and other representatives of the Company), no facts have come to the
attention of such counsel which cause it to (1) believe that (except for
financial statements, financial [and statistical] data and schedules included
therein or omitted therefrom as to which such counsel need not express any
belief) the Registration Statement (as amended or supplemented, if applicable)
at the time the Registration Statement or any post-effective amendment became
effective contained any untrue statement of a material fact or omitted to state
a material fact
26
<PAGE>
required to be stated therein or necessary to make the statements therein not
misleading or (2) believe that (except for financial statements, financial [and
statistical] data and schedules included therein or omitted therefrom as to
which such counsel need not express any belief) the Prospectus (as amended or
supplemented) as of its date or the Closing Date contains any untrue statement
of a material fact or omits to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
In rendering such opinions, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers and other representatives of the Company, certificates of public
officials, and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and its Subsidiaries,
provided that copies of any such statements or certificates shall be delivered
or otherwise made available to your counsel.
(g) You shall have received an opinion, dated the Closing Date, of
Skadden, Arps, Slate, Meagher & Flom ("Skadden Arps"), counsel for the
Underwriters, in form and substance reasonably satisfactory to you.
(h) You shall have received letters on and as of the date hereof as
well as on and as of the Closing Date (in the latter case constituting an
affirmation of the statements set forth in the former), in form and
substance satisfactory to you, from Arthur Andersen & Co., independent
public accountants, with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus.
(i) Skadden Arps shall have been furnished with such documents and
opinions, in addition to those set forth above, as they may reasonably
require for the purpose of enabling them to review or pass upon the matters
referred to in this Section 8 and in order to evidence the accuracy,
completeness or satisfaction in all material respects of any of the
representations, warranties or conditions herein contained.
(j) Prior to the Closing Date, the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
27
<PAGE>
(k) At the Closing Date, the Shares shall have been approved for
listing on the New York Stock Exchange, subject to notice of issuance.
(l) The Line of Credit and Guarantee Reimbursement Agreement by and
among HMH Holdings, Inc. as borrower, Marriott International, Inc. as
lender and the Company and certain subsidiaries as guarantors dated as of
October 8, 1993 shall have been amended to waive the requirement that net
proceeds received by the Company from the sale of the Shares be used to
repay amounts outstanding thereunder and to permit the Company to use such
net proceeds as set forth in the Prospectus under "Use of Proceeds."
(m) If the Option Closing Date is after the Closing Date, each of the
foregoing conditions shall have been satisfied as of the Option Closing
Date as if the references to the "Closing Date" therein were references to
the "Option Closing Date."
9. Defaults. If on the Closing Date or any Option Closing Date, as the
--------
case may be, any of the Underwriters shall fail or refuse to purchase Firm
Shares or Additional Shares, as the case may be, which it has agreed to purchase
hereunder on such date, and the aggregate amount of Firm Shares or Additional
Shares, as the case may be, that such defaulting Underwriter(s) agreed but
failed or refused to purchase does not exceed 10% of the total number of Shares
to be purchased on such date by all of the Underwriters, each non-defaulting
Underwriter shall be obligated severally, in the proportion which the number of
Firm Shares set forth opposite its name in Schedules I and II hereto bears to
the total number of Firm Shares which all the non-defaulting Underwriters, as
the case may be, have agreed to purchase, or in such other proportion as you may
specify, to purchase the Firm Shares or Additional Shares, as the case may be,
that such defaulting Underwriter or Underwriters, as the case may be, agreed but
failed or refused to purchase on such date; provided that in no event shall the
--------
number of Firm Shares or Additional Shares, as the case may be, that any
Underwriter has agreed to purchase pursuant to Section 3 hereof be increased
pursuant to this Section 9 by an amount in excess of one-ninth of such number of
Firm Shares or Additional Shares, as the case may be, without the written
consent of such Underwriter. If, on the Closing Date or on the Option Closing
Date, as the case may be, any of the Underwriters shall fail or refuse to
purchase the Firm Shares or the Additional Shares, as the case may be, with
respect to which such default exceeds 10% of such total number of the Shares to
be purchased on such date by all Underwriter(s) and arrangements satisfactory to
the other Underwriter(s) and
28
<PAGE>
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability on the part of
the non-defaulting Underwriter(s) or the Company, except as otherwise provided
in Section 10. In any such case that does not result in termination of this
Agreement, the Underwriters or the Company may postpone the Closing Date or the
Option Closing Date, as the case may be, for not longer than seven (7) days, in
order that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. Any action
taken under this paragraph shall not relieve a defaulting Underwriter from
liability in respect of any default by any such Underwriter under this
Agreement.
10. Effective Date of Agreement and Termination. This Agreement shall
-------------------------------------------
become effective upon the later of (i) the execution and delivery of this
Agreement by the parties hereto, (ii) the effectiveness of the Registration
Statement, and (iii) if a post-effective amendment is required to be filed
pursuant to Rule 430A under the Act, the effectiveness of such post-effective
amendment.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by notice to the Company if any of the following has occurred: (i)
subsequent to the date the Registration Statement is declared effective or the
date of this Agreement, any Material Adverse Change occurs which, in your
judgment, makes it impracticable or inadvisable to market the Shares or to
enforce contracts for the sale of the Shares, (ii) any outbreak or escalation of
hostilities or other national or international calamity or crisis or material
adverse change in the financial markets of the United States or elsewhere, or
any other substantial national or international calamity or emergency if the
effect of such outbreak, escalation, calamity, crisis or emergency would, in
your judgment, make it impracticable or inadvisable to market the Shares or to
enforce contracts for the sale of the Shares, (iii) any suspension or limitation
of trading generally in securities on the New York Stock Exchange, the American
Stock Exchange, the Nasdaq Stock Market or in the over-the-counter markets or
any setting of minimum prices for trading on such exchanges or markets, (iv) any
declaration of a general banking moratorium by Federal, New York or Maryland
authorities, (v) the taking of any action by any Federal, state or local
government or agency in respect of its monetary or fiscal affairs that in your
judgment has a material adverse effect on the financial markets in the United
States, and would, in your judgment, make it impracticable or inadvisable to
market the Shares or to enforce contracts for the sale of the Shares or (vi) the
enactment, publication, decree, or other promulgation of any Federal or state
statute, regulation, rule or order of any court or other
29
<PAGE>
governmental authority which would, in your judgment, have a Material Adverse
Effect.
The indemnities and contribution provisions and the other agreements,
representations and warranties of the Company, its officers and directors and of
the Underwriters set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and payment
for the Shares, regardless of (i) any investigation, or statement as to the
results thereof, made by or on behalf of any of the Underwriters or by or on
behalf of the Company, the officers or directors of the Company or any
controlling person of the Company, (ii) acceptance of the Shares and payment for
them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters pursuant to
clauses (i) or (vii) of the second paragraph of this Section 10 or because of
the failure or refusal on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
you for all out-of-pocket expenses (including the fees and disbursements of
counsel) incurred by you. Notwithstanding any termination of this Agreement,
the Company shall be liable for all expenses which it has agreed to pay pursuant
to Section 5(k) hereof.
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters, any
Indemnified Person referred to herein and their respective successors and
assigns, all as and to the extent provided in this Agreement, and no other
person shall acquire or have any right under or by virtue of this Agreement.
The terms "successors and assigns" shall not include a purchaser of any of the
Shares from any of the Underwriters merely because of such purchase.
11. Notices. Notices given pursuant to any provision of this Agreement
-------
shall be addressed as follows: (a) if to the Company, to it at Host Marriott
Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817, Attention: General
Counsel, with a copy to Latham & Watkins, 1001 Pennsylva-
30
<PAGE>
nia Avenue, N.W., Suite 1300, Washington, D.C. 20004, Attention: Bruce E.
Rosenblum, Esq., and (b) if to any Underwriter, to Donaldson, Lufkin & Jenrette
Securities Corporation, 140 Broadway, New York, New York 10005, Attention:
Syndicate Department, and, in each case, with a copy to Skadden, Arps, Slate,
Meagher & Flom at 300 South Grand Avenue, Suite 3400, Los Angeles, California
90071, Attention: Gregg A. Noel, Esq., or in any case to such other address as
the person to be notified may have requested in writing.
12. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK.
13. Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto and their respective successors and the officers
and directors and other persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
31
<PAGE>
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument. Please confirm that the foregoing
correctly sets forth the agreement among the Company and you.
Very truly yours,
HOST MARRIOTT CORPORATION
By:
------------------------
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY SHEARSON INC.
BT SECURITIES CORPORATION
Acting severally on behalf of themselves
and as representatives of the several U.S.
Underwriters named in Schedule I
hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-------------------------
Name:
Title:
32
<PAGE>
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
SMITH BARNEY SHEARSON INC.
BANKERS TRUST INTERNATIONAL PLC
Acting on behalf of themselves and
as representatives of the several
International Managers named in
Schedule II hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-------------------------
Name:
Title:
<PAGE>
SCHEDULE I
Number of
Firm Shares
to be Purchased
---------------
Donaldson, Lufkin & Jenrette
Securities Corporation ...............
Montgomery Securities .................
Smith Barney Shearson Inc .............
BT Securities Corporation .............
[additional names]
------------
Total ................................. 14,000,000
===========
<PAGE>
SCHEDULE II
Number of
Firm Shares
to be Purchased
---------------
Donaldson, Lufkin & Jenrette
Securities Corporation ...............
Montgomery Securities .................
Smith Barney Shearson Inc .............
Bankers Trust International PLC .......
[additional names]
-----------
Total ................................. 3,500,000
==========
<PAGE>
Exhibit 4.4(ii)
- --------------------------------------------------------------------------------
FIRST AMENDMENT DATED OCTOBER 8, 1993
TO
RIGHTS AGREEMENT
DATED AS OF FEBRUARY 3, 1989
BETWEEN MARRIOTT CORPORATION
AND THE BANK OF NEW YORK
- --------------------------------------------------------------------------------
<PAGE>
This First Amendment ("Amendment") to the Rights Agreement dated as of
February 3, 1989 ("Rights Agreement") between Marriott Corporation (the
"Company") and The Bank of New York, a New York banking corporation (the "Rights
Agent") is entered into as of this 8th day of October, 1993 between the Company
and the Rights Agent.
WITNESSETH:
----------
WHEREAS, the Company has declared a special dividend (the "Special
Dividend"), consisting of the distribution to holders of outstanding shares of
common stock, par value $1.00 per share of the Company (the "Common Stock") of
all the outstanding shares of common stock, par value $1.00 per share (the "MII
Common Stock") of the Company's wholly-owned subsidiary, Marriott International,
Inc. ("MII");
WHEREAS, in connection with the Special Dividend, the Company and MII
have entered into a Distribution Agreement (the "Distribution Agreement"),
pursuant to which the Company has granted to MII, effective upon consummation of
the Special Dividend, the right (the "MII Purchase Right") to purchase up to 20%
of each class of the then outstanding voting stock of the Company upon the
occurrence of certain events involving changes in control of the Company as
specified in the Distribution Agreement, at the fair market value per share of
the Common Stock determined as set forth in the Distribution Agreement;
WHEREAS, the Company desires to amend the Rights Agreement to provide
that (i) if MII exercises the MII Purchase Right within 10 days following the
Distribution Date (as defined in the Rights Agreement), MII shall be entitled to
receive the Rights attached to the Common Stock as provided in Section 3(a) of
the Rights Agreement and (ii) that shares of Common Stock acquired by MII upon
exercise of the MII Purchase Right will be "Exempt Shares" under the Rights
Agreement and will not render MII an "Acquiring Person" under the Rights
Agreement;
WHEREAS, the Board of Directors by resolution dated September 29, 1993
has directed the Company to enter into this Amendment; and
WHEREAS, the Distribution Date under the Rights Agreement has not yet
occurred, and pursuant to Section 26 of the Rights Agreement, the Company and
the Rights Agent may amend the Rights Agreement without the approval of any
holders of shares of Common Stock.
<PAGE>
NOW THEREFORE, pursuant to Section 26 of the Rights Agreement, the
parties hereby amend the Rights Agreement as follows:
SECTION 1. CAPITALIZED TERMS. All capitalized terms used herein,
-----------------
and not defined herein, shall have the meanings ascribed to such terms in the
Rights Agreement.
SECTION 2. DEFINITIONS.
-----------
a) The definition of "Beneficial Owner" set forth in Section 1(f)
shall be amended by adding the following clause to the end of Section 1(f)(i):
"or (D) any shares of Common Stock issuable upon exercise of the
MII Purchase Right."
b) The definition of "Exempt Shares" set forth in Section 1(r) shall
be amended by adding the following clause to the end of the first sentence of
such definition:
"and (v) any shares of Common Stock acquired by such Person as a
result of the exercise of the MII Purchase Right."
c) The following additional defined terms shall be added to Section 1:
""Distribution Agreement" shall mean that certain Distribution
Agreement dated September 30, 1993 between the Company and Marriott
International, Inc.
"Exercise Notice" shall mean a written notice delivered by MII (or any
successor or assignee of MII to the extent permitted under the Distribution
Agreement) to the Company pursuant to Section 6.07 of the Distribution
Agreement, which notice constitutes an irrevocable commitment to purchase a
specified number of shares of Common Stock through exercise of the MII Purchase
Right.
"MII" shall mean Marriott International, Inc., a Delaware corporation.
"MII Purchase Right" shall mean the right granted by the Company
pursuant to Section 6.07 of the Distribution Agreement to MII (or any successor
or assignee of MII to the extent permitted under the Distribution Agreement).
SECTION 3. ISSUANCE OF RIGHTS CERTIFICATES. The following
-------------------------------
Section 3(d) shall be added immediately following Section 3(c) of the rights
agreement:
2
<PAGE>
"(d) Notwithstanding anything to the contrary set forth herein, if an
Exercise Notice with respect to the MII Purchase Right is delivered to
the Company on or prior to the Distribution Date, the shares of Common
Stock issuable upon exercise of the MII Purchase Right as specified in
the Exercise Notice shall be deemed to have been issued prior to the
Distribution Date, and any holder of a share of Common Stock issued
upon exercise of the MII Purchase Right shall be entitled to receive
the same number of Rights per share of Common Stock as if such holder
were a record holder of Common Stock as of the Close of Business on
the Distribution Date as provided in Section 3(a), even if the closing
with respect to the sale of shares of Common Stock upon exercise of
the MII Purchase Right occurs after the Distribution Date. MII shall
notify the Rights Agent of any Exercise Notice delivered with respect
to the MII Purchase Right and shall list the names and addresses of
any Persons that are entitled to receive Rights Certificates as a
result of the exercise of the MII Purchase Right on the stockholder
records of the Company that are provided to the Rights Agent pursuant
to Section 3(a) for the purpose of mailing and distributing Rights
Certificates to holders of Common Stock."
SECTION 4. NO RECITALS, ETC.. The Rights Agent assumes no
-----------------
responsibility for or in respect of the validity or sufficiency of this
Amendment or the due execution thereof by the Company, or for or in respect of
the recitals and statements contained herein, all of which recitals and
statements are made solely by the Company.
SECTION 5. COUNTERPARTS. This Amendment may be simultaneously
------------
executed in any number of counterparts, each of which when so executed shall be
deemed to be an original, but such counterparts together shall constitute but
one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
Attest: MARRIOTT CORPORATION
By By /s/ WILLIAM O. KAFES
-------------------- -------------------------
Name: William O. Kafes
Title: Vice President
Attest THE BANK OF NEW YORK,
as Rights Agent
By By /s/ JOHN I. SIVERTSEN
-------------------- ---------------------------
Name: John I. Sivertsen
Title: Vice President
4
<PAGE>
Exhibit 5
January 19, 1994
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Re: Registration Statement No. 33-51707; 20,125,000
Shares of Common Stock, Par Value $1.00 Per Share
-------------------------------------------------
Ladies and Gentlemen:
In connection with the registration of up to 20,125,000 shares of common
stock of the Company, par value $1.00 per share (the "Shares"), under the
Securities Act of 1933, as amended (the "Act"), by Host Marriott Corporation, a
Delaware corporation (the "Company"), on Form S-1 filed with the Securities and
Exchange Commission (the "Commission") on December 23, 1993 (File No. 33-51707),
as amended by Amendment No. 1 filed with the Commission on January 4, 1994 and
as amended by Amendment No. 2 filed with the Commission on January 19, 1994
(collectively, the "Registration Statement"), you have requested my opinion with
respect to the matters set forth below.
In my capacity as General Counsel to the Company, I am familiar with the
proceedings taken and proposed to be taken by the Company in connection with the
authorization, issuance and sale of the Shares, and for the purposes of this
opinion, have assumed such proceedings will be timely completed in the manner
presently proposed. In addition, I have made such legal and factual
examinations and inquiries, including an examination of originals or copies
certified or otherwise identified to my satisfaction of such documents,
corporate records and instruments, as I have deemed necessary or appropriate for
purposes of this opinion.
In my examination, I have assumed the genuineness of all signatures, the
authenticity of all documents submitted to me as originals and the conformity to
authentic original documents of all documents submitted to me as copies.
I am opining herein as to the effect on the subject transaction only of
the General Corporation Law of the State of Delaware, and I express no opinion
with respect to the applicability thereto, or the effect thereon, of the laws of
any other jurisdiction or of any other laws of Delaware, or as to any
<PAGE>
Host Marriott Corporation
January 18, 1994
Page 2
matters of municipal law or the laws of any other local agencies within the
state.
Subject to the foregoing, it is my opinion that the Shares have been
duly authorized, and, upon issuance, delivery and payment therefor in the manner
contemplated by the Registration Statement, will be validly issued, fully paid
and nonassessable.
I consent to your filing this opinion as an exhibit to the Registration
Statement and to the reference to this opinion contained under the heading
"Legal Matters."
Very truly yours,
/s/ Stephen J. McKenna
Stephen J. McKenna
<PAGE>
EXHIBIT 7
January 19, 1994
Host Marriott
10400 Fernwood Road
Bethesda, Maryland 20817
Re: Series A Cumulative Convertible Preferred Stock
Registration Statement on Form S-1
-----------------------------------------------
Gentlemen:
You have requested our opinion under Delaware law with respect to the
Series A Cumulative Convertible Preferred Stock ("the Preferred Stock") of Host
Marriott Corporation, a Delaware corporation ("the Company"), in connection with
the above referenced Registration Statement on Form S-1 under the Securities
Act of 1933 relating to the registration of the common stock of the Company
(the "Registration Statement").
You have advised us that the Preferred Stock will have a liquidation
preference of $50,000.00 per share plus an amount in cash equal to all accrued
but unpaid dividends thereon to the date of distribution. Although the
Preferred Stock is no par its stated capital is $50,000 per share. The specific
questions posed are whether under Delaware law, exclusive of any restrictions
<PAGE>
Host Marriott
January 17, 1994
Page 2
contained in the Certificate of Incorporation, imposed by the board of
directors, or contained in any agreement or instrument by which the Company is
bound, (i) there will exist any restriction upon the Company's surplus solely by
reason of the excess of the Preferred Stock's liquidation preference over its
stated capital, and (ii) any remedy will be available to holders of the
Preferred Stock before or after payment of any dividend that would reduce
surplus to an amount less than the excess of the liquidation preference over
the stated capital of the Preferred Stock. In our opinion, the answer to each
question is no.
With respect to the excess of the Preferred Stock's liquidation preference
over the stock's stated capital, the Delaware General Corporation Law ("DGCL")
does not require a sinking fund, reserve or other restriction on surplus where
the liquidation value of preferred stock exceeds its stated capital, and we have
found no decision of the Delaware courts imposing such a restriction. This
conclusion finds support in the provisions of Section 170 of the Delaware
statute which regulates the payment of dividends. Section 170(a) of the DGCL
provides that a corporation may declare and pay dividends either (1) "out of
its surplus" (as elsewhere defined in the statute), or (2) if there is no
surplus, "out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year." 8 Del.C. (S)170(a).
<PAGE>
Host Marriott
January 17, 1994
Page 3
With respect to the latter, Section 170 provides that when there is a
capital deficit, and capital has been depleted to an amount less than the
aggregate amount of capital represented by outstanding stock of all classes
having a preference upon a distribution of assets, no dividend on any
outstanding shares may be legally paid out of such net profits until the
deficiency in the amount of capital represented by the stock having a
liquidation preference shall have been restored. Id. Thus, the only statutory
--
restriction upon payment of dividends arises when the capital of the
corporation has been depleted to an amount less than the aggregate stated
capital of the outstanding stock having a liquidation preference.
With respect to the former, surplus is defined in Section 154 of the DGCL
as follows:
The excess, if any, at any given time, of the net assets of the corporation
over the amount so determined to be capital shall be surplus. Net assets
means the amount by which total assets exceed total liabilities. Capital
and surplus are not liabilities for this purpose.
8 Del.C. (S)154
This formula for determining surplus available for dividends does not
explicitly require or recognize any restriction for a liquidation preference in
excess of stated capital. Thus it appears that the mere existence of a spread
between aggregate
<PAGE>
Host Marriott
January 17, 1994
Page 4
stated capital and total liquidation preference does not limit or restrict the
use of surplus for the payment of dividends.
The question remains, however, whether the value of a liquidation
preference should be treated as a liability in calculating net assets for
purposes of Section 154. While our courts have not ruled upon this precise
question, the decision of the Delaware Supreme Court in Rothschild Int'l Corp.
----------------------
v. Liggett Group Inc., Del. Supr., 474 A.2d 133 (1984) lends further support to
- ---------------------
our conclusion that such a contention would not prevail. In that decision,
preferred stockholders of a merged corporation asserted that the merger amounted
to a liquidation of the company, triggering their liquidation preference.
Rejecting this claim, the Court observed that "[o]nly upon a liquidation of its
assets would Liggett's preferred shareholders' charter rights to payment of par
value 'spring into being'."Id. at 136. Similarly, in Dart v. Kohlberg, Kravis,
-- -------------------------
Roberts & Co., Del.Ch., C.A. No. 7366, Hartnett, V.C. (May 6, 1985), the court
- -------------
rejected a claim asserted by preferred stockholders that a leveraged buy-out
merger of the corporation constituted a redemption entitling them to be paid
either the redemption price or liquidation price provided in the certificate of
incorporation. Other Delaware decisions have held that a preferred stockholder
is not a creditor of the corporation with respect to accumulated but unpaid
dividends. See Federal
--- -------
<PAGE>
Host Marriottt
January 17, 1994
Page 5
United Corp. v. Havender, Del.Supr., 11 A.2d 331, 339 (1940); Treves v. Menzies,
- ------------------------ -----------------
Del,Ch., 142 A.2d 520, 523 (1958).
Finally, two decisions in the United States District Court for Delaware,
applying Delaware law, indicate that a liquidation preference does not
constitute a matured liability until liquidation actually occurs (or, possibly,
when it becomes reasonably foreseeable). In Goldman v. Postal Telegraph. Inc.,
----------------------------------
52 F.Supp. 763 (D.Del. 1943), plaintiff attacked a plan which included
amendment of the defendant corporation's certificate of incorporation to
eliminate the right of a class of preferred stockholders to receive a $60 per
share liquidation preference. Plaintiff contended that the elimination of the
preference was an unconstitutional interference with his "fixed", "vested" or
"contractual" rights. In ruling that plaintiff's constitutional rights were
not violated, the court stated it had little doubt the Delaware courts
. . . would have held the plaintiff's right to $60 on liquidation did not
enjoy the qualities of a matured debt, but is indistinguishable from any
other "preference" which is subject to alteration.
52 F.Supp. at 769.
In Bailey v. Tubize Rayon Corp., 56F.Supp. 415 (D.Del. 1944), plaintiff
----------------------------
contended that an amendment that would have eliminated a class of preferred
stock, and with it its liquidation
<PAGE>
Host Marriott
January 17, 1994
Page 6
preference, was invalid. The court rejected this argument, stating
. . . the preferential right of the Class A stockholdes
[sic] to receive $100 in liquidation gives them no present
---------------------
interest in any portion of the defendant's assets. That
-------------------------------------------------
right would arise only upon the liquidation of the defendant
and, since defendant is engaged in a profitable going business,
it is impossible to foresee ultimate liquidation values of the company.
56 F.Supp. at 423 (emphasis added).
These authorities indicate that until liquidation occurs (or, possibly,
becomes reasonably foreseeable), a liquidation preference is not a matured debt
and does not represent a present or vested interest in a corporation's
assets./1/ This would strongly suggest that such a preference is not a
liability that must be taken into account under Section 154 of the DGCL in
computing surplus available for dividends in a going concern.
It could also be argued that the liquidation preference should be
reflected when determining capital under the formula set forth in Section 154.
It is clear under the terms of that section, however, that stated capital in
the case of shares having no par value consists only of the aggregate stated
capital of such
- ---------------
/1/ Whether the foreseeability as opposed to the occurrence of liquidation
would convert the liquidation preference of the preferred to a "matured debt"
need not be and is not addressed here, since we have assumed that liquidation of
the Company is not now reasonably foreseeable.
<PAGE>
Host Marriott
January 17, 1994
Page 7
shares unless the board otherwise expressly provides for a higher capital
account. The liquidation preference therefore plays no part in this computation
under the terms of the statute.
We therefore conclude that the difference between the stated capital and
the higher liquidation preference of the Preferred Stock does not result in any
restriction on the Company's surplus. Dividends which would reduce surplus to a
level within the spread between the aggregated stated capital and the
liquidation preference of the Preferred Stock would be permissible under
Delaware law. Consequently, in our view there are no remedies under Delaware
law available to holders of the Preferred Stock either before or after payment
of a dividend having that effect.
The opinions expressed herein are limited to the laws, rules, regulations
and judicial practices of the State of Delaware currently in effect. We express
no opinion on the laws, rules, regulations or judicial practices of the federal
government (including securities laws) or of any other jurisdiction.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to any reference to our opinion therein.
POTTER ANDERSON & CORROON
By /s/ MICHAEL D. GOLDMAN
-----------------------
Michael D. Goldman
<PAGE>
Exhibit 10.14(ii)
COURTYARD BY MARRIOTT
MANAGEMENT AGREEMENT
--------------------
This Management Agreement ("Agreement") is executed as of the
25th day of September, 1993 ("Effective Date"), by HMH COURTYARD PROPERTIES,
INC. ("Owner"), a Delaware corporation, with a mailing address at 10400 Fernwood
Road, Bethesda, Maryland 20817 and COURTYARD MANAGEMENT CORPORATION ("Management
Company"), a Delaware corporation, with a mailing address at 10400 Fernwood
Road, Bethesda, Maryland 20817.
R E C I T A L S :
A. Owner is the owner of the Hotel (as defined and more fully described in
Section 1.01) which is located as set forth on Exhibit "A" hereto; and
B. Owner desires to have Management Company manage and operate the Hotel,
and Management Company is willing to perform such services for the account of
Owner on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
<PAGE>
ARTICLE I
DEFINITION OF TERMS
-------------------
1.01 Definition of Terms
-------------------
The following terms when used in this Agreement shall have the meanings
indicated:
"Accounting Period" shall mean each of the four (4) week accounting periods
-----------------
which are used in Management Company's accounting system, except that an
Accounting Period may occasionally contain five (5) weeks when necessary to
conform Management Company's accounting system to the calendar.
"Accounting Period Statement" shall have the meaning set forth in Section
---------------------------
5.03.
"Additional Invested Capital" shall mean the cumulative total, as of any
---------------------------
given date during the Term, of the following: (i) any expenditures made by
Owner in response to a Building Estimate, pursuant to Section 8.03, and any
expenditures by Owner pursuant to Section 20.10.C; (ii) any contributions by
Owner to the FF&E Reserve (beyond the funding described in Section 8.02.B and
E); other than those contributions which are reimbursed to Owner under Section
8.02.F; (iii) any payments by Owner with regard to special assessments or impact
fees, pursuant to Section 13.01.B(2) or 13.01.B.(3); and (iv) any costs,
expenses and charges which are described on Exhibit "F" hereto as "Capital
Charges" pursuant to Section 2.05.A. Owner shall give Management Company prompt
notice of any amounts it has provided funding for which constitute
<PAGE>
"Additional Invested Capital" together with such evidence of funding as
Management Company may reasonably require.
"Affiliate" shall mean any individual or entity directly or indirectly
---------
through one or more intermediaries, controlling, controlled by or under common
control with a party. The term "control," as used in the immediately preceding
sentence, means, with respect to a corporation, the right to the exercise,
directly or indirectly, of fifty-one percent (51%) or more of the voting rights
attributable to the shares of the controlled corporation, and, with respect to
an entity that is not a corporation, the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of the
controlled entity.
"Agreement" shall have the meaning set forth in the Preamble.
---------
"Annual Operating Projection" shall have the meaning set forth in Section
---------------------------
9.03.
"Annual Operating Statement" shall have the meaning set forth in Section
--------------------------
9.01.
"Available Cash Flow" shall mean an amount, with respect to each Fiscal
-------------------
Year or portion thereof (prorated for any partial Fiscal Years) during the Term
of this Agreement, equal to the excess, if any, of Operating Profit over the sum
of: (i) the applicable Owner's Priority in such Fiscal Year; plus, (ii) the
Base Management Fee; plus, (iii) Deferred Contingent Base Management Fees paid
to Manager in such Fiscal Year.
<PAGE>
"Base Management Fee" shall mean, for each Fiscal Year (prorated for any
-------------------
partial Fiscal Years) during the Term of this Agreement, an amount equal to two
percent (2%) of Gross Revenues as payment to Management Company for Central
Office Services which are for the general benefit of the Courtyard by Marriott
System.
"Building Estimate" shall have the meaning set forth in Section 8.03.A.
-----------------
"Capitalization Multiple" shall mean the number ten (10).
-----------------------
"Case Goods" shall mean furniture and furnishings used in the Hotel,
----------
including, without limitation: chairs, beds, chests, headboards, desks, lamps,
tables, television sets, mirrors, pictures, wall decorations and similar items.
"CC&R's" shall have the meaning set forth in Section 2.05.
------
"Central Office Services" shall mean certain services performed by
-----------------------
personnel not normally located at the Hotel and include corporate planning and
policy services, corporate financial planning, legislative and governmental
representation, corporate human resources and benefits planning, in-house legal
services and trademark protection relating to Proprietary Marks which are used
generally in the Courtyard by Marriott System. Any service which is defined as
being included within the term "Chain Services" shall not also be included
within "Central Office Services." The Central Office Services which are
provided to the Hotel shall be generally consistent with those Central Office
Services which are provided to other comparable Courtyard by Marriott hotels
within the Courtyard by Marriott System.
<PAGE>
"Chain Services" shall mean those certain services furnished to the Hotel
--------------
which are furnished generally on a central or regional basis to other hotels in
the Courtyard by Marriott System. Chain Services shall include: (i) national
sales office services; central operational support for rooms, food and beverage
and engineering; central training services; career development; management
personnel relocation; central safety and loss prevention services; central
advertising and promotion (including direct and image media and advertising
administration); consumer affairs; to the extent not charged or allocated
directly to the Hotel as a Deduction, the national and regional reservations
system service and inventory and revenue management services; centralized
computer payroll and accounting services; computer system development, support
and operating costs; central monitoring and management support from "line
management" personnel such as area managers; (ii) such additional central or
regional services as are or may be, from time to time, furnished for the benefit
of hotels in the Courtyard by Marriott System or in substitution for services
now performed at individual hotels which may be more efficiently performed on a
group basis; provided, however, that services not currently included in chain
services pursuant to (i) and (ii) above shall only be added to "Chain Services"
if, and to the extent that such services: (a) are not Central Office Services
(it being understood that Management Company's sole compensation for providing
the Central Office Services shall be receipt of the Base Management Fee); (b)
are not services relating to non-routine work
<PAGE>
(it being understood that the cost and expense of such non-routine services
shall be Deductions as set forth in paragraph 6 of the definition of Operating
Profit); and (c) are either (x) new services (i.e., not previously performed at
or for the Hotel) or (y) services which theretofore had been performed at the
Hotel, but which can be performed more efficiently and economically on a
centralized, regional or other basis.
"Communications, Computer and Office Equipment" shall mean: the following
---------------------------------------------
equipment used in the Hotel and all ancillary equipment; (i) telephone; (ii) all
computer equipment and all ancillary equipment used in the Hotel or for the
benefit of the Hotel; (iii) miscellaneous office equipment such as copiers,
postage meters, etc. (iv) television sets; and (v) audio-visual equipment.
"Courtyard by Marriott System" shall mean the hotel system managed by
----------------------------
Management Company (or one or more of its Affiliates) which is, as of the
Effective Date, operated under the trade name "Courtyard by Marriott".
"Courtyard by Marriott System Standards" shall mean both the operational
--------------------------------------
standards (for example, staffing, amenities offered to guests, advertising,
etc.) and the physical standards (for example, the quality, condition and
utility of the FF&E, etc.) generally required of hotels in the Courtyard by
Marriott System as such operational and physical standards may fluctuate from
time to time (provided, however, that the Courtyard by Marriott System Standards
<PAGE>
shall in no event be lower than the operational and physical standards, as of
the date in question, of comparable hotels in comparable hotel systems).
"Courtyard by Marriott System Fee" shall during any given Fiscal Year (or
--------------------------------
portion thereof), be equal to three percent (3%) of Gross Revenues. It shall
mean an amount paid to Management Company, in each Fiscal Year (prorated for any
partial Fiscal Years) during the Term of this Agreement, as payment to
Management Company for certain services ("System Services") which are for the
benefit of the Courtyard by Marriott System, are not Central Office Services or
Chain Services, and are performed by personnel not normally located at the
Hotel. System Services shall be limited to divisional executive management,
divisional financial planning, divisional contracting, divisional product
planning and development, divisional human resources planning and development,
divisional marketing planning, and services of Management Company's technical
and operational experts making periodic inspection and consultation visits to
the Hotel (but specifically excluding "line management" personnel such as area
managers and services of Management Company's Architecture and Construction
personnel who provide design, procurement construction or related services).
"Coverage Ratio" shall mean the number one and three-tenths (1.3).
--------------
"Cure Payment" shall have the meaning set forth in Section 4.03.B.
------------
<PAGE>
"Deductions" shall have the meaning set forth in the definition of
----------
Operating Profit.
"Default" shall have the meaning set forth in Section 16.01.
-------
"Deferred Contingent Base Management Fees" shall mean an amount equal to
----------------------------------------
(a) the sum of all unpaid Base Management Fees deferred in accordance with
Section 5.02.B(i) less (b) all sums paid to Management Company in accordance
with the provisions of Section 5.02.B(ii).
"Effective Date" shall have the meaning set forth in the Preamble.
--------------
"Employee Claims" shall mean any and all claims (including all fines,
---------------
judgments, penalties, costs, Litigation and/or arbitration expenses, attorneys'
fees and expenses, and costs of settlement with respect to any such claim) by
any employee or employees of Management Company against Owner or Management
Company with respect to the employment at the Hotel of such employee or
employees. "Employee Claims" shall include, without limitation, the following:
(i) claims which are eventually resolved by arbitration, by Litigation or by
settlement; (ii) claims which also involve allegations that any applicable
employment-related contracts affecting the employees at the Hotel have been
breached; and (iii) claims which involve allegations that one or more of the
Employment Laws has been violated; provided, however, that "Employee Claims"
shall not include claims for worker compensation benefits (which shall be
governed by Article XII hereof) or for unemployment benefits.
<PAGE>
"Employment Laws" shall mean any federal, state or local law (including the
---------------
common law), statute, ordinance, rule, regulation, order or directive with
respect to employment, conditions of employment, benefits, compensation, or
termination of employment that currently exists or may exist at any time during
the Term of this Agreement, including, but not limited to, Title VII of the
Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Workers
Adjustment and Retraining Notification Act, the Occupational Safety and Health
Act, the Immigration Reform and Control Act of 1986, the Polygraph Protection
Act of 1988 and the Americans With Disabilities Act of 1990.
"Environmental Laws" shall mean: any federal, state or local law, rule or
------------------
regulation (both present and future) dealing with the use, generation,
treatment, storage, disposal or abatement of Hazardous Materials, including, but
not limited to, (i) the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601 et seq., as amended; (ii) the regulations
-- ---
promulgated thereunder, from time to time; (iii) all federal, state and local
laws, rules and regulations (now or hereafter in effect) dealing with the use,
generation, treatment, storage, disposal or abatement of Hazardous Materials;
and (iv) the regulations promulgated thereunder, from time to time.
"Event of Default" shall have the meaning set forth in Section 16.02.
----------------
"Existing CC&R's" shall have the meaning set forth in Section 2.05.A.
---------------
<PAGE>
"Existing Ground Leases" shall mean the ground leases which are listed on
----------------------
Exhibit "F", but for purposes of this Agreement shall not include any amendments
or modifications thereof after the Effective Date.
"Existing Mortgages" shall mean the Mortgages which are listed on Exhibit
------------------
"F", but for purposes of this Agreement shall not include any amendments or
modifications thereof after the Effective Date.
"FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case Goods,
----
signage and equipment at the Hotel (including, without limitation, facsimile
machines, Communications, Computer and Office Equipment, Shuttle Vehicles,
audio-visual equipment, and all computer and other equipment needed for the
reservation system and the property management system, and all other electronic
systems needed for the Hotel from time to time, as well as similar systems based
on other technologies which may be developed in the future.
"FF&E Estimate" shall have the meaning set forth in Section 8.02.C.
-------------
"FF&E Reserve" shall have the meaning set forth in Section 8.02.A.
------------
"First Notice" shall have the meaning set forth in Section 6.02.
------------
"Fiscal Year" shall mean Management Company's Fiscal Year which now ends at
-----------
midnight on the Friday closest to December 31 in each calendar year; the new
Fiscal Year begins on the Saturday
<PAGE>
immediately following said Friday. Any partial Fiscal Year between the
Effective Date and the commencement of the first full Fiscal Year and any
partial Fiscal Year between the end of the last full Fiscal Year and the
Termination of this Agreement, shall constitute a separate Fiscal Year. If
Management Company's Fiscal Year is changed in the future, appropriate
adjustment to this Agreement's reporting and accounting procedures shall be
made; provided, however, that no such change or adjustment shall alter the Term
of this Agreement, or in any way reduce the distributions of Operating Profit or
other payments due to Owner hereunder, or otherwise significantly and adversely
affect Owner's rights or obligations under this Agreement.
"Fixed Asset Supplies" shall mean supply items included within "Property
---------------------
and Equipment" under the Uniform System of Accounts, including linen, cleaning
supplies, china, glassware, tableware, uniforms, and similar items.
"Force Majeure" shall mean acts of God, acts of war, civil disturbance,
-------------
governmental action (including the revocation or refusal to grant Licenses,
where such revocation or refusal is not due to the fault of the party whose
performance is to be excused for reasons of Force Majeure), strikes, lockouts,
fire, unavoidable casualties or any other causes beyond the reasonable control
of either party (excluding, however: (i) lack of financing; or (ii) general
economic and/or market factors).
"Foreclosure" shall mean any exercise of the remedies available to a
-----------
Holder, upon a default under the Secured Loan held
<PAGE>
by such Holder, which results in a transfer of title to or possession of the
Hotel. The term "Foreclosure" shall include, without limitation, any one or
more of the following events, if they occur in connection with a default under a
Secured Loan: (i) a transfer by judicial foreclosure; (ii) a transfer by deed
in lieu of foreclosure; (iii) the appointment by a court of a receiver to assume
possession of the Hotel; (iv) a transfer of either ownership or control of the
Owner, by exercise of a stock pledge or otherwise; (v) if title to the Hotel is
held by a tenant under a ground lease, an assignment of the tenant's interest in
such ground lease; or (vi) any similar judicial or non-judicial exercise of the
remedies held by the Holder.
"Foreclosure Date" shall mean the date on which title to or possession of
----------------
the Hotel is transferred by means of a Foreclosure.
"Future CC&R's" shall have the meaning set forth in Section 2.05.B.
-------------
"GDP Deflator" shall mean the "Gross Domestic Product Implicit Price
------------
Deflator" issued from time to time by the United States Bureau of Economic
Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not
at such time so prepared and published, any comparable index selected by Owner
and reasonably satisfactory to Management Company (a "Substitute Index") then
prepared and published by an agency of the Government of the United States,
appropriately adjusted for changes in the manner in which such index is prepared
and/or year upon which such index is based. Any dispute regarding the selection
of the Substitute Index or the
<PAGE>
adjustments to be made thereto shall be settled by arbitration in accordance
with Section 20.13. Except as otherwise expressly stated herein, whenever a
number or amount is required to be "adjusted by the GDP Deflator", or similar
terminology, such adjustment shall be equal to the percentage increase or
decrease (except that, for purposes of this Agreement, the GDP Deflator shall
not be decreased below its level as of the Effective Date) in the GDP Deflator
which is issued for the month in which such adjustment is to be made (or, if the
GDP Deflator for such month is not yet publicly available, the GDP Deflator for
the most recent month for which the GDP Deflator is publicly available) as
compared to the GDP Deflator which was issued for the month in which the
Effective Date occurred.
"Gross Revenues" shall mean, for each Fiscal Year during the Term of this
--------------
Agreement, all revenues and receipts of every kind derived from operating the
Hotel and parts thereof, including, but not limited to: income (from both cash
and credit transactions), before commissions and discounts for prompt or cash
payments, from rental of rooms, stores, offices, meeting, exhibit or sales space
of every kind; license, lease and concession fees and rentals (not including
gross receipts of licensees, lessees and concessionaires); income from vending
machines; health club membership fees; food and beverage sales; wholesale and
retail sales of merchandise (other than proceeds from the sale of FF&E no longer
necessary to the operation of the Hotel, which shall be deposited in the FF&E
Reserve as set forth in Section 8.02.D
<PAGE>
hereof); service charges, to the extent not distributed to the employees at the
Hotel as gratuities; and proceeds, if any, from business interruption or other
loss of income insurance; provided, however, that Gross Revenues shall not
include the following: gratuities to Hotel employees; federal, state or
municipal excise, sales, use or similar taxes collected directly from patrons or
guests or included as part of the sales price of any goods or services;
insurance proceeds (other than proceeds from business interruption or other loss
of income insurance); condemnation proceeds (other than for a temporary taking);
any proceeds from any Sale of the Hotel or from the refinancing of any debt
encumbering the Hotel; proceeds from the disposition of FF&E no longer necessary
for the operation of the Hotel; or interest which accrues on amounts deposited
in either the FF&E Reserve or any escrow accounts which are established in
accordance with Section 13.01.C; or Cure Payments.
"Ground Lease Rental" shall mean the annual rental, as of the Effective
-------------------
Date, under the Existing Ground Lease.
"Ground Lessor" shall mean the landlord under the Existing Ground Lease.
-------------
"Hazardous Materials" shall mean and include any substance or material
-------------------
containing one or more of any of the following: "hazardous material", "hazardous
waste", "hazardous substance", "regulated substance", "petroleum", "pollutant",
"contaminant", or "asbestos" as such terms are defined in any applicable
Environmental Law in such concentration(s) or amount(s) as may
<PAGE>
impose clean-up, removal, monitoring or other responsibility under the
Environmental Laws, as the same may be amended from time to time, or which may
present a significant risk of harm to guests, invitees or employees of the
Hotel.
"Holder" shall mean any holder, from time to time, of any Secured Loan.
------
"Hotel" shall mean the hotel, containing approximately the number of guest
-----
rooms which are set forth on Exhibit "A-1" hereto, which Owner owns at the
location specified in the Recitals; the term "Hotel" shall include the Site, the
improvements built thereon, and all FF&E, Fixed Asset Supplies and Inventories
installed therein.
"Hotel Retention" shall have the meaning set forth in Section 12.03 hereof.
---------------
"Impositions" shall mean all real estate and personal property taxes,
-----------
levies, assessments and similar charges (other than those which are specifically
excluded pursuant to Section 13.01.B) including, without limitation, the
following: all water, sewer or similar fees, rates, charges, excises or levies;
license fees; permit fees; inspection fees and other authorization fees and
other governmental charges of any kind or nature whatsoever, whether general or
special, ordinary or extraordinary, foreseen or unforeseen, or hereinafter
levied or assessed of every character (including all interest and penalties
thereon), which at any time during or in respect of the Term of this Agreement
may be assessed, levied, confirmed or imposed on Owner with respect to the Hotel
or
<PAGE>
otherwise in respect of or be a lien upon the Hotel. Impositions shall not
include any income or franchise taxes payable by Owner or Management Company.
Impositions shall include any taxes, levies, assessments and similar charges
which may be enacted by the applicable governmental authority in lieu of, or in
complete or partial substitution for, Impositions.
"Incentive Management Fee" shall mean, for each Fiscal Year, during the
------------------------
Term of this Agreement the payments which shall be made to Management Company,
as compensation (in addition to the Base Management Fee and Courtyard by
Marriott System Fee) to Management Company for its services under this
Agreement, in the amount of fifty percent (50%) of the Available Cash Flow in
each Fiscal Year (or portion thereof); provided, however, that the cumulative
Incentive Management Fee received by Management Company, from the Effective Date
through any given point in time during the Term of this Agreement, shall not
exceed twenty percent (20%) of the cumulative Operating Profit from the
Effective Date through such point in time; provided further, however, that in no
event shall the aforesaid cumulative limitation require Management Company to
refund to Owner any Incentive Management Fees which were paid in a previous
Fiscal Year and which were within such limitation as of the time when they were
paid.
"Initial Term" shall have the meaning set forth in Section 4.01.
------------
"Intellectual Property" shall mean: (i) all Software; and (ii) all
---------------------
manuals, brochures and directives issued by Management
<PAGE>
Company to its employees at the Hotel regarding the procedures and techniques to
be used in operating the Hotel.
"Interest Rate" shall mean an annual rate of interest equal to the Prime
-------------
Rate (as adjusted from time to time) plus three hundred (300) basis points;
provided, however that in no event shall the Interest Rate exceed the maximum
rate which is permitted under applicable Legal Requirements.
"Inventories" shall mean "Inventories" as defined in the Uniform System of
-----------
Accounts, such as provisions in storerooms, refrigerators, pantries and
kitchens; beverages in wine cellars and bars; other merchandise intended for
sale; fuel; mechanical supplies; stationery; and other expensed supplies and
similar items.
"Legal Requirements" shall mean any federal, state or local law, code,
------------------
rule, ordinance, regulation or order of any governmental authority or agency
having jurisdiction over the business or operation of the Hotel or the matters
which are the subject of this Agreement, including, without limitation, the
following: (i) any building, zoning or use laws, ordinances, regulations or
orders, and (ii) Environmental Laws.
"License" shall mean any license, permit, decree, act, order, authorization
-------
or other approval or instrument which is necessary in order to operate the Hotel
in accordance with Legal Requirements and pursuant to the Courtyard by Marriott
System Standards and otherwise in accordance with this Agreement.
<PAGE>
"Litigation" shall mean: (i) any cause of action commenced in a federal,
----------
state or local court; and (ii) any claim brought before an administrative agency
or body (for example, without limitation, employment discrimination claims).
"Loan Priority Basis" shall mean the sum total, as of any given point in
-------------------
time during the Term, of (i) the amount shown on Exhibit "A"-1; plus (ii) any
Additional Invested Capital expended by Owner, less the amount of any
condemnation award received by Owner and not applied to restoration of the Hotel
pursuant to Section 15.02.B..
"Management Analysis Report" shall mean a report which, if required
--------------------------
pursuant to Section 9.01.B, shall be prepared by Management Company and
delivered to Owner (at the time of the delivery of the Annual Operating
Statement), which shall include a description regarding the preceding Fiscal
Year, of: (i) the Hotel's operating performance, including significant
variations from the Annual Operating Projection; (ii) an analysis of any
significant variation of the actual average daily rate and occupancy from what
was set forth in the Annual Operating Projection; (iii) a review of the
competitive hotel market; (iv) a description of any significant promotional or
other marketing programs in which the Hotel participated, which were not
anticipated as part of the Annual Operating Projection for the preceding Fiscal
Year; (v) a calculation of the Revenue Index, and Operating Profit less Ground
Lease Rental, if any, compared to the Performance Termination Threshold; (vi)
such other supplementary
<PAGE>
information as shall be reasonably necessary to an understanding of the
financial results of the Hotel; and (vii) a reasonably detailed report setting
forth the components of Chain Services, the amounts billed for each such
component during the Fiscal Year in question and the method of allocation for
each such component, but only if Owner requests such a report in writing not
later than the date which is thirty days (30) prior to the date upon which
Management Company must deliver the Annual Operating Statement to Owner.
"Management Company" shall have the meaning set forth in the Preamble.
------------------
"Management Fees" shall mean the Courtyard by Marriott System Fee, the Base
---------------
Management Fee, Deferred Contingent Base Management Fees and the Incentive
Management Fee.
"Marriott" shall mean Marriott International, Inc., a Delaware corporation
--------
having an address at 10400 Fernwood Road, Bethesda, Maryland 20817.
"Mortgage" shall mean any security instrument which encumbers real
--------
property, including, without limitation, mortgages, deeds of trust, security
deeds and similar instruments.
"Net Operating Profit" shall mean the greater of: (i) the excess, if any,
--------------------
of Operating Profit over Owner's Priority; or (ii) zero (0).
"Non-Disturbance Agreement" shall mean an agreement, in recordable form in
-------------------------
the jurisdiction in which the Hotel is located, executed and delivered by a
Holder (which agreement shall by its terms be binding upon all Subsequent
Owners), for the benefit of
<PAGE>
Management Company, pursuant to which, in the event such Holder or any
Subsequent Owner comes into possession of or acquires title to the Hotel either
at or following a Foreclosure, such Holder and all Subsequent Owners shall (x)
recognize Management Company's rights under this Agreement, and (y) shall not
name Management Company as a party in any Foreclosure action or proceeding, and
(z) shall not disturb Management Company in its right to continue to manage the
Hotel pursuant to this Agreement; provided, however, that at such time, (i) this
Agreement has not expired or otherwise been earlier terminated in accordance
with its terms; (ii) there are no outstanding Events of Default by Management
Company, and (iii) no material event has occurred and no material condition
exists which, after notice or the passage of time or both, would entitle Owner
to terminate this Agreement.
"Operating Accounts" shall have the meaning set forth in Section 9.02.
------------------
"Operating Loss" shall mean a negative Operating Profit.
--------------
"Operating Profit" shall mean, in each Fiscal Year during the Term of this
----------------
Agreement, the excess of Gross Revenues over the following deductions
("Deductions") incurred by Management Company or its Affiliates (or, in the case
of any Owner Deductions, by Owner) in operating the Hotel:
1. The cost of sales including, without limitation, salaries, wages,
employee benefits, Employee Claims (except to the extent specifically set forth
to the contrary in Section 14.01.C or 14.01.D), payroll taxes and other costs
related to Hotel employees
<PAGE>
(the foregoing costs shall not include salaries and other employee costs of
executive personnel of Manager who do not work at the Hotel on a regular basis
except that the foregoing costs shall include the allocable portion of the
salary and other employee costs of area or regional personnel the cost of whom
are not included within the definitions of Chain Services or System Services
assigned to a "cluster" of hotels which includes the Hotel; provided, however,
that such allocable portion of salary and employee costs shall be a Deduction
only to the extent that they relate directly to the Hotel);
2. Departmental expenses; administrative and general expenses; the cost
of Hotel advertising, marketing and business promotion; all utility costs
including but not limited to the cost of heat, light, power and water; and the
cost of routine repairs, maintenance and minor alterations which are treated as
Deductions under Section 8.01;
3. The cost of Inventories and Fixed Asset Supplies consumed in the
operation of the Hotel;
4. A reasonable reserve for uncollectible accounts receivable as
determined by Management Company;
5. All reasonable costs and fees of independent professionals or other
third parties who are retained by Management Company to perform services
required or permitted hereunder; provided that Management Company will notify
Owner at least thirty (30) days in advance of any proposed expenditure under
this paragraph 5 which is in excess of Twenty-five Thousand Dollars
<PAGE>
($25,000.00), subject to adjustment by the GDP Deflator on each anniversary of
the Effective Date, and which was not specifically identified in the Annual
Operating Projection, and Management Company shall consider in good faith any
comments which Owner may have with respect to such proposed expenditure; and
provided, further, that if such expenditure involves immediately-needed repair
work to the Hotel or if immediate action is otherwise required, the
above-described requirement regarding thirty (30) days' prior notice shall be
modified to require whatever notice period is reasonable under the circumstances
(including notification after the fact, if necessary);
6. The reasonable cost and expense of technical consultants and
operational experts who are employees of Management Company or one of its
Affiliates, and who perform specialized services in connection with non-routine
Hotel work; provided, however, that the costs and expenses so incurred shall
only be Deductions to the extent such costs and expenses are reasonable and
competitively priced, as compared to similar work done by outside consultants or
experts; and provided, further, that Management Company will notify Owner at
least thirty (30) days in advance of any proposed expenditure under this
paragraph 6 which is in excess of Twenty-five Thousand Dollars ($25,000),
subject to adjustment by the GDP Deflator on each anniversary of the Effective
Date, and which was not specifically identified in the Annual Operating
Projection, and Management Company shall consider in good faith any comments
which Owner may have with respect to such proposed
<PAGE>
expenditure; and provided, further, that if immediate action is otherwise in the
best interests of the Hotel required, the above-described requirement regarding
thirty (30) days' prior notice shall be modified to require whatever notice
period is reasonable under the circumstances (including notification after the
fact, if necessary);
7. The Courtyard by Marriott System Fee;
8. Subject to Section 11.03.B, the Hotel's pro rata share of costs and
expenses incurred by Management Company (or its Affiliate) in providing Chain
Services;
9. The Hotel's pro rata share of costs and expenses incurred in
connection with sales, advertising, marketing and/or promotional programs
developed for or within the Courtyard by Marriott System, such as (without
limitation) the Courtyard Club, where such costs and expenses are not deducted
as either departmental expenses under paragraph 2 above or as Chain Services
under paragraph 8 above;
10. Insurance costs and expenses as provided in Section 12.04.B;
11. Taxes, if any, payable by or assessed against Management Company
related to this Agreement or to Management Company's operation of the Hotel
(exclusive of Management Company's income taxes or franchise taxes) and all
Impositions assessed against the Hotel;
12. Amounts which are required to be transferred into the FF&E Reserve
in accordance with the provisions of Section 8.02;
<PAGE>
13. Lease payments pursuant to leases of Shuttle Vehicles and of
Communications, Computer and Office Equipment (to the extent Management Company
has not elected to make such payments from the FF&E Reserve);
14. All sums charged to the Hotel for room reservations obtained for
the Hotel through the reservation system used by Management Company, but in no
event in excess of the amount charged, on a per reservation basis for similarly
computed activity to other Hotels in the Courtyard by Marriott System using
such reservation system.
15. The reimbursement to Owner of the amount of any Owner Deductions;
16. The payment to Management Company of the cost of preparing the
Management Analysis Report pursuant to Section 9.01.B; and
17. Such other costs and expenses incurred by Management Company or its
Affiliates (not including the costs and expenses of providing the Central Office
Services) as are specifically provided for elsewhere in this Agreement or are
otherwise reasonably necessary for the proper and efficient operation of the
Hotel (including, without limitation, the costs and expenses of all functions
described in Section 2.03, to the extent such costs and expenses are not already
treated as Deductions elsewhere in this definition of Operating Profit, unless,
and to the extent that, any such costs and expenses are specifically stated not
to be Deductions under any provision of this Agreement).
<PAGE>
The term "Deductions" shall not include (i) debt service payments pursuant
to any Secured Loan, nor (ii) rental payments pursuant to any ground lease of
the Site; both of the foregoing shall be paid by Owner from its own funds, and
not from Gross Revenues nor from the FF&E Reserve. In no event shall the costs
or expenses of providing the Central Office Services be treated as Deductions,
or otherwise be reimbursed out of Gross Revenues; it being the intent of the
parties that all such costs and expenses are to be paid by Management Company
(or its Affiliates) from its own funds.
"Owner" shall have the meaning set forth in the Preamble. Subject to
-----
compliance with Articles XVIII and XIX of this Agreement, the term "Owner" shall
include all successors and assigns of the entity identified as the "Owner" in
the Preamble.
"Owner Deductions" shall mean amounts paid by Owner with respect to: (i)
----------------
premiums for the insurance policies described in Section 12.05; and (ii)
reasonable costs of any negotiations or Litigation with respect to any contest
of Impositions, as described in Section 13.01.A; provided, however, that to the
extent Owner spends in excess of Five Thousand Dollars ($5,000.00) with respect
to any contest of Impositions and has not received Management Company's consent
as provided in Section 13.01.A, then any amount in excess of such Five Thousand
Dollars ($5,000.00) or such greater amount as may be approved by Management
Company, shall not be considered an Owner Deduction. Except as specifically set
forth in Section 8.02.F.2, the amount of any Owner Deductions paid by Owner
<PAGE>
shall be reimbursed to Owner (as a Deduction) in the Fiscal Year in which they
were paid. Owner shall give Management Company prompt notice of any amounts it
has paid which constitute "Owner Deductions" together with such evidence of
payments as Management Company may reasonably require.
"Owner's Distribution" shall mean, with respect to each Fiscal Year or
--------------------
portion thereof during the Term of this Agreement, funds distributed to Owner
in accordance with the provisions of Section 5.02 hereof which shall equal
Operating Profit less any Base Management Fee, Deferred Contingent Base
Management Fees and Incentive Management Fees paid to Management Company.
"Owner's Priority" shall mean, with respect to each Fiscal Year (prorated
----------------
for any partial Fiscal Years) during the Term of this Agreement, a dollar amount
equal to ten percent (10%) of the Priority Basis for that Fiscal Year.
If the Hotel has an Existing Ground Lease, the annual rental payments for such
Fiscal Year (prorated for any partial Fiscal Year) shall be added to the Owner's
Priority.
"Performance Termination Threshold" shall mean, with respect to each full
---------------------------------
Fiscal Year during the Term of this Agreement, the dollar amount set forth on
Exhibit "A-1", plus eight percent (8%) of any Additional Invested Capital
expended by Owner pursuant to clause (ii) of the definition of the Priority
Basis; provided, however, that the aforesaid dollar amount shall be adjusted, as
of the tenth (10th) anniversary of the Effective Date, in an amount equal to
seventy-five percent (75%) of the percentage change in the
<PAGE>
GDP Deflator between the Effective Date and the tenth (10th) anniversary of the
Effective Date; provided that, in no event will the Performance Termination
Threshold be lower than it is as of the Effective Date and provided further,
that in calculating the aforesaid change in the GDP Deflator during such period
of time, both: (i) the two (2) years having the highest annual rates of change
in the GDP Deflator during such period; and (ii) the two (2) years having the
lowest annual rates of change in the GDP Deflator during such period, shall be
ignored, and such percentage change in the GDP Deflator between the Effective
Date and the tenth (10th) anniversary of the Effective Date shall be
recalculated, for purposes of this Agreement, using as the rate of change in the
GDP Deflator for each of such four (4) excluded years (i.e., those years
described in clauses (i) and (ii), above) the average annual rate of change in
the GDP Deflator during the non-excluded years; and provided further that, to
the extent that certain portions of the Performance Termination Threshold, as of
immediately prior to such tenth (10th) anniversary adjustment, reflect
expenditures which qualify as Additional Invested Capital, the aforesaid GDP
Deflator adjustment shall be calculated with respect to such portions by using,
as the base, not the GDP Deflator as of the Effective Date, but rather the GDP
Deflator as of either the date of such expenditure or (if construction is
involved) the date on which the items in question were substantially completed.
"Post-Foreclosure Decision Date" shall have the meaning set forth in
------------------------------
Section 6.06.
<PAGE>
"Prime Rate" shall mean the "prime rate" as published in the "Money Rates"
----------
section of The Wall Street Journal; however, if such rate is, at any time during
-----------------------
the Term, no longer so published, the term "Prime Rate" shall mean the average
of the prime interest rates which are announced, from time to time, by the three
(3) largest banks (by assets) headquartered in the United States which publish a
"prime rate."
"Priority Basis" shall mean the sum total, as of any given point in time
--------------
during the Term, of: (i) the dollar amount shown on Exhibit "A-1"; plus (ii)
any Additional Invested Capital expended by Owner; provided that each
expenditure of Additional Invested Capital shall be added to the Priority Basis
at such date or dates as the expenditure occurred, taking into consideration at
what point (or points) during such Fiscal Year such expenditure occurred; less
(iii) the amount of any condemnation award received by Owner and not applied to
restoration of the Hotel pursuant to Section 15.02.B.
"Proprietary Marks" shall mean all trademarks, trade names, symbols, logos,
-----------------
slogans, designs, insignia, emblems, devices, service marks and distinctive
designs of buildings and signs, or combinations thereof, which are used to
identify hotels in the Courtyard by Marriott System. The names "Marriott",
"Courtyard" "Courtyard by Marriott" and "Courtyard Club", and any of the
foregoing used in conjunction with other words or names, are examples, without
limitation of Proprietary Marks. The term "Proprietary Marks" shall include all
present and future
<PAGE>
Proprietary Marks, whether they are now or hereafter owned by Management Company
or one of its Affiliates, and whether or not they are registered under the laws
of the United States or any other country. The term "Proprietary Marks" shall
also include all trade names, trademarks, symbols, logos, designs, etc. which
are used in connection with the operation of the Hotel during the Term (such as,
without limitation, the names of the restaurants and lounges). Notwithstanding
the foregoing, those trade names, trademarks, symbols, logos, designs, etc.,
which are specifically set forth on Exhibit "E" hereto shall be deemed to be
"Proprietary Marks" only for so long as this Agreement is in effect, and such
Proprietary Marks shall revert to the exclusive control of Owner as of the date
of Termination.
"Proprietary Signage" shall mean any signage used in connection with the
-------------------
Hotel (including both interior and exterior signage, and including billboards
and other signage not located on the Site) which contains one or more
Proprietary Marks; any signage which contains the word "Marriott" or "Courtyard"
shall automatically be deemed to be Proprietary Signage.
"Prospectus" shall have the meaning set forth in Section 20.05.
----------
"Qualified Lender" shall mean any Holder, from time to time, of any
----------------
Qualified Loan with respect to which Management Company has received a written
notice (pursuant to Section 20.09 of this Agreement) stating: (i) the name and
address of such Holder; and
<PAGE>
(ii) that such Holder is a "Qualified Lender" pursuant to the terms of this
Agreement.
"Qualified Loan" shall mean any Secured Loan in which the initial principal
--------------
amount, as of the date such Secured Loan is incurred, when added to the current
principal balance of all existing Secured Loans as of that date, is less than or
equal to the greater of the following:
(i) Seventy percent (70%) of the Loan Priority Basis; or
(ii) the result obtained by (a) dividing the Operating Profit for the
thirteen (13) most recent full Accounting Periods by the Coverage
Ratio; then, (b) multiplying the result of clause (a) by the
Capitalization Multiple; or
(iii) the existing balance of any Secured Loans encumbering the Hotel
immediately prior to the date of the incurrence of such Qualified
Loan, plus commercially reasonable Transaction Costs associated with
such refinancing, up to an amount equal to four percent (4%) of the
principal amount of such Qualified Loan.
In addition, regardless of whether or not the above test set forth in clauses
(i), (ii) and (iii) is satisfied, the existing (as of the Effective Date)
balance of any Secured Loan which is secured by any Existing Mortgage shall be
deemed to be a "Qualified Loan."
"Qualified Loan Acceleration" shall mean the acceleration of the
---------------------------
indebtedness incurred pursuant to any Qualified Loan, as a result of a default
under the terms and conditions of such Qualified Loan.
"Renewal Terms" shall have the meaning set forth in Section 4.01.
-------------
<PAGE>
"Restricted Area" shall mean that area which is shown on the map attached
---------------
hereto as Exhibit "D", as described in the narrative which is set forth in
Exhibit "D-1".
"Restricted Hotel" shall mean any hotel whose size, facilities and market
----------------
positioning are such that, if such hotel had been operated by Management Company
or one of its Affiliates as of the Effective Date, it would have been operated
as a member of the Courtyard by Marriott System (that is, as a limited service
hotel, as opposed to a full service hotel or one of the other limited service
brands (Residence Inn or Fairfield Inn) also operated by Affiliates of
Management Company. The term "Restricted Hotel" shall not include any one or
more of the following: (i) any existing (as of the Effective Date) member of
the Courtyard by Marriott System which is within the Restricted Area; (ii) any
full service Marriott hotel or Marriott suite hotel (or other similar full
service lodging product) or any Residence Inn by Marriott (or other similar
extended-stay lodging product) or any Fairfield Inn (or other similar
economy-priced lodging product); (iii) any hotel or hotels which are members of
a chain of hotels (provided that such chain has a minimum of four (4) or more
hotels in operation), all or substantially all (but in no event less than four
(4) hotels) of which is acquired by, or merged with, or franchised by or joined
through marketing agreement with Management Company or one of its Affiliates (or
the operation of which is transferred to Management Company or one of its
Affiliates); (iv) any hotel or hotels which are members of a group of hotels
which is (in a single
<PAGE>
transaction with a single seller or transferor) acquired by or merged with, or
franchised by or joined through marketing agreement, with Management Company or
one of its Affiliates (or the operation of which is transferred to Management
Company or one of its Affiliates), provided that such group of hotels contains
no fewer than four (4) hotels; (v) any future lodging product developed by
Management Company or one of its Affiliates which is not a lodging product which
would have been included within the Courtyard by Marriott System, as such system
existed as of the Effective Date; or (vi) any existing non-Marriott hotel within
the Restricted Area which is specifically designated on Exhibit D-1 as not being
a Restricted Hotel.
"Revenue Data Publication" shall mean Smith's STAR Report, a monthly
------------------------
publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee,
or an alternative source, reasonably satisfactory to both parties, of data
regarding the Revenue Per Room of hotels in the general trade area of the Hotel.
The "competitive set" for the Hotel shall be determined (with periodic
adjustments) by Management Company, subject to Owner's approval (such approval
not to be unreasonably withheld). If such Smith's STAR Report is discontinued
in the future, or ceases (in the reasonable opinion of either Owner or
Management Company) to be a satisfactory source of data regarding the Revenue
Per Room of various hotels in the general trade area of the Hotel, Management
Company shall select an alternative source, subject to Owner's approval (such
approval not to be unreasonably withheld). If the
<PAGE>
parties fail to agree on either such competitive set or such alternative source,
as the case may be, within a reasonable period of time, the matter shall be
resolved by arbitration pursuant to Section 20.13.
"Revenue Index" shall mean that fraction which is equal to (a) the Revenue
-------------
Per Room for the Hotel, divided by (b) the average Revenue Per Room for the
hotels in the Hotel's competitive set (including the Hotel), as set forth in the
Revenue Data Publication.
"Revenue Index Threshold" shall mean the number set forth on Exhibit "A-1"
-----------------------
hereto. However, if the entry of a new hotel into the Hotel's competitive set
(or the removal of a hotel from such competitive set) causes significant
variations in the Revenue Index which do not reflect the Hotel's true position
in the relevant market, appropriate adjustments shall be made to the Revenue
Index Threshold by mutual consent of Owner and Management Company (neither such
consent to be unreasonably withheld).
"Revenue Per Room" shall mean, (i) the term "revenue per room" as defined
----------------
by the Revenue Data Publication; or (ii) if the Revenue Data Publication is no
longer being used (as more particularly set forth in the definition of "Revenue
Data Publication"), the aggregate gross room revenues of the hotel in question
for a given period of time divided by the total room nights for such period. If
clause (ii) of the preceding sentence is being used, a "room" shall be a hotel
guest room which is keyed as a single unit, and
<PAGE>
shall include rooms which are temporarily unavailable due to: (i) maintenance or
(ii) ongoing renovation work.
"Sale/Leaseback Transaction" shall have the meaning set forth in Section
--------------------------
6.10.
"Sale of the Hotel" shall mean any sale, assignment, transfer or other
-----------------
disposition, for value or otherwise, voluntary or involuntary, of Owner's title
to the Hotel or the Site (either fee or leasehold title, as the case may be),
but shall not include a collateral assignment intended to provide security for a
loan. For purposes of this Agreement, a "Sale of the Hotel" shall also include a
lease (or sublease) of the entire Hotel or Site. The phrase "Sale of the
Hotel" shall also include any sale, transfer, or other disposition, for value or
otherwise, in a single transaction or a series of related transactions, of the
controlling interest in Owner. If Owner is a corporation, the phrase
"controlling interest" shall mean the right to exercise, directly or indirectly,
fifty percent (50%) or more of the voting rights attributable to the shares of
Owner (through ownership of such shares or by contract). If Owner is not a
corporation, the phrase "controlling interest" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of Owner. Notwithstanding the foregoing, the term "Sale
of the Hotel" shall not include any sale, assignment, transfer or other
disposition of the Hotel or the Site by Owner to an Affiliate of Owner.
<PAGE>
"Second Notice" shall have the meaning set forth in Section 6.02.
-------------
"Secured Loan" shall mean and include: (i) any indebtedness secured by a
------------
Mortgage encumbering the Hotel or all or any part of Owner's interest therein;
and (ii) all amendments, modifications, supplements and extensions of any such
Mortgage.
"Settlement Threshold Amount" shall mean the greater of (i) One Hundred
---------------------------
Thousand Dollars ($100,000) (as adjusted by the GDP Deflator); or (ii) a dollar
amount (to be re-determined whenever reasonably necessary) equal to the highest
amount paid in a representative sampling of Employee Claims, which have been
settled within the preceding twelve (12) months where each of such settlements
can be reasonably characterized as being (i) within the normal course of
business at the Hotel, and (ii) within the range of similar settlements at other
hotels comparable to the Hotel. Any dispute between the parties as to the
appropriate amount under clause (ii) of the preceding sentence shall be
submitted to arbitration under Section 20.13.
"Shuttle Vehicles" shall mean any car, van, bus or similar motor vehicle
----------------
used primarily for the purpose of transporting Hotel guests.
"Site" shall mean the parcel or parcels of land described in Exhibit "A"
----
attached hereto.
"Soft Goods" shall mean all fabric, textile and flexible plastic products
----------
(not including items which are classified as "Fixed Asset Supplies" under the
Uniform System of Accounts)which
<PAGE>
are used in furnishing the Hotel, including, without limitation: carpeting,
drapes, bedspreads, wall and floor coverings, mats, shower curtains and similar
items.
"Software" shall mean all computer software and accompanying documentation
--------
(including all future upgrades, enhancements, additions, substitutions and
modifications thereof), other than computer software which is commercially
available, which are used by Management Company in connection with the property
management system, the reservation system and all future electronic systems
developed by Management Company for use in the Hotel.
"Subsequent Owner" shall mean any individual or entity which acquires title
----------------
to or possession of the Hotel at or through a Foreclosure.
"Term" shall mean the Initial Term plus all Renewal Terms.
----
"Termination" shall mean the expiration or sooner cessation of this
-----------
Agreement.
"Transaction Costs" shall mean, with respect to the incurring of any
-----------------
Secured Loan, all normal transaction costs (to the extent actually incurred)
including, without limitation, the following: state and local transfer taxes;
escrow fees; recording costs; Mortgage recording taxes; costs of any survey
required by the Holder; reasonable fees of the Holder's outside attorneys and
accountants; appraisal fees; title insurance premiums; financing costs
(including "points"); reasonable attorneys' fees of Owner in connection with
such Secured Loan; environmental inspection, testing and reporting fees to the
extent required by the Holder;
<PAGE>
and brokerage commissions (provided that no such brokerage commissions shall be
recognized as "Transaction Costs" hereunder if they are made to a person or
entity affiliated with Owner, to the extent (if any) that such payments exceed
the normal customary amounts).
"Uniform System of Accounts" shall mean the Uniform System of Accounts for
--------------------------
Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of
New York City, Inc.
"Working Capital" shall mean assets which are used in the day-to-day
---------------
operation of the Hotel's business, including, without limitation, amounts kept
in petty cash funds, amounts deposited in operating bank accounts, receivables,
prepaid expenses and funds expended to purchase Inventories, less accounts
payable and accrued current liabilities.
END OF ARTICLE I
<PAGE>
ARTICLE II
APPOINTMENT OF MANAGEMENT COMPANY
---------------------------------
2.01 Appointment
-----------
Owner hereby appoints and employs Management Company as Owner's exclusive
agent to supervise, direct and control the management and operation of the Hotel
for the Term provided in Article IV. Management Company accepts said
appointment and agrees to manage the Hotel during the Term of this Agreement in
accordance with the terms and conditions hereinafter set forth. The performance
of all activities by Management Company hereunder shall be for the account of
Owner.
2.02 Delegation of Authority
-----------------------
Except as otherwise specifically set forth in this Agreement, Hotel
operations shall be under the exclusive supervision and control of Management
Company which, except as otherwise specifically provided in this Agreement,
shall be responsible for the proper and efficient operation of the Hotel.
Management Company shall have discretion and control, free from interference,
interruption or disturbance, but in all respects subject to the provisions of
this Agreement, in all matters relating to management and operation of the
Hotel, including, without limitation, the following: charges for rooms and
commercial space; credit policies; food and beverage prices and services;
employment policies; granting of leases, parking services, Licenses and
<PAGE>
concessions for shops and agencies within the Hotel (provided that the term of
any such lease, License or concession shall not exceed the Term of this
Agreement; and provided further that Owner's consent shall be required prior to
the execution by Management Company of any such lease, License or concession
which (i) has a term of more than five (5) years; or (ii) involves more than one
thousand (1,000) square feet of space within the Hotel); receipt, holding and
disbursement of funds; maintenance of bank accounts; procurement of Inventories,
supplies and services; participation in marketing, advertising plans, promotion
and publicity; and, generally, all activities necessary for operation of the
Hotel.
2.03 Operational Standards
---------------------
In accordance with the Courtyard by Marriott System Standards and the other
terms of this Agreement, Management Company shall, in connection with the Hotel,
perform each of the following functions (provided that in all cases, except as
otherwise specifically set forth in this Agreement, the costs and expenses of
performing such functions shall be Deductions):
A. Obtain and keep in full force and effect, either in its own name on
behalf of Owner or in Owner's name, as may be required by the Legal
Requirements, any and all Licenses necessary for the operation of the Hotel,
to the extent the same is within the control of Management Company (or, if same
is not within the control of Management Company, Management Company shall use
all due
<PAGE>
diligence and reasonable efforts to obtain and keep same in full force and
effect).
B. Recruit, employ, supervise, direct and (when appropriate) discharge the
employees at the Hotel.
C. Establish and revise, as necessary, administrative policies and
procedures, including policies and procedures for the control of revenue and
expenditures, for the purchasing of supplies and services, for the control of
credit, and for the scheduling of maintenance, and verify that the foregoing
procedures are operating in a sound manner.
D. Plan, execute, and supervise repairs and maintenance at the Hotel.
E. Procure (as agent for Owner) all Fixed Asset Supplies and Inventories.
F. Maintain the Operating Accounts.
G. Prepare and deliver Accounting Period Statements, Annual Operating
Statements, Annual Operating Projections, Building Estimates, FF&E Estimates,
and such other budgets and reports as are required by this Agreement.
H. Establish prices, rates and charges for services provided in the Hotel,
including room rates.
I. As agent for Owner, negotiate and enter into leases, concessions and
Licenses for shops and other facilities within the Hotel.
<PAGE>
J. Administer the leases, concessions and Licenses for shops and other
facilities within the Hotel (whether entered into pursuant to subsection I,
above, or otherwise).
K. Provide the Central Office Services and the Chain Services.
L. Provide, or cause to be provided, risk management services relating to
the types of insurance required to be obtained or provided by Management Company
under this Agreement, provided that the costs and expenses of providing such
services are to be paid as described in Section 12.04.B.
M. Reasonably cooperate with Owner concerning (i) disputes with any Holder
regarding the Hotel, (ii) contests of Impositions and Legal Requirements, and
(iii) adjustments of insurance claims and condemnation awards involving the
Hotel.
N. Reasonably cooperate (provided that Management Company shall not,
except as otherwise specifically set forth in Section 6.01, be obligated to
enter into any amendments of this Agreement) with Owner in any attempt(s) by
Owner to effectuate a Sale of the Hotel (provided that nothing herein shall
affect the provisions of Section 20.05), or to obtain any Secured Loan. If
given reasonable notice, such cooperation shall include, without limitation:
(i) answering any reasonable questions by prospective purchasers and Holders;
(ii) preparing lists and schedules of leases, concessions, FF&E, Fixed Asset
Supplies, Inventories, and similar items (but specifically excluding customer
lists); and (iii) making such certifications and representations to Owner, to
such purchasers and
<PAGE>
to such Holders, regarding the Hotel and the operation thereof, as Owner may
reasonably request (taking into account the extent of Management Company's
control and responsibility provided for hereunder). Owner shall promptly
reimburse Management Company, from its own funds and not as a Deduction, for the
reasonable costs and expenses incurred by Management Company in connection with
any actions necessary to comply with the requirements of this Section 2.03.N,
provided that such actions are not otherwise required under other provisions of
this Agreement.
O. Arrange for and supervise public relations and advertising, and prepare
annual marketing plans.
P. Endeavor to manage the timing of expenditures to replenish Inventories,
Fixed Asset Supplies, payments on accounts payable and collections of accounts
receivable, so as to avoid or minimize any cash deficits with respect to Hotel
operations, which deficits would otherwise require additional funding of Working
Capital by Owner.
Q. Comply with all provisions in the Existing Ground Lease and in any
Existing Mortgages which are by their terms applicable to the operation of the
Hotel; provided, however, that all practices and procedures used by Management
Company in the operation of the Hotel as of the Effective Date shall be deemed
to be in compliance with the Existing Ground Lease and all Existing Mortgages;
and provided further, that if either the Ground Lessor or any Holder under an
Existing Mortgage shall, from time to time, notify Management Company that it
has determined that certain
<PAGE>
practices and procedures which are used by Management Company in the operation
of the Hotel are not in compliance with the provisions of the Existing Ground
Lease or such Existing Mortgage (as the case may be), Management Company shall
promptly alter such practices and procedures to ensure such compliance; and
provided further, that if such compliance would require work by Management
Company which is beyond the normal course of Hotel operations, or would impose
additional financial burdens on the Hotel which are beyond the normal course of
Hotel operations, Owner (from its own funds, not as a Deduction) shall
compensate Management Company for such work and such additional burdens.
2.04 Limitations on Authority
------------------------
A. Notwithstanding anything in Section 2.02 or elsewhere in this
Agreement to the contrary (unless otherwise stated in this Section 2.04), and in
addition to the various other provisions of this Agreement which prohibit
Management Company from taking certain actions or which allow certain actions
only if Owner's consent thereto has been obtained, Management Company shall not,
without the prior written approval of Owner, which approval Owner may withhold
in its sole discretion, perform any of the following actions in connection with
the Hotel and on behalf of or burdening Owner:
1. Acquiring any land or interest therein;
<PAGE>
2. Acquiring any capital assets or interest therein except (i) items in
the approved Building Estimate, and (ii) FF& E, Fixed Asset Supplies and
Inventories (to the extent the same constitute capital assets) in the ordinary
course of business as expressly provided for in this Agreement;
3. Financing, refinancing or mortgaging of any portion of the Hotel
or the revenue due to Owner therefrom;
4. Selling (other than dispositions of FF&E, Fixed Asset Supplies
and Inventories in the ordinary course of business as expressly provided for in
this Agreement), leasing (other than as expressly provided for in this
Agreement, including without limitation, Section 2.02 of this Agreement), or
other transferring of, or the pledging or placing of any lien or encumbrance on,
any part of the Hotel;
5. In the event of a total or partial condemnation, consenting to
any award or participating in any condemnation proceeding, except as expressly
provided for in this Agreement;
6. Entering into, modifying or terminating any lease, concession or
License, except to the extent permitted under Section 2.02;
7. Adjusting any claim or settling any Litigation which (a) is not
covered by any of the insurance policies described in Article XII and is not an
Employee Claim, and which would result in a Deduction or payment in excess of
Five Hundred Thousand Dollars ($500,000) in any Fiscal Year, as adjusted by the
GDP Deflator, or (b) would impose on Owner any material liability or obligation
<PAGE>
other than the payment of money, or would require Owner to make any material
admission; or
8. Adjusting any claim, under applicable property insurance
policies, regarding injury or damage to the Hotel or its contents, where the
estimated cost of restoration is in excess of One Million Dollars ($1,000,000),
as adjusted by the GDP Deflator.
2.05 Covenants, Conditions or Restrictions
--------------------------------------
A. As of the Effective Date, there are existing covenants, conditions,
restrictions and/or agreements, including reciprocal easements or cost-sharing
arrangements (all of the foregoing types of encumbrances on the Hotel, or
agreements relating to the Hotel, whether existing as of the Effective Date or
not, shall be collectively referred to as "CC&R's"; those CC&R's which are in
existence as of the Effective Date shall be referred to in this Agreement as
"Existing CC&R's"). Management Company hereby gives its consent to all Existing
CC&R's. Except as otherwise specifically set forth to the contrary in Exhibit
"F" hereto, all costs, expenses and charges which are imposed on the Hotel under
the Existing CC&R's shall be paid from Gross Revenues as Deductions. Those
certain costs, expenses and charges which are described on Exhibit "F" hereto as
"capital charges" shall be paid by Owner, from its own funds, and all such
payments shall be treated for purposes of this Agreement as Additional Invested
Capital expended by Owner.
<PAGE>
B. CC&R's which are entered into, or become encumbrances on the Hotel
and/or the Site, after the Effective Date shall be referred to in this Agreement
as "Future CC&R's". Owner agrees that it will give Management Company, for
Management Company's prior approval, written notice of its intention to execute
any Future CC&R's, such notice to be reasonably in advance of the execution
thereof. Owner covenants that, during the Term of this Agreement, there will
not be (unless Management Company has given its prior written consent thereto)
any Future CC&R's affecting the Site or the Hotel: (i) which purport to impose
any material financial obligations on the Hotel; (ii) which would prohibit or
limit Management Company from operating the Hotel, including cocktail lounges,
restaurants and other facilities customarily a part of or related to a
first-class limited service hotel, in accordance with the Courtyard by Marriott
System Standards; or (iii) which would allow Hotel facilities (for example,
parking spaces) to be used by persons other than guests, invitees or employees
of the Hotel.
C. All financial obligations imposed on Owner or on Management Company or
on the Hotel pursuant to any Future CC&R's shall be paid by Owner from its own
funds, and not from Gross Revenues or from the FF&E Reserve, unless Management
Company has given its prior written consent to such Future CC&R's. Management
Company agrees that it will not unreasonably withhold its consent to any such
Future CC&R's; provided, however, that Management Company shall be entitled to
withhold its consent in its discretion
<PAGE>
if a proposed Future CC&R would have a material impact on the operation of the
Hotel, as described in clauses (i), (ii) or (iii) of Section 2.05.B. Upon
receipt of such consent from Management Company, such sums shall be Deductions
in computing Operating Profit.
D. Owner shall not waive any protections which benefit the Hotel pursuant
to existing restrictive covenants without the prior written consent of
Management Company which consent shall not be unreasonably withheld, conditioned
or delayed.
2.06 Licenses and Permits
--------------------
Owner agrees that, upon request by Management Company, it will sign
promptly and without charge applications for Licenses.
END OF ARTICLE II
<PAGE>
ARTICLE III
OWNERSHIP OF THE HOTEL
----------------------
3.01 Ownership of the Hotel
----------------------
A. Each party acknowledges that the status of title to the Site and to
the Hotel is as described on Exhibit "F" hereto; neither party will hold the
other party responsible for any defects in said status of title, and each party
hereby releases the other party from all claims stemming from any such defects.
B. Owner hereby covenants that, throughout the Term of this Agreement, it
will not change the status of title to the Site from that which is described on
Exhibit "F" hereto, except that Owner shall have the right either (i) to
effectuate a Sale of the Hotel in accordance with Article XIX, or (ii) to
encumber the Site and the Hotel with the following:
1. Mortgages which are given to secure any one or more Qualified
Loans;
2. Liens for Impositions or other public charges not yet due or which
are being contested in good faith; and
3. Easements or other encumbrances (not including those described in
subsection 1 or 2 above) which do not adversely affect the operation of the
Hotel by Management Company and which are not prohibited pursuant to Section
2.05.B of this Agreement.
C. Owner shall indemnify, defend and hold Management Company and its
Affiliates harmless from claims by entities which have loaned money to Owner
that Management Company (or any of such
<PAGE>
Affiliates) owes any such lender all or any portion of such indebtedness.
D. Management Company shall indemnify, defend and hold Owner and its
Affiliates harmless from claims by entities which have loaned money to
Management Company that Owner (or any of such Affiliates) owes any such lender
all or any portion of such indebtedness.
END OF ARTICLE III
<PAGE>
ARTICLE IV
TERM
----
4.01 Term
----
A. The initial term ("Initial Term") of this Agreement shall commence with
the Effective Date and, unless sooner terminated as herein provided, shall
continue until the expiration of Fiscal Year 2013. The Term shall thereafter be
automatically renewed for each of three (3) successive periods of ten (10) full
Fiscal Years each ("Renewal Terms"), unless either: (i) Management Company, at
its option, notifies Owner, in accordance with Section 20.09, at any time within
the period of eighteen (18) months prior to the expiration of the Initial Term
or the then current Renewal Term, as the case may be, of its intention not to
renew; or (ii) Management Company has committed an Event of Default, and has
been notified by Owner of such Event of Default, under Article XVI of this
Agreement, as of the date of any such renewal.
B. If Management Company so notifies Owner of its intention not to renew
pursuant to Section 4.01.A, Management Company shall continue to manage the
Hotel pursuant to this Agreement until the termination date set forth in such
notice, provided that such termination date shall be: (i) no less than twelve
(12) months after the date of such notice; and (ii) in no event earlier than
the expiration date of the Initial Term or the then current Renewal Term, as the
case may be. Such termination date may be after the expiration of the Initial
Term or the then current Renewal Term, as
<PAGE>
the case may be, provided that the requirements of the preceding sentence are
satisfied. However, if Management Company has so notified Owner of its
intention not to renew, Owner may, at its option, by written notice to
Management Company at least ninety (90) days prior to the date on which Owner
desires Termination to occur, reduce the period of time prior to Termination to
any shorter period of time which Owner desires, provided that such shorter
period of time shall be at least the greater of: (a) ninety (90) days,
(beginning as of the date of such notice from Owner), or (b) the minimum period
of time which Management Company reasonably decides is prudent, given the
requirements of the applicable Employment Laws regarding employee discharges.
In no event shall the fact that Management Company may, pursuant to the
preceding sentence, be managing the Hotel after the expiration of the Initial
Term or the then current Renewal Term, as the case may be, be construed as an
election by Management Company to renew the Term, if Management Company has
elected (in accordance with this Section 4.01) in writing not to so renew.
C. If Owner has the right, under the provisions of the Existing Ground
Lease, to elect to renew or extend the term of the Existing Ground Lease, Owner
shall so notify Management Company at least one hundred eighty (180) days (but
no more than one (1) year) prior to the expiration of the period within which
Owner is obligated to notify the Ground Lessor of its election to renew or
extend the term of the Existing Ground Lease. Such notice from Owner shall
contain all of the relevant facts about the impending
<PAGE>
election to renew or extend, including the length of the period of renewal or
extension. Unless Management Company notifies Owner, within a period of ninety
(90) days after receipt of the foregoing notice from Owner, that Management
Company disapproves the renewal or extension of the term of the Existing Ground
Lease, Owner will, by proper notice to the Ground Lessor, within the applicable
time period under the Existing Ground Lease, elect to renew or extend the term
of the Existing Ground Lease.
D. If, after proper notice from Owner in accordance with Section 4.01.C,
Management Company fails to disapprove the renewal or extension of the term of
the Existing Ground Lease, the Term of this Agreement shall be deemed to be
automatically extended to the later of: (i) the expiration of the term of the
Existing Ground Lease, as renewed or extended in accordance with Section 4.01.C;
or (ii) the date on which the Term of this Agreement would otherwise have
expired absent this sentence. If, in order to comply with the preceding
sentence, it is necessary for Management Company to waive its option not to
renew with respect to one or more Renewal Terms, such waiver shall be deemed to
have been given; however, Management Company shall retain the right not to renew
(as more particularly described in Section 4.01 A) as to any portion of such
Renewal Term(s) which would occur after the expiration of the term of the
Existing Ground Lease, as renewed or extended in accordance with Section 4.01.C.
E. If, after proper notice from Owner in accordance with Section 4.01.C,
Management Company disapproves the renewal or
<PAGE>
extension of the term of the Existing Ground Lease, the Term of this Agreement
shall be deemed to be automatically reduced to the earlier of: (i) the
expiration of the term of the Existing Ground Lease; or (ii) the date on which
the Term of this Agreement would otherwise have expired absent this sentence.
4.02 Actions to be Taken Upon Termination
------------------------------------
Upon a Termination of this Agreement, the following shall be applicable:
A. Management Company shall, within sixty (60) days after Termination of
this Agreement, prepare and deliver to Owner a final accounting statement with
respect to the Hotel, as more particularly described in Section 9.01 hereof,
along with a statement of any sums due from Owner to Management Company pursuant
hereto, dated as of the date of Termination. Within thirty (30) days after the
receipt by Owner of such final accounting statement, the parties will make
whatever cash adjustments are necessary pursuant to such final statement. The
cost of preparing such final accounting statement shall be a Deduction, unless
the Termination occurs as a result of an Event of Default by either party, in
which case the defaulting party shall pay such cost. Management Company and
Owner acknowledge that there may be certain adjustments for which the necessary
information will not be available at the time of such final accounting, and the
parties agree to readjust such amounts and make the necessary cash adjustments
when such information becomes available; provided, however, that (unless
<PAGE>
there are ongoing disputes of which each party has received notice) all accounts
shall be deemed final as of one hundred eighty (180) days after such
Termination.
B. As of the date of the final accounting referred to in subsection A
above, Management Company shall release and transfer to Owner any of Owner's
funds which are held or controlled by Management Company with respect to the
Hotel, with the exception of funds to be held in escrow pursuant to Section
12.04, and Section 14.01.F. During the period between the date of Termination
and the date of such final accounting, Management Company shall pay (or reserve
against) all Deductions which accrued (but were not paid) prior to the date of
Termination, using for such purpose any Gross Revenues prior to the date of
Termination.
C. Management Company shall make available to Owner such books and
records respecting the Hotel (including those from prior years, subject to
Management Company's reasonable records retention policies) as will be needed by
Owner to prepare the accounting statements, in accordance with the Uniform
System of Accounts, for the Hotel for the year in which the Termination occurs
and for any subsequent year. Such books and records shall not include: (i)
employee records which must remain confidential either under Legal Requirements
or under reasonable system-wide corporate policies of Management Company; (ii)
any Intellectual Property; or (iii) customer lists.
D. Management Company shall (to the extent permitted by Legal
Requirements) assign to Owner or any other manager employed
<PAGE>
by Owner to operate and manage the Hotel, all Licenses for the Hotel which have
been issued in Management Company's name; provided that if Management Company
has expended any of its own funds in acquiring such Licenses or in transferring
any such Licenses to Owner, Owner shall reimburse Management Company therefor if
it has not done so already.
E. All Proprietary Signage shall be removed by Management Company from
the Hotel and from the Site (and from any locations other than the Site). The
cost of such removal shall be a Deduction, unless the Termination occurs
either: (i) as a result of an Event of Default by either party, in which case
the defaulting party shall pay the cost of such removal from its own funds, and
not as a Deduction; or (ii) as a result of Management Company's election not to
renew the Term, as of the expiration of either the Initial Term or any Renewal
Term (as the case may be), in which case Management Company shall pay the cost
of such removal from its own funds, and not as a Deduction.
F. Various other actions shall be taken, as described in this Agreement,
including, but not limited to, the actions described in Sections 7.01, 10.02,
10.03, 10.04, 12.04.B, and 14.01.F.
G. Management Company shall peacefully vacate and surrender the Hotel to
Owner.
The provisions of this Section 4.02 shall survive any Termination.
<PAGE>
4.03 Performance Termination
-----------------------
A. Subject to the provisions of Section 4.03.B below, Owner shall have
the option to terminate this Agreement if:
1. With respect to any two (2) consecutive full Fiscal Years (not
including any Fiscal Year prior to Fiscal Year 1996), Operating Profit less the
amount of Ground Lease Rental, if applicable, for each of such two (2) Fiscal
Years is less than the Performance Termination Threshold; and
2. The Revenue Index of the Hotel during each of such two (2)
consecutive Fiscal Years is less than the Revenue Index Threshold; and
3. The fact that the Hotel is not meeting the tests set forth in
Section 4.03.A(1) and (2) is not the result of either (x) Force Majeure, or (y)
any major renovation of the Hotel. Such option to terminate shall be exercised
by serving written notice thereof on Management Company no later than sixty (60)
days after the receipt by Owner of the annual accounting under Section 9.01
hereof for the second (2nd) of the two (2) Fiscal Years referred to in Section
4.03.A(1). If Management Company does not elect to avoid such Termination
pursuant to Section 4.03.B below, this Agreement shall terminate as of the end
of the fourth (4th) full Accounting Period following the date on which
Management Company receives Owner's written notice of its intent to terminate
this Agreement; provided that such period of time shall be extended as required
by applicable Legal Requirements pertaining to the termination of the employment
of the employees at the Hotel.
<PAGE>
Owner's failure to exercise its right to terminate this Agreement pursuant to
Section 4.03.A with respect to any given Fiscal Year shall not be deemed an
estoppel or waiver of Owner's right to terminate this Agreement with respect to
subsequent Fiscal Years to which this Section 4.03.A may apply.
B. Upon receipt of Owner's written notice of Termination under Section
4.03.A, Management Company shall have the option, to be exercised within sixty
(60) days after receipt of said notice, to avoid such Termination by paying
Owner an amount (the "Cure Payment") equal to one hundred five percent (105%) of
the amount by which Operating Profit less Ground Lease Rental, if any, for
either of the two (2) Fiscal Years in question (i.e., the two (2) Fiscal Years
referred to in Section 4.03.A(1)) was less than the Performance Termination
Threshold. Any such Cure Payment shall be accounted for as a fee to Owner in
connection with the avoidance of such Termination. In the event Management
Company makes a Cure Payment pursuant to this Section 4.03.B, the Fiscal Year
with respect to which such Cure Payment was made shall thereafter not be
treated, for purposes of subsequent elections by Owner pursuant to Section
4.03.A, as a Fiscal Year in which the circumstances described in Section
4.03.A(1) have occurred. If Management Company exercises such option to make
such Cure Payment, then the foregoing Owner's election to terminate this
Agreement under Section 4.03.A shall be cancelled and of no force or effect with
respect to the two (2) Fiscal Years in question and this Agreement shall not
terminate. Such cancellation, however, shall not affect
<PAGE>
the right of Owner, as to each subsequent Fiscal Year to which Section 4.03.A
applies, to again elect to terminate this Agreement pursuant to the provisions
of Section 4.03.A (which subsequent election shall again be subject to
Management Company's rights under this Section 4.03.B). If Management Company
does not exercise its option to make the Cure Payment, then this Agreement shall
be terminated as of the date set forth in Section 4.03.A. Any Cure Payment which
is paid by Management Company pursuant to this Section 4.03.B shall not be
recoverable by Management Company. Any Cure Payment which is paid by Management
Company pursuant to this Section 4.03.B shall only operate to cancel Owner's
election to terminate this Agreement under Section 4.03.A, and shall not operate
to cure any outstanding Defaults by Management Company under Article XVI.
END OF ARTICLE IV
<PAGE>
ARTICLE V
COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS
-------------------------------------------------
5.01 Management Fees
---------------
A. In consideration of the services it provides pursuant to this
Agreement, Management Company shall retain the Management Fees. Owner's
Priority, the Base Management Fee, Deferred Contingent Base Management Fees, the
Courtyard by Marriott System Fee and the Incentive Management Fee shall be
appropriately prorated for any Partial Fiscal Year.
B. Notwithstanding the provisions of Article IX of this Agreement
permitting the consolidation of reports and co-mingling of certain funds with
other hotels owned by Owner, the Base
Management Fee, Deferred Contingent Management Fees, Courtyard by Marriott
System Fee and Incentive Management Fee shall be calculated based on the
revenues generated by the Hotel and not on a consolidated basis with any other
hotels which may be owned by Owner.
5.02 Distribution of Operating Profit In each Fiscal Year, Operating
--------------------------------
Profit shall be distributed to Owner and Management Company in accordance with
the following priorities:
A. Owner shall first receive an amount equal to the lesser of: (i)
Owner's Priority; or (ii) Operating Profit.
B. Management Company shall next receive (i) the Base Management Fee,
provided, however, that if, in any Fiscal Year, the
<PAGE>
Base Management Fee exceeds Net Operating Profit, Management Company's right to
receive the Base Management Fee shall be deferred to the extent of such excess,
and such deferred sums shall become Deferred Contingent Base Management Fees;
(ii) the Deferred Contingent Base Management Fees; to the extent that Net
Operating Profit is otherwise sufficient for such purposes; and (iii) an amount
equal to the Incentive Management Fee.
C. Owner shall receive all Operating Profit remaining after the
distributions made pursuant to the preceding subparagraphs of this Section 5.02.
5.03 Accounting and Interim Payments
-------------------------------
A. On or before the twentieth (20th) day after the close of each
Accounting Period, Management Company shall deliver to Owner a reasonably
detailed accounting statement (the "Accounting Period Statement") in
substantially the form set forth in Exhibit "B" hereto. Upon Owner's written
request therefor, Management Company shall forward copies of any such Accounting
Period Statement to any Holders or Ground Lessors, at the addresses specified by
Owner. Such Accounting Period Statement shall set forth the results of the
operations of the Hotel for the preceding Accounting Period and for the Fiscal
Year-to-date, all in accordance with generally accepted accounting principles
applied on a consistent basis. Each Accounting Period Statement shall be
accompanied by a statement, by either the controller, assistant controller of
the Hotel or other authorized financial representative of Management Company,
that, to
<PAGE>
the best of his or her knowledge and belief, and subject to routine year-end
audit and adjustment, such Accounting Period Statement is true and correct in
all material respects. Each Accounting Period Statement shall include: (i)
average rate and occupancy, Gross Revenues, Operating Profit, Owner's Priority,
the Management Fees, and the interim Owner's Distribution; and (ii) comparisons
with the categories for the prior Fiscal Year. With each such Accounting Period
Statement, Management Company shall transfer any interim Owner's Distribution
due to Owner, and shall retain any interim Management Fees due to Management
Company. Calculations and payments of the Management Fees and the Owner's
Distribution with respect to each Accounting Period within a Fiscal Year shall
be accounted for cumulatively.
B. Within seventy-five (75) days after the close of each Fiscal Year,
Management Company shall submit an Annual Operating Statement, as more fully
described in Section 9.01, for such Fiscal Year to Owner, which Annual Operating
Statement shall be controlling over the interim Accounting Period Statements.
Any adjustments or payments required by any such Annual Operating Statement
shall be made promptly by the parties. Operating Losses shall not be carried
forward or backward to subsequent or prior Fiscal Years.
<PAGE>
5.04 Accounting for Period Prior to Effective Date
---------------------------------------------
A. It shall be a general principle in the accounting for the Hotel that
all liabilities incurred and/or income generated prior to the Effective Date, or
properly allocated to the period prior to the Effective Date under generally
accepted accounting principles, shall be included in the Accounting Period
Statements and the Annual Operating Statements for the Hotel pursuant to this
Agreement for the Fiscal Year in which such liabilities are paid or such income
is received, provided, however, that the foregoing shall not be reflected in the
computation of Operating Profit for purposes of Section 4.03.
B. As of the Effective Date, the cash on hand at the Hotel shall be
deposited in one of the Operating Accounts set up by Management Company pursuant
to Section 9.02, and shall be treated as part of the Working Capital described
in Section 7.01.
END OF ARTICLE V
<PAGE>
ARTICLE VI
FINANCING OF THE HOTEL
----------------------
6.01 Amendments of Management Agreement
----------------------------------
A. If requested by any Qualified Lender or prospective Qualified Lender
(in which event such amendments shall take effect as of the funding of such
Qualified Loan), Management Company agrees to execute and deliver any amendment
of this Agreement which is reasonably required by such Qualified Lender or
prospective Qualified Lender, provided that Management Company shall be under no
obligation to amend this Agreement if the result of such amendment would be:
(i) to reduce, defer or delay the amount of any payment to be made to Management
Company hereunder; (ii) to materially increase Management Company's obligations
under this Agreement; (iii) to change the Term of this Agreement; (iv) to cause
the Hotel to be operated other than pursuant to the Courtyard by Marriott System
Standards; (v) to amend either Section 8.02 or Section 14.01; or (vi) to
otherwise materially affect Management Company's rights under this Agreement.
Any such amendment shall take effect as of the funding of such Qualified Loan.
B. In addition to the provisions of Section 6.01.A, if a Qualified Lender
or prospective Qualified Lender requests that Management Company enter into an
amendment of this Agreement, and if such amendment would impose additional
duties (for example, an increase in the reporting requirements or in the
record-keeping requirements, or adding the obligation to prepare parallel
<PAGE>
accounting statements using a different fiscal year) on Management Company or
would otherwise adversely affect Management Company's rights under this
Agreement, but not to the degree described in clauses (i) through (vi) of
Section 6.01.A, Management Company hereby agrees that it will execute and
deliver such requested amendment of this Agreement, provided that Owner
compensates Management Company for the additional burden imposed by such
amendment out of Owner's funds and not as a Deduction. It is understood that
the word "burden", as used in the preceding sentence, shall encompass not only
additional work to be performed by Management Company, but also any adverse
effect on the Incentive Management Fee which would be caused by requiring
increased services by third parties. Any dispute as to whether Management
Company is entitled to any compensation pursuant to this Section 6.01.B, or as
to the amount of such compensation, shall be resolved by arbitration pursuant to
Section 20.13.
C. Proposed amendments to this Agreement which are requested by any
Qualified Lender or prospective Qualified Lender, and which would affect the
insurance provisions set forth in Article XII, shall be governed exclusively by
Article XII.
6.02 Notice and Opportunity to Cure
------------------------------
A. In the event of: (i) a Default by Owner in the performance or
observance of any of the terms and conditions of this Agreement; or (ii) any
other occurrence which entitles Management Company to terminate this Agreement,
and in the event that Management Company
<PAGE>
gives written notice thereof to Owner pursuant to Article XVI of this Agreement,
Management Company shall also give a duplicate copy (herein referred to as the
"First Notice") of such notice to each Qualified Lender, at the address
previously provided to Management Company. Any such notice will be sent in the
manner described in Section 20.09 hereof. In addition, in the event that such
Default is not cured within the applicable cure period under Article XVI of this
Agreement, and Management Company intends to exercise its remedy of terminating
this Agreement, Management Company shall send a second notice (the "Second
Notice"), to each Qualified Lender, at the same address and in the same manner
applicable to the First Notice stating Management Company's intention to
terminate this Agreement. Management Company shall forbear from taking any
action to terminate this Agreement for a period of thirty (30) days after the
service of the First Notice, and for an additional period of thirty (30) days
after the service of the Second Notice (if such Second Notice is required, as
set forth above).
B. In the event of a Default by Owner under the provisions of this
Agreement, Management Company agrees to accept performance by any Qualified
Lender with the same force and effect as if same were performed by Owner, in
accordance with the provisions and within the cure periods prescribed in this
Agreement (except that each Qualified Lender shall have such additional cure
periods, not available to Owner, as are set forth in this Section 6.02).
C. No notice given by Management Company to Owner shall be effective as a
notice under Article XVI of this Agreement unless
<PAGE>
the applicable duplicate notice to each Qualified Lender which is required under
Section 6.02.A (either the First Notice or the Second Notice, as the case may
be) has been given. It is understood that any failure by Management Company to
give such a duplicate notice (either the First Notice or the Second Notice, as
the case may be) to any Qualified Lender shall not itself be a Default by
Management Company under this Agreement, but rather shall operate only to void
the effectiveness of any such notice by Management Company to Owner under
Article XVI of this Agreement.
D. Except as specifically limited by this Section 6.02, nothing herein
shall preclude Management Company from exercising any of its rights or remedies
against Owner with respect to any Default by Owner under this Agreement.
6.03 Assignment of Management Agreement
----------------------------------
Owner shall have the right to collaterally assign to any Qualified Lender,
as additional security for the indebtedness evidenced by a Qualified Loan, all
of Owner's right, title and interest in and to this Agreement, including the
right to distributions payable to Owner pursuant to Article V thereof. If,
pursuant to any such assignment (or subsequent loan documentation entered into
between Owner and a Qualified Lender with a similar purpose), and provided that
Management Company has previously received a copy of such assignment and such
subsequent documentation, Management Company may receive (from time to time) a
notice or notices from such Qualified Lender directing Management
<PAGE>
Company to pay to such Qualified Lender subsequent distributions under Article V
of this Agreement which would otherwise be payable to Owner, Management Company
shall comply with any such notice. Management Company shall continue to make
payments in compliance with any such notice from such Qualified Lender until
Management Company receives written instructions to the contrary from such
Qualified Lender. Owner hereby gives its consent to any such payments by
Management Company to such Qualified Lender which are in compliance with any
such notice. The foregoing consent by Owner shall be deemed to be irrevocable
until the entire Qualified Loan has been discharged, as evidenced either by the
recordation of a satisfaction or release executed by such Qualified Lender, or
by the delivery of a written statement to that effect from such Qualified Lender
to Management Company. Management Company shall comply with the direction set
forth in any such notice without any necessity to investigate why such Qualified
Lender sent such notice, or to confirm whether or not Owner is in fact in
default under the terms of such Qualified Loan. If Management Company receives
such notices from more than one Qualified Lender, Management Company shall (at
its option) either (i) comply with the provisions of the notice sent by the
Qualified Lender whose Qualified Loan has the senior lien priority, or (ii)
institute Litigation for a declaratory judgment to determine to whom payments
under this Agreement shall be made (in which case, the costs and expenses of
such Litigation, including attorneys' fees, shall be Deductions).
<PAGE>
6.04 Subordination of Management Agreement
-------------------------------------
A. This Agreement, and Management Company's right to continue to manage
and operate the Hotel pursuant to this Agreement, are and shall be subject and
subordinate to the lien of any Qualified Loan, (i.e., upon a Foreclosure of any
such Qualified Loan, such Qualified Lender, at its option, unless it has
otherwise agreed to the contrary in a Non-Disturbance Agreement, shall have the
right to terminate this Agreement). Notwithstanding the foregoing, during the
Term of this Agreement, all debt service (including increased or accelerated
payments after a default) payable with respect to any Qualified Loan shall be
paid exclusively from Owner's Distribution.
B. Section 6.04.A is intended to be, and is, fully effective and binding,
as between Management Company and any such Qualified Lender; however, Management
Company agrees to execute such confirmatory documentation (in recordable form in
the jurisdiction in which the Hotel is located) as such Qualified Lender shall
reasonably request.
C. Notwithstanding the possible termination of this Agreement which is
set forth in the foregoing provisions of this Section 6.04, it is understood
that, until such time as this Agreement is validly terminated either (i)
pursuant to the applicable provision of this Agreement, or (ii) pursuant to a
court order in connection with the Foreclosure of a Qualified Loan (assuming
that such termination does not breach any binding Non-Disturbance Agreement),
the Holder of each Qualified Loan will
<PAGE>
honor and recognize the right of Management Company to operate the Hotel in
accordance with this Agreement (including the right of Management Company to
collect all Gross Revenues and make expenditures in accordance with this
Agreement).
6.05 Non-Disturbance Agreement
-------------------------
A. Owner agrees that, in connection with the obtaining by Owner of any
Secured Loan or Secured Loans, from time to time, Owner will use good faith
reasonable efforts to obtain a Non-Disturbance Agreement from each Holder or
Holders. The phrase "good faith reasonable efforts" shall be determined by
reference to the following: (i) normal loan underwriting procedures and
practices (including those practices relating to non-disturbance agreements)
which are generally being implemented by entities which are making loans similar
to such Secured Loan, as of that point in time; and (ii) the concessions which
Management Company is, as of that point in time, reasonably prepared to make in
order to satisfy the objectives of lenders in connection with the lender-manager
relationship after a Foreclosure. In no event, however, shall the failure of
Owner to obtain such a Non-Disturbance Agreement affect or modify any of the
responsibilities of Management Company towards Qualified Lenders which are
contained elsewhere in this Article VI.
B. Notwithstanding Section 6.05.A, Owner agrees that, prior to obtaining
any Qualified Loan, it will obtain from each prospective Holder or Holders
thereof a Non Disturbance Agreement pursuant to which Management Company's
rights under this Agreement
<PAGE>
will not be disturbed as a result of a loan default stemming from non-monetary
factors, which (i) relate to Owner, and (ii) are not Defaults by Management
Company under Article XVI of this Agreement .
6.06 Attornment
----------
A. Management Company agrees that, subject to the provisions of Section
6.06.B, upon a Foreclosure of any Qualified Loan, provided that this Agreement
has not expired or otherwise been earlier terminated in accordance with its
terms, Management Company shall attorn to any Subsequent Owner and shall remain
bound by all of the terms, covenants and conditions of this Agreement for the
balance of the remaining Term (including any Renewal Terms) with the same force
and effect as if such Subsequent Owner were the "Owner" under this Agreement;
provided, however, that Management Company shall be under no such obligation to
so attorn, and, to the contrary, shall thereupon have the right to terminate
this Agreement on thirty (30) days' prior written notice to both Owner and such
Subsequent Owner: (i) if such Subsequent Owner would not qualify as a permitted
transferee under Section 19.01.A of this Agreement; or (ii) unless such
Subsequent Owner, within twenty (20) days after the Foreclosure Date (or, in the
event such Subsequent Owner acquires title to the Hotel after the Foreclosure
Date, within twenty (20) days after the date of such acquisition of title to the
Hotel), assumes all of the obligations of the "Owner" under this Agreement which
arise from and after the Foreclosure Date (or
<PAGE>
such later date of acquisition of title to the Hotel), pursuant to a written
assumption agreement which shall be delivered to Management Company. Upon the
written request of any Qualified Lender, Management Company shall periodically
execute and deliver a statement, in a form reasonably satisfactory to such
Qualified Lender, reaffirming Management Company's obligation to attorn as set
forth in this Section 6.06.A.
B. It is understood by the parties that, in view of the fact that a
Qualified Lender will have the right to terminate this Agreement on a
Foreclosure under the provisions of Section 6.04, Management Company has an
interest in being informed, within a reasonable period of time after a Qualified
Loan Acceleration, of whether or not such Qualified Lender intends to exercise
such right of termination. Accordingly, if, by no later than that date (the
"Post-Foreclosure Decision Date") which is ninety (90) days after the date of
any Qualified Loan Acceleration, Management Company has not received a
Non-Disturbance Agreement executed by the Holder of such Qualified Loan,
Management Company shall, as of the Post-Foreclosure Decision Date and
thereafter, no longer be under any obligation to attorn (pursuant to the
provisions of Section 6.06.A) with respect to any Foreclosure of that Qualified
Loan, and Management Company shall have the option to terminate this Agreement,
by written notice to both Owner and the Holder of each existing Qualified Loan,
at any time within the sixty (60) day period immediately following the
Post-Foreclosure Decision Date.
<PAGE>
6.07 No Modification or Termination of Agreement
-------------------------------------------
If the documents evidencing and securing a Qualified Loan require the
consent of the Qualified Lender to any amendment or modification of this
Agreement which materially affects such Qualified Lender, no such amendment or
modification of this Agreement shall be binding or effective unless such
Qualified Lender shall have consented in writing thereto.
6.08 Owner's Right to Finance the Hotel
----------------------------------
Owner shall have the right, from time to time, without Management Company's
prior consent or approval, to obtain Qualified Loans, and to encumber the Hotel
with Mortgages securing such Qualified Loans. Owner shall not, without the
prior consent of Management Company, have the right to obtain Secured Loans
which are not Qualified Loans.
6.09 Cross Collateralization
-----------------------
A. In connection with obtaining Qualified Loans, Owner shall have
the right to cross collateralize the Hotel with other hotels which it owns in
the Courtyard by Marriott System, provided that:
1. the hotels to be the subject of the Qualified Loans are owned
by Owner or an Affiliate of Owner;
2. the Qualified Loans are secured only by hotels in the
Courtyard by Marriott System which are managed by Management Company or its
Affiliates and are not cross collateralized with any
<PAGE>
property other than hotels managed by Management Company or its Affiliates in
the Courtyard by Marriott System;
3. the basic terms and conditions of the Qualified Loans for the
Hotel and each other hotel securing such loan are intended to be part of an
integrated transaction; and
4. the closing of the Qualified Loans shall take place within
six (6) months of each other.
B. Any Mortgage secured by the Hotel shall contain a provision
requiring Holder to provide Management Company prior written notice of any
default under such Mortgage. Further, upon receipt of any notice of default by
such Holder, Owner shall forward a copy of such notice to Management Company
within three (3) days thereafter, in accordance with the notice provisions set
forth in Section 20.09.
6.10 Sale/Leaseback Transactions
---------------------------
Any single transaction or related series of transactions in which (i)
Owner's interest in the Hotel is sold or transferred by the then Owner
("Seller") to a buyer ("Buyer"), and (ii) the Buyer (as "Landlord") leases the
Hotel to the Seller (as "tenant"), is hereby defined as a "Sale/Leaseback
Transaction". With respect to each Sale/Leaseback Transaction during the Term
of this Agreement, the following provisions will apply: (a) the sale or
transfer of the Hotel will be considered a Sale of the Hotel; however, the
Seller (as tenant under the aforesaid lease), not the Buyer, shall thereafter be
treated as the "Owner" for purposes of this
<PAGE>
Agreement; (b) the purchase price will not be a Secured Loan, but any mortgage
financing placed (either at the time of the transaction or later) on the Buyer's
interest in the Hotel will be treated as a Secured Loan, and the proceeds of
each such Secured Loan will be aggregated with all outstanding Secured Loans
which encumber either the Buyer's interest in the Hotel or the Seller's
leasehold interest in the Hotel, for purposes of determining whether a given
Secured Loan qualifies as a Qualified Loan; (c) payments pursuant to such lease
shall not be treated as Deductions, except for Impositions and similar items
which would have been treated as Deductions in the absence of such
Sale/Leaseback Transaction; and (d) all subsequent sales, transfers or
assignments of either Buyer's interest in the Hotel or Seller's interest in the
Hotel will be treated as Sales of the Hotel. Owner will not enter into any
Sale/Leaseback Transaction unless Management Company and the proposed Buyer have
previously executed a mutually satisfactory attornment agreement pursuant to
which, as of the date of the termination of Seller's leasehold interest, the
provisions of this Agreement will (unless there has been an Event of Default or
other
<PAGE>
event entitling either party to terminate this Agreement) be binding both on
Management Company and on Buyer (as the successor "Owner"); such attornment
agreement will also contain an immediately effective provision which will
incorporate the terms of Section 6.08 of this Agreement, binding both on
Management Company and on Buyer.
END OF ARTICLE VI
<PAGE>
ARTICLE VII
WORKING CAPITAL AND FIXED ASSET SUPPLIES
----------------------------------------
7.01 Working Capital
---------------
A. Owner shall, from time to time during the Term of this Agreement,
provide Management Company, within thirty (30) days after Owner's receipt of
written request therefor by Management Company, with the funds necessary to
maintain Working Capital at levels determined by Management Company to be
reasonably necessary to operate the Hotel in accordance with the Courtyard by
Marriott System Standards. Any such request by Management Company shall be
accompanied by a detailed explanation of the reasons for the request. If Owner
fails to respond to any such request within thirty (30) days after Owner's
receipt thereof, Management Company shall be entitled, at its option, without
affecting other remedies which may be available pursuant to Article XVI, to lend
Owner the necessary additional Working Capital from Management Company's own
funds, which loan will bear interest at the Interest Rate (compounded annually),
and will be secured by a security interest (subordinate to any Qualified Loan)
encumbering all Working Capital previously or thereafter provided by either
Owner or Management Company, and will be repaid in accordance with such terms
and conditions as Management Company shall at that time reasonably determine.
B. Management Company will manage the Working capital of the Hotel
prudently and in accordance with the Courtyard by Marriott
<PAGE>
System Standards. Management Company shall review and analyze the Working
Capital needs of the Hotel on an annual basis. If Management Company reasonably
determines that there is excess Working Capital, such excess shall be returned
to Owner.
C. Working Capital provided by Owner pursuant to this Section 7.01
shall remain the property of Owner throughout the Term of this Agreement. Upon
Termination, Owner shall retain any of its unused Working Capital, except for
Inventories purchased by Management Company pursuant to Section 10.02.
D. If Owner owns other hotels in the Courtyard by Marriott System
which are operated by Management Company, Management Company, at its option, may
co-mingle the Working Capital for the Hotel with the Working Capital account for
Owner's other hotel(s) in a single bank account.
7.02 Fixed Asset Supplies
--------------------
As of the Effective Date, Owner shall provide the Hotel with the Fixed
Asset Supplies which are necessary to operate the Hotel in accordance with the
Courtyard by Marriott System Standards. Owner shall, from time to time
thereafter during the Term of this Agreement, provide Management Company, within
thirty (30) days after Owner's receipt of written request therefor by Management
Company, with any additional funds necessary to maintain Fixed Asset Supplies at
levels determined by Management Company to be necessary to operate the Hotel in
accordance with the Courtyard by Marriott System Standards. Fixed Asset
Supplies shall remain the
<PAGE>
property of Owner throughout the Term of this Agreement, except for Fixed Asset
Supplies purchased by Management Company pursuant to Section 10.02.
END OF ARTICLE VII
<PAGE>
ARTICLE VIII
REPAIRS, MAINTENANCE AND REPLACEMENTS
-------------------------------------
8.01 Routine Repairs and Maintenance
-------------------------------
Management Company shall maintain the Hotel in good repair and condition,
to a standard comparable with competitive hotels and in conformity with
applicable Legal Requirements and the Courtyard by Marriott System Standards,
and shall make or cause to be made such routine maintenance, repairs and minor
alterations, the cost of which can be expensed under generally accepted
accounting principles, as it, from time to time, deems reasonably necessary for
such purposes. The cost of such maintenance, repairs and alterations shall be
paid from Gross Revenues and shall be treated as a Deduction in determining
Operating Profit.
8.02 FF&E Reserve
------------
A. Management Company shall establish a reserve account (the "FF&E
Reserve") in a bank designated by Management Company (and approved by Owner,
such approval not to be unreasonably withheld) to cover the cost of:
1. Replacements and renewals to the Hotel's FF&E ;
2. Certain routine repairs and maintenance to the Hotel building
which are normally capitalized under generally accepted accounting principles
such as exterior and interior repainting, resurfacing building walls, floors,
roofs and parking areas, and replacing folding walls and the like (but which are
not major
<PAGE>
repairs, alterations, improvements, renewals or replacements to the Hotel's
buildings' structure, roof, or exterior facade, or to its mechanical,
electrical, heating, ventilating, air conditioning, plumbing or vertical
transportation systems, the cost of which shall be governed exclusively by
Sections 8.03.C and 8.03.D); and
3. At Management Company's option, lease payments for Shuttle
Vehicles and Communications, Computer and Office Equipment used in connection
with the operation of the Hotel.
Management Company agrees that it will, from time to time, execute such
reasonable documentation as may be requested by any Qualified Lender to assist
such Qualified Lender in establishing or perfecting its security interest in the
funds which are in the FF&E Reserve; provided, however, that no such
documentation shall contain any amendment or modification of any of the
provisions of this Agreement, including this Section 8.02.
B. During the period of time from the Effective Date through the
Termination of this Agreement, subject to the provisions of Sections 8.02.E and
8.02.F, Management Company shall transfer (as of the end of each Accounting
Period) into the FF&E Reserve an amount equal to five percent (5%) of Gross
Revenues for that Accounting Period. All such amounts transferred into the FF&E
Reserve after the Effective Date shall be paid from Gross Revenues and shall
constitute Deductions in determining Operating Profit.
C. Each year, at the same time as Management Company submits the Annual
Operating Projection described in Section 9.03, Management Company shall prepare
an estimate (the "FF&E Estimate")
<PAGE>
of the expenditures necessary during the ensuing Fiscal Year, for (i)
replacements and renewals to the Hotel's FF&E, (ii) repairs to the Hotel
building of the nature described in Section 8.02.A.2, and (iii) if elected by
Management Company, lease payments for Shuttle Vehicles, and Communications,
Computer and Office Equipment used in connection with the operation of the
Hotel, and shall submit such FF&E Estimate to Owner for its review. All
expenditures from the FF&E Reserve will be (as to both the amount of each such
expenditure and the timing thereof) both reasonable and necessary, given the
objective that the Hotel will be maintained and operated to a standard
comparable to competitive hotels and in accordance with the Courtyard by
Marriott System Standards. Notwithstanding the foregoing, Management Company
shall not be required to enumerate on the FF&E Estimate any individual project
which will cost less than Ten Thousand Dollars ($10,000.00) as adjusted by the
GDP Deflator on each anniversary of the Effective Date.
D. Management Company shall from time to time make such (i) replacements
and renewals to the Hotel's FF&E, and (ii) repairs to the Hotel building of the
nature described in Section 8.02.A.2, as it deems necessary, and (iii) lease
payments as described in Section 8.02.A.3 as it deems necessary provided that
Management Company shall not expend more than the balance in the FF&E Reserve
without the prior approval of Owner. Management Company will endeavor to
follow the applicable FF&E Estimate, but shall be entitled to depart therefrom,
in its reasonable discretion,
<PAGE>
provided that: (a) such departures from the applicable FF&E Estimate result
from circumstances which could not reasonably have been foreseen at the time of
the submission of such FF&E Estimate; (b) such departures from the applicable
FF&E Estimate are in the best interest of the Hotel; and (c) if the deviations
from the FF&E Estimate are greater than Ten Thousand Dollars ($10,000.00), as
adjusted by the GDP Deflator on each anniversary of the Effective Date,
Management Company has submitted to Owner a revised FF&E Estimate setting forth
and explaining such departures. At the end of each Fiscal Year, any amounts
remaining in the FF&E Reserve shall be retained in the FF&E Reserve, and shall
be carried forward to the next Fiscal Year. Upon a Sale of the Hotel, funds in
the FF&E Reserve will not be affected (or, if withdrawn, will be replaced as set
forth in Section 19.01.D), and all dispositions of such funds (both before and
after such Sale of the Hotel) will continue to be made exclusively pursuant to
the provisions of this Agreement. Proceeds from the sale of FF&E no longer
necessary to the operation of the Hotel shall be deposited in the FF&E Reserve,
as shall any interest which accrues on amounts placed in the FF&E Reserve.
Neither (i) proceeds from the disposition of FF&E, nor (ii) interest which
accrues on amounts held in the FF&E Reserve, shall either (x) result in any
reduction in the required contributions to the FF&E Reserve set forth in
subsection B above, or (y) be included in Gross Revenues. Shuttle Vehicles and
Communications, Computer and Office Equipment are the only items of FF&E which
Management Company is authorized to lease (rather than
<PAGE>
purchase). At Management Company's option, lease payments with respect to
Shuttle Vehicles and Communications, Computer and Office Equipment shall be
paid from the FF&E Reserve. If Management Company proposes that other items of
FF&E (other than Shuttle Vehicles and Communications, Computer and Office
Equipment) should be leased rather than purchased, Management Company shall
submit such proposal to Owner for Owner's approval (not to be unreasonably
withheld; provided, however that in connection with the foregoing, it is
understood that the failure of a Qualified Lender to approve such leasing
proposal shall justify Owner in withholding its approval thereof, regardless of
whether withholding such approval would otherwise be deemed to be unreasonable.
E. The percentage contribution for the FF&E Reserve which is described in
Section 8.02.B is an estimate. As the Hotel ages, this percentage may not be
sufficient to keep the FF&E Reserve at the levels necessary to make the
replacements and renewals to the Hotel's FF&E, or to make the repairs to the
Hotel building of the nature described in Section 8.02.A.2, which are required
to maintain the Hotel in accordance with the Courtyard by Marriott System
Standards and comparable with competitive hotels. If (i) any FF&E Estimate
prepared in good faith by Management Company exceeds the available funds in the
FF&E Reserve or would cause a shortfall to occur in future years, and (ii)
Management Company has prepared and delivered to Owner a financial plan
describing the shortages in the available funding in the FF&E Reserve for the
Fiscal Years in question, Management Company will have the right,
<PAGE>
during the time periods described in such financial plan, to increase the
percentage of Gross Revenues set forth in Section 8.02.B to a higher percentage,
provided that in no event will such percentage exceed six percent (6%) of Gross
Revenues per Fiscal Year.
F. If any FF&E Estimate which is prepared in accordance with clauses (i)
and (ii) of Section 8.02.E would require funding in excess of six percent (6%)
of Gross Revenues per Fiscal Year, Owner may either:
1. Agree to increase the percentages of Gross Revenues set forth in
Section 8.02.B to provide the additional funds required, or
2. Make a lump-sum contribution to the FF&E Reserve in the necessary
amount (in which case, such lump-sum contribution shall be an Owner Deduction
and shall be reimbursed to Owner in equal annual payments over the useful life
of the FF&E which is purchased, and such reimbursements shall be Deductions).
If Owner elects not to agree to either option 1 or option 2 above within
thirty (30) days after the submission of such FF&E Estimate (or, if Owner has
elected option 2, and has not funded the required amount within sixty (60) days
after expiration of the aforesaid thirty (30) day period), Management Company
shall be entitled, at its option, to terminate this Agreement by written notice
to Owner, (with a copy to each Qualified Lender) which notice shall be delivered
no later than ninety (90) days after the expiration of the sixty (60) day period
described in the preceding
<PAGE>
sentence. The effective date of such Termination shall be the date set forth in
such notice, provided that in no event shall the effective date of such
Termination be less than one hundred eighty (180) days, and no more than three
hundred sixty five (365) days after the date of such notice. Such failure to
fund by Owner shall not be deemed a Default by Owner under Article XVI, and
Management Company shall not be entitled to any remedies with respect to such
failure other than such termination of this Agreement and as set forth in
Section 8.03.E.
G. If Owner owns any other hotel(s) in the Courtyard by Marriott System
which is (are) operated by Management Company, Management Company shall
co-mingle the FF&E Reserve for the Hotel with the FF&E reserve account for
Owner's other hotel(s) in a single bank account unless such co-mingling is
prohibited by any Qualified Lender.
8.03 Building Alterations, Improvements, Renewals, and Replacements
--------------------------------------------------------------
A. Management Company shall prepare an annual estimate (the "Building
Estimate") of the expenditures necessary for major
repairs, alterations, improvements, renewals and replacements (which repairs,
alterations, improvements, renewals and replacements are not among those
referred to in Section 8.02.A.2) to the structure or exterior facade of the
Hotel, or to the mechanical, electrical, heating, ventilating, air conditioning,
plumbing, or vertical transportation elements of the Hotel
<PAGE>
building. Management Company shall submit each such Building Estimate to Owner
for its approval at the same time the Annual Operating Projection is submitted,
and Management Company shall not make any expenditures for such purposes without
the prior written consent of Owner. Owner shall not unreasonably withhold its
consent with respect to such changes, repairs, alterations, improvements,
renewals or replacements to the Hotel as are required by reason of any Legal
Requirement, or required under Management Company's current life-safety
standards (provided that, in order for any such life-safety standards to be
"required" within the meaning of this Section 8.03.A, such standards must be
both required and in the process of being implemented at a majority of the
hotels within the Courtyard by Marriott System operated by Management Company,
which are comparable to the Hotel), or otherwise required for the continued
safety of guests or prevention of material damage to property, including the
removal of Hazardous Materials in compliance with all Environmental Laws
pursuant to Section 20.10).
B. In the event of the receipt by Management Company of a governmental
order or other circumstances described in Section 8.03.A above, Management
Company shall give Owner notice thereof within five (5) business days thereafter
or sooner if circumstances reasonably warrant; Management Company shall then be
authorized (but not obligated) to take appropriate remedial action without
receiving Owner's prior consent as follows: (i) in an emergency threatening the
Hotel, its guests, invitees or employees; or (ii)
<PAGE>
if the continuation of the given condition could (in Management Company's
reasonable judgment) potentially subject Management Company and/or Owner to
either criminal or more than de minimis civil liability, and Owner has either
-- -------
failed to remedy the situation or has failed to take appropriate legal action to
stay the effectiveness of any applicable Legal Requirement. Management Company
shall cooperate with Owner in the pursuit of any such action and shall have the
right to participate therein. Owner shall reimburse Management Company for any
costs incurred by Management Company in connection with any such remedial action
within thirty (30) days after Owner's receipt of notice from Management Company
of the amount of such costs.
C. The cost of all changes, repairs, alterations, improvements, renewals
or replacements referred to in Section 8.03.A or 8.03.B (including the expenses
incurred by either Owner or Management Company in connection with any civil or
criminal proceeding described above) shall be borne solely by Owner, and shall
not be paid from Gross Revenues or from the FF&E Reserve. Any failure of Owner
to either (i) approve and provide funding for any proposed expenditures pursuant
to the last sentence of Section 8.03.A, within seventy-five (75) days after
Management Company's request therefor, or (ii) in the case of any Legal
Requirement which is described in Section 8.03.B, to either comply therewith or
to stay the effectiveness of such Legal Requirement during the period of any
contesting thereof, shall be a Default by Owner. In such event, Management
Company shall be entitled (without affecting
<PAGE>
its other remedies under Article XVI) to terminate this Agreement upon ninety
(90) days' written notice to Owner; (with a copy to each Qualified Lender);
provided, however, that Management Company shall have the right to stipulate
such shorter period of time as may be appropriate, given the time periods which
are mandated by Legal Requirements, as described in Section 8.03.A, or given
Management Company's good faith concerns about its own civil and/or criminal
liability.
D. Management Company shall have the right, from time to time, to set
forth in any Building Estimate (in addition to the expenditures described in
Section 8.03.A), such changes, alterations or improvements to the Hotel as are
required, in Management Company's reasonable judgment, to keep the Hotel in a
competitive, efficient and economical operating condition, in accordance with
the Courtyard by Marriott System Standards (which Management Company shall
substantiate by demonstrating a reasonable return on the proposed investment to
be made by Owner). The cost of all changes, alterations or improvements
referred to in this Section 8.03.D shall be paid, to the extent reasonably
possible (given the requirement, set forth in Section 8.02, that the balance in
the FF&E Reserve be maintained at a level sufficient to maintain the Hotel in
accordance with the Courtyard by Marriott System Standards) from the FF&E
Reserve, and Owner shall pay such costs from its own funds only to the extent
there are not adequate funds for such purpose in the FF&E Reserve. Any failure
of Owner to approve and provide funding for the Owner's portion of any proposed
<PAGE>
expenditures pursuant to Section 8.03 D, as described in the preceding sentence,
or provide funding for items in Section 8.03.A (other than those items included
in the last sentence of Section 8.03.A) within sixty (60) days after Management
Company's request therefor, shall not be a Default by Owner but shall entitle
Management Company to terminate this Agreement and receive payment of the fee
set forth in Section 8.03.E. Such Termination shall be evidenced by a written
notice to Owner, (with a copy to each Qualified Lender) which notice shall be
delivered to Owner no later than ninety (90) days after the expiration of the
sixty (60) day period described in the preceding sentence. The effective date
of such Termination shall be the date stated by Management Company in such
notice, provided that such effective date shall be no less than one hundred
eighty (180) days, and no more than three hundred sixty (360) days, after the
date of such notice. It is understood that "alterations" and "improvements"
which either (a) increase or decrease the number of guest rooms in the Hotel, or
(b) involve changing the architectural footprint of the Hotel or involve other
significant changes in the structural design of the Hotel, in any case by more
than a de minimis amount, are beyond the scope of this Article VIII, and would
-- -------
require an amendment of this Agreement prior to implementation by either party.
E. Notwithstanding anything to the contrary in Section 8.02.F and 8.03.D,
if Owner owns five (5) or fewer hotels in the Courtyard by Marriott System which
are managed by Management Company, and Management Company elects to terminate
the Management
<PAGE>
Agreement due to: (i) Owner's failure to elect either option 1 or 2 in Section
8.02.F; (ii) Owner's failure to fund the required amount in Section 8.02.F,
having elected option 2, or (iii) Owner's failure to fund pursuant to Section
8.03.D, as applicable, then upon Management Company's election to terminate the
Management Agreement, which pursuant to both Sections 8.02.F and 8.03.D must (a)
be made within ninety (90) days following the expiration of the time period in
which Owner must provide such additional funds, and (b) set forth an effective
date of such Termination which is no less than one hundred eighty (180) days and
no more than three hundred sixty five (365) days after the date of such notice,
then, Owner agrees to pay to Management Company a fee equal to three (3) times
the Base Management Fee for the prior Fiscal Year (regardless of whether said
Base Management Fee was actually paid to Management Company); provided, however,
that if, within ten (10) days from receipt of Management Company's notice to
terminate, Owner provides the funds required pursuant to Section 8.02.F or
8.03.D, as applicable, then upon receipt of such funds by Management Company,
Management Company's notice to terminate shall be deemed null and void and this
Agreement shall continue in full force and effect. Said fee shall be paid to
Management Company upon the termination date set forth in the written notice
from Management Company to Owner terminating this Agreement. This fee shall be
compensation for lost revenue and expenses and not as a penalty. If Owner
fails to pay such fee within the time period set forth herein, then Management
Company shall have the right (without affecting
<PAGE>
Management Company's other right under this Agreement) to withhold the amount of
such fee from Owner's Distribution.
8.04 Liens
-----
Management Company and Owner shall use their best efforts to prevent any
liens from being filed against the Hotel which arise from any maintenance,
repairs, alterations, improvements, renewals or replacements in or to the
Hotel. They shall cooperate fully in obtaining the release of any such liens,
and the cost thereof, if the lien was not occasioned by the fault of either
party, shall be treated the same as the cost of the matter to which it relates.
If the lien arises as a result of the fault of either party, then the party at
fault shall bear the full cost (including, without limitation, all legal fees,
court costs, bonding fees and underlying debt) of obtaining the lien release.
8.05 Ownership of Replacements, Etc.
-------------------------------
All repairs, alterations, improvements, renewals or replacements of the
Hotel which are made pursuant to Article VIII or otherwise shall be the property
of Owner. Subject to the provisions of Section 8.02, the funds in the FF&E
Reserve shall be the property of Owner.
END OF ARTICLE VIII
<PAGE>
ARTICLE IX
BOOKKEEPING AND BANK ACCOUNTS
-----------------------------
9.01 Books and Records
-----------------
A. Books of control and account shall, in all material respects, be kept
on the accrual basis and in accordance with the Uniform System of Accounts, with
the exceptions provided in this Agreement. Owner may at reasonable intervals
during Management Company's normal business hours examine such records. Within
seventy-five (75) days following the close of each Fiscal Year, Management
Company shall furnish Owner a statement (the "Annual Operating Statement")
substantially in the form of Exhibit G hereto for such Fiscal Year and a
certificate of Management Company's chief accounting officer (or its controller
or any vice-president), certifying that to the best of his or her knowledge and
belief such year-end Annual Operating Statement is true and correct. Owner
shall have sixty (60) days after receipt to examine or review (at Owner's sole
expense, and not as a Deduction) said Annual Operating Statement. If Owner
raises no objections within said sixty (60) day period, the Annual Operating
Statement shall be deemed to have been accepted by Owner as true and correct,
and Owner shall have no further right to question its accuracy. If Owner does
raise such an objection, by notice to Management Company, Owner shall arrange
for an audit to be commenced within sixty (60) days after the date of such
objection, and shall diligently cause such audit to be completed within a
reasonable period of time. Owner shall pay all
<PAGE>
costs and expenses of such audit at its sole expense (and not as a Deduction);
however, if such audit establishes that Management Company has understated the
Operating Profit for that Fiscal Year by five percent (5%) or more, the
reasonable costs and expenses of such audit shall be paid as a Deduction.
B. Upon written request by Owner, but in no event more frequently than
annually, Management Company shall, prepare and deliver to Owner the Management
Analysis Report. In addition, Management Company shall, in connection with an
impending Sale of the Hotel or commitment by a Qualified Lender to make a
Qualified Loan, within thirty (30) days after written request therefor from
Owner, prepare and deliver to Owner an updated Management Analysis Report
describing significant changes since the effective date of the most recent
Management Analysis Report; provided, however that Management Company shall not
be required to prepare such updated Management Analysis Report if a report has
been delivered within the previous one hundred twenty (120) days. The cost and
expense of preparing the Management Analysis Report shall be paid as a
Deduction.
9.02 Hotel Accounts, Expenditures
----------------------------
A. All funds derived from operation of the Hotel shall be deposited by
Management Company in Hotel bank accounts (the "Operating Accounts") in a bank
or banks designated by Management Company and approved by Owner, which approval
shall not be unreasonably withheld. Withdrawals from said accounts shall be
<PAGE>
made only by representatives of Management Company whose signatures have been
authorized. Reasonable petty cash funds shall be maintained at the Hotel.
B. All payments made by Management Company hereunder shall be made from
authorized bank accounts, petty cash funds, or from Working Capital provided by
Owner pursuant to Section 7.01. Management Company shall not be required to make
any advance or payment to or for the account of Owner except out of such funds,
and Management Company shall not be obligated to incur any liability or
obligation for Owner's account without assurances that necessary funds for the
discharge thereof will be provided by Owner. Debts and liabilities incurred by
Management Company as a result of its operation and management of the Hotel
pursuant to the terms hereof, whether asserted before or after the Termination
of this Agreement, will be paid by Owner to the extent funds are not available
to Management Company for that purpose from Gross Revenues.
9.03 Annual Operating Projection
---------------------------
A. Management Company shall submit to Owner for its review, at least
thirty (30) days prior to the beginning of each full Fiscal Year after the
Effective Date, a preliminary draft of the projection of the estimated financial
results of the operation of the Hotel during the next Fiscal Year substantially
in the form of Exhibit H (the "Annual Operating Projection"). Such Annual
Operating Projection shall project the estimated Gross Revenues and
<PAGE>
Operating Profit for the forthcoming Fiscal Year for the Hotel. In preparing
the Annual Operating Projection for each Fiscal Year, Management Company's goal
will be the maximization of the long-term Operating Profit of the Hotel, in
keeping with Courtyard by Marriott System Standards and the general standards of
the hotel industry for similar properties. At Owner's request, Management
Company agrees to take reasonable steps to ensure that qualified personnel from
Management Company's staff are available to explain the preliminary draft of the
Annual Operating Projection including any material items which are expected to
be significantly different amounts from the amounts actually experienced (or
projected) for the same items in the preceding Fiscal Year. A meeting (or
meetings) for such purpose shall be held, at Owner's request, within a
reasonable period of time after the submission to Owner of the preliminary draft
of the Annual Operating Projection. Management Company will at all times give
good faith consideration to Owner's suggestions regarding any Annual Operating
Projection. Management Company shall thereafter submit to Owner, twenty (20)
days after the beginning of such Fiscal Year, the final Annual Operating
Projection.
B. Management Company shall use reasonable efforts to adhere to the Annual
Operating Projection. It is understood, however, that the Annual Operating
Projection is an estimate only and that unforeseen circumstances such as, but
not limited to, the costs of labor, materials, services and supplies, casualty,
operation of law, or economic and market conditions may make adherence to the
<PAGE>
Annual Operating Projection impracticable, and Management Company shall be
entitled to depart therefrom for such reasons.
9.04 Operating Losses; Credit
------------------------
A. To the extent there is an Operating Loss, additional funds in the
amount of any such Operating Loss shall be provided by Owner within thirty (30)
days after Management Company has given written notice thereof to Owner;
provided, however, that if Owner has already received a request from Management
Company for additional Working Capital pursuant to Section 7.01.A, and if such
request under Section 7.01.A reflects fundamentally the same cash shortage which
resulted in a request under this Section 9.04.A, Owner and Management Company
shall mutually discuss the extent to which the requests under Section 7.01.A and
Section 9.04.A may overlap, and such requests shall be modified accordingly.
B. In no event shall either party borrow money in the name of or pledge
the credit of the other.
9.05 Consolidated Reports
---------------------
With respect to Management Company's reports, books and records required
to be kept and provided to Owner pursuant to Sections 9.01.A, 9.01.B and 9.03.A
hereof provided that Owner is also the owner of other hotels in the Courtyard by
Marriott System and that said Hotels are managed by Management Company,
Management Company shall have the right, at Management Company's option, to
prepare said reports on a consolidated basis rather than by
<PAGE>
individual hotel; provided, however that if Owner reasonably determines that it
requires individual reports for each individual hotel and requests individual
reports from Management Company, in writing, together with Owner's reasons for
requesting individual reports, Management Company shall comply with such
request.
END OF ARTICLE IX
<PAGE>
ARTICLE X
PROPRIETARY MARKS; INTELLECTUAL PROPERTY
----------------------------------------
10.01 Proprietary Marks
-----------------
A. During the Term of this Agreement, the Hotel shall be known as a
Courtyard by Marriott System, with such additional identification as may be
agreed to by Owner and Management Company to provide local identification. If
the name of the "Courtyard by Marriott System" is changed, Management Company
shall have the right to change the name of the Hotel to conform thereto.
B. The names "Marriott", "Courtyard", "Courtyard by Marriott" and
"Courtyard Club", whether used alone or in connection with another word or
words, and all other Proprietary Marks shall in all events remain the exclusive
property of Management Company and its Affiliates. Owner shall have no right to
use the foregoing names or any other Proprietary Mark; provided, however, that
Owner shall have the right, during the Term of this Agreement, to have
Proprietary Signage installed (in strict conformance with the specifications
provided by Management Company prior to the Effective Date, or subsequent
specifications provided by Management Company from time to time during the Term)
in the Hotel and on the Site.
C. Except as provided in Section 10.02, upon Termination, any use of or
right to use the Proprietary Marks under this Agreement by Owner shall
immediately cease. As of the date of Termination, Management Company shall
remove all Proprietary Signage from the
<PAGE>
Hotel and from the Site (and from any locations other than the Site). The cost
of such removal shall be paid as set forth in Section 4.02.E.
D. Notwithstanding the foregoing, those trademarks, trade names, symbols,
logos and designs which are specifically listed on Exhibit "E" shall be deemed
"Proprietary Marks" only during the Term of this Agreement; upon a Termination,
the exclusive control of such Proprietary Marks shall revert to Owner.
10.02 Purchase of Inventories and Fixed Asset Supplies
------------------------------------------------
Upon Termination, Management Company shall have the option, to be exercised
no later than thirty (30) days prior to Termination, to elect to purchase, at
their then book value, any items of the Hotel's Inventories and Fixed Asset
Supplies as may be marked with the Courtyard by Marriott name or any other
Proprietary Mark. In the event Management Company does not exercise such
option, Owner agrees that it will use any such items not so purchased
exclusively in connection with the Hotel until they are consumed.
10.03 Computer Software and Equipment
-------------------------------
A. All Software is and shall remain the exclusive property of Management
Company or one of its Affiliates (or the licensor of such Software, as the case
may be), and Owner shall have no right to use, or to copy, any Software.
B. Upon Termination, Management Company shall have the right to remove
from the Hotel, without compensation to Owner, all
<PAGE>
Software. Furthermore, upon Termination, Management Company shall be entitled
to remove from the Hotel any computer equipment which is utilized as part of a
centralized reservation or property management system or is otherwise considered
proprietary by Management Company. If any of such removed computer equipment is
owned by Owner, Management Company shall reimburse Owner for all previous
expenditures made by Owner for the purchase of such equipment, subject to a
reasonable allowance for depreciation.
10.04 Intellectual Property
---------------------
All Intellectual Property shall at all times be proprietary to Management
Company or its Affiliates, and shall be the exclusive property of Management
Company or its Affiliates. During the Term of this Agreement, Management
Company shall be entitled to take all reasonable steps to ensure that the
Intellectual Property remains confidential and is not disclosed to anyone other
than Management Company's employees at the Hotel. Upon Termination, all
Intellectual Property shall be removed from the Hotel by Management Company,
without compensation to Owner.
<PAGE>
10.05 Breach of Covenant
------------------
Management Company and/or its Affiliates shall be entitled, in case of any
breach of the covenants of Article X by Owner or others claiming through it, to
injunctive relief and to any other right or remedy available at law. Article X
shall survive Termination.
END OF ARTICLE X
<PAGE>
ARTICLE XI
POSSESSION AND USE OF HOTEL
---------------------------
11.01 Quiet Enjoyment
---------------
Owner covenants that, so long as: (i) an Event of Default by Management
Company has not occurred under Article XVI of this Agreement; and (ii) Owner
does not have the right to terminate this Agreement under any other Section of
this Agreement, Management Company shall quietly hold, occupy and enjoy the
Hotel throughout the Term hereof free from hindrance or ejection by Owner or
other party claiming under, through or by right of Owner (except as may be
otherwise set forth in Section 6.04). Owner agrees to pay and discharge any
payments and charges and, at its expense, to prosecute all appropriate actions,
judicial or otherwise, necessary to assure such free and quiet occupation.
Nothing set forth in the preceding sentence, however, shall be deemed to create
a recourse obligation by Owner to pay any payment or charge pursuant to a
contract which is non-recourse to Owner.
11.02 Use
---
A. Management Company shall use the Hotel solely for the operation of a
hotel pursuant to the Courtyard by Marriott System Standards, and for all
activities in connection therewith which are customary and usual to such an
operation.
B. Management Company shall comply with and abide by all applicable Legal
Requirements pertaining to the operation of the
<PAGE>
Hotel, provided that: (i) all costs and expenses (other than those which are
specifically described in clauses (ii) or (iii) of this Section 11.02.B) of such
compliance shall be paid from Gross Revenues as Deductions in the computation of
Operating Profit; (ii) all costs and expenses of compliance with Environmental
Laws shall be paid as set forth in Section 20.10; (iii) all costs and expenses
of compliance with the Legal Requirements which are described in Section 8.03.A
shall be paid as set forth in Section 8.03; and (iv) Management Company shall
have the right, but not the obligation, in its reasonable discretion, to contest
or oppose, by appropriate proceedings, any such Legal Requirements (provided
that the consent of Owner, not to be unreasonably withheld, shall be obtained
prior to initiating any such proceedings which directly involve Owner's
ownership interest in the Hotel in a material manner. The reasonable expenses
of any such contest shall be paid from Gross Revenues as Deductions.
11.03 Chain Services
--------------
A. Management Company shall, beginning with the Effective Date and
thereafter during the Term of this Agreement, cause Chain Services to be
furnished to the Hotel.
B. Costs and expenses incurred in the providing of Chain Services shall be
allocated on a fair and equitable basis among all Courtyard by Marriott hotels
owned, leased or managed by Management Company in the United States which
benefit from these services. Such allocation shall be made without regard to any
"caps" or other
<PAGE>
limitations on the amount which Management Company or its Affiliates may charge
to a given hotel, pursuant to agreements which Management Company (or its
Affiliates) may have with the owner of such hotel. Any excess of that portion
of such costs and expenses which is fairly allocated to a given hotel over the
"cap" which may be in effect with regard to that hotel shall be paid by
Management Company from its own funds. Management Company shall make no profit
from Chain Services. Upon Owner's written request, an explanation of the
current Chain Services will be given to Owner, and the basis for the allocation
of the charge for each Chain Service will be explained to Owner, in reasonable
detail, at the time of the submission of the Annual Operating Statement (as more
particularly set forth in Section 9.01). In no event will the total charge for
all of the Chain Services which are described in the definition of Chain
Services in Section 1.01 (exclusive of reservation system services), for any
given Fiscal Year, exceed five percent (5%) of Gross Revenues for such Fiscal
Year. The parties hereby stipulate that the limitation set forth in the
preceding sentence is intended to apply only to the services which are currently
listed (as of the Effective Date) in the definition of Chain Services in Section
1.01; accordingly, if there are types of expenditures which were originally
treated as Deductions (other than pursuant to paragraph 8 of the definition of
"Operating Profit" in Section 1.01), but which are later determined to be more
properly treated as Chain Services, such expenditures shall be treated as
Deductions pursuant to said paragraph 8 of the
<PAGE>
definition of "Operating Profit" without regard to the aforesaid limitation.
11.04 Owner's Right to Inspect
------------------------
Owner or its agents shall have access to the Hotel at any and all
reasonable times for the purpose of inspection or showing the Hotel to
prospective purchasers, tenants or Holders.
11.05 Indemnity
---------
A. Management Company shall indemnify and hold harmless Owner (and any
officer, director, employee, advisor, partner or shareholder of Owner) in
respect of, and, at Owner's request, shall defend any action, cause of action,
suit, debt, cost, expense (including, without limitation, reasonable attorneys'
fees), claim or demand whatsoever brought or asserted by any third person
whomsoever, at law or in equity, arising by reason of: (i) liabilities stemming
from general corporate matters of Management Company or its Affiliates, to the
extent the same are not directly and primarily related to the Hotel; (ii)
infringement and other claims relating to the Proprietary Marks; (iii) if
Management Company intentionally or negligently fails to maintain insurance
coverage that it is required to maintain pursuant to this Agreement, the excess
of the amount of any liability or loss that would have been covered over the
amount of any applicable deductible; and (iv) the bad faith or willful
misconduct of Management Company or its Affiliates, or any of their employees,
<PAGE>
servants or agents or other persons for whom they are responsible, resulting in
a claim for bodily injury, death or property damage occurring on, in or in
conjunction with the business of the Hotel, to the extent that such claim
exceeds the insurance proceeds (including Hotel Retentions) which are available
to pay such claim.
B. If any claim, action or proceeding is made or brought against Owner,
against which claim, action or proceeding Management Company shall be obligated
to indemnify pursuant to the terms of this Agreement, then, upon demand by
Owner, Management Company, at its sole cost and expense, shall resist or defend
such claim, action or proceeding (in Owner's name, if necessary), using such
attorneys as Owner shall approve, which approval shall not be unreasonably
withheld. If, in the Owner's reasonable opinion, (i) there exists a conflict of
interest which would make it inadvisable to be represented by counsel for
Management Company, or (ii) there are legal defenses available to Management
Company that are different from or inconsistent with those available to the
Owner, or (iii) there are claims at issue which are not covered by Management
Company's insurance, the Owner shall be entitled to retain its own attorneys,
and Management Company shall pay the reasonable fees and disbursements of such
attorneys.
C. Matters with respect to which Management Company has specifically
agreed to indemnify Owner under other provisions of this Agreement (for example,
Section 14.01 regarding "Employee Claims", and Section 20.11 regarding
environmental matters) are to
<PAGE>
be treated exclusively under such other provisions and not under this Section
11.05.
END OF ARTICLE XI
<PAGE>
ARTICLE XII
INSURANCE
---------
12.01 Interim Insurance
-----------------
[Intentionally omitted]
12.02 Property and Operational Insurance
----------------------------------
Management Company shall, commencing with the Effective Date and thereafter
during the Term of this Agreement, procure and maintain, either with insurance
companies of recognized responsibility or by legally qualifying itself as a self
insurer, a minimum of the following insurance:
A. Property insurance on the Hotel building(s) and contents against loss
or damage by fire, lightning and all other risks covered by the usual extended
coverage endorsement, all in an amount not less than one hundred percent (100%)
of the replacement cost thereof (excluding the cost of foundations and
excavations);
B. Boiler and machinery insurance against loss or damage from explosion of
boilers or pressure vessels to the extent applicable to the Hotel;
C. Business interruption insurance covering loss of profits and necessary
continuing expenses for interruptions caused by any occurrence covered by the
insurance referred to in Section 12.02.A and B, which shall be of a type and in
such amounts (but such coverage shall in no event be for less than one (1) year)
as are generally established by Management Company at similar hotels it
<PAGE>
owns, leases or manages under the Courtyard by Marriott name in the United
States;
D. General liability insurance against claims for bodily injury, death or
property damage occurring on, in, or in conjunction with the business of the
Hotel, and automobile liability insurance on vehicles operated in conjunction
with the Hotel, with a combined single limit for each occurrence of not less
than One Hundred Million Dollars ($100,000,000); representatives of Management
Company and Owner shall meet, at Owner's request, at intervals of approximately
once every five (5) years, to review the adequacy of such limit;
E. Workers' compensation and employer's liability insurance as may be
required under applicable laws covering all of Management Company's employees at
the Hotel;
F. Fidelity bonds, with reasonable limits to be determined by Management
Company, covering its employees in job classifications normally bonded in other
similar hotels it leases or manages under the Courtyard by Marriott name in the
United States or as otherwise required by law, and comprehensive crime insurance
to the extent Management Company and Owner mutually agree it is necessary for
the Hotel; and
G. Such other insurance in amounts as Management Company and Owner, in
their reasonable judgment, mutually deem advisable for protection against
claims, liabilities and losses arising out of or connected with the operation of
the Hotel.
<PAGE>
12.03 General Insurance Provisions
----------------------------
A. All insurance described in Section 12.02 may be obtained by Management
Company by endorsement or equivalent means under its blanket insurance policies,
provided that such blanket policies substantially fulfill the requirements
specified herein. Upon the request of either Owner or any Qualified Lender,
representatives of the requesting party shall be entitled to examine, at
Management Company's corporate headquarters, all insurance policies maintained
by Management Company regarding the Hotel.
B. Management Company may self insure or otherwise retain such risks or
portions thereof as it does with respect to other similar hotels it owns, leases
or manages under the Marriott name in the United States.
C. All policies of insurance required under Section 12.02 shall be carried
in the name of Management Company. The policies required under Sections
12.02.A, B, C and D shall include the Owner as an additional insured. Upon
notice by the Owner, Management Company shall also have the policies required
under Sections 12.02 A, B, C and D include any Qualified Lender as an additional
insured. Any property losses thereunder shall be payable to the respective
parties as their interests may appear. Any Mortgage on the Hotel shall contain
provisions to the effect that proceeds of the insurance policies required to be
carried under Section 12.02.A and B shall, with respect to any casualty
involving less than twenty-five percent (25%) of the replacement cost of the
Hotel, be available for repair and restoration of the Hotel.
<PAGE>
D. Management Company shall deliver to the Owner certificates of insurance
with respect to all policies so procured and, in the case of insurance policies
about to expire, shall deliver certificates with respect to the renewal thereof.
E. All certificates of insurance provided for under Article XII shall, to
the extent obtainable, state that the insurance shall not be cancelled or
materially changed without at least thirty (30) days' prior written notice to
Owner.
F. The term "Hotel Retention" shall mean the amount of any loss or reserve
under Management Company's blanket insurance or self-insurance programs which is
allocated to the Hotel, not to exceed the higher of (a) the maximum per
occurrence limit established for similar hotels participating in such programs,
or (b) the insurance policy deductible on any loss which may fall within high
hazard classifications as mandated by the insurer (e.g., earthquake, flood,
windstorm on coastal properties, etc.). If the Hotel is not a participant under
Management Company's blanket insurance or self-insurance programs, "Hotel
Retention" shall mean the amount of any loss or reserve allocated to the Hotel,
not to exceed the insurance policy deductible.
12.04 Cost and Expense
----------------
A. [Intentionally omitted]
B. Insurance premiums and any other costs or expenses with respect to the
insurance or self-insurance required under Section 12.02, including any Hotel
Retention, shall be paid from Gross
<PAGE>
Revenues as Deductions. To the extent that such costs or expenses include
reimbursement by Management Company of its own costs or expenses, or those of
one of its Affiliates, such costs or expenses shall be generally competitive (as
calculated over the Term of this Agreement) with costs and expenses of
non-affiliated entities providing similar services. Such premiums and costs
shall be allocated on an equitable basis to the hotels participating under
Management Company's blanket insurance or self-insurance programs. Any reserves,
losses, costs or expenses which are uninsured shall be treated as a cost of
insurance and shall be Deductions. Upon Termination, an escrow fund in an
amount reasonably acceptable to Management Company shall be established from
Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by
Owner) to cover the amount of any Hotel Retention and all other costs which will
eventually have to be paid by either Owner or Management Company with respect to
pending or contingent claims, including those which arise after Termination for
causes arising during the Term of this Agreement. Upon the final disposition of
all such pending or contingent claims, any unexpended funds remaining in such
escrow shall be paid to Owner.
12.05 Owner's Option to Obtain Certain Insurance
------------------------------------------
Owner may, at its option, by written notice to Management Company which
shall be delivered no later than ninety (90) days prior to the natural
expiration of the insurance policies which Management Company has obtained
pursuant to Section 12.02.A, B and
<PAGE>
C, procure and maintain the insurance specified in Section 12.02.A, B and C (in
which case Management Company shall allow such policies obtained by it under
Section 12.02.A, B, and C to expire), subject to the following terms and
conditions:
A. All such policies of insurance shall be carried in the name of Owner,
with Management Company as an additional insured. Any property losses thereunder
shall be payable to the respective parties as their interests may appear. The
documentation with respect to each Secured Loan shall contain provisions to the
effect that proceeds of the insurance policies required to be carried under
Section 12.01.A and B shall be available for repair and restoration of the
Hotel, to the extent required pursuant to Section 12.03.C. However, any Holder
of such Secured Loan shall be entitled to impose reasonable conditions on the
disbursement of insurance proceeds for the repair and/or restoration of the
Hotel, including a demonstration by Owner and/or Management Company that the
amount of such proceeds (together with other funds Owner agrees to make
available) is sufficient for such purpose.
B. Owner shall deliver to Management Company certificates of insurance
with respect to all policies so procured and, in the case of insurance policies
about to expire, shall deliver certificates with respect to the renewal thereof.
C. All such certificates of insurance shall, to the extent obtainable,
state that the insurance shall not be canceled or materially changed without at
least thirty (30) days' prior written notice to the certificate holder.
<PAGE>
D. Premiums for such insurance coverage shall be treated as Deductions,
provided that if the cost of such insurance procured by Owner exceeds the cost
of Management Company's comparable coverage by more than ten percent (10%), all
such excess costs shall be the sole responsibility of Owner and shall not be a
Deduction.
E. Should Owner exercise its option to procure the insurance described in
this Section 12.05, Owner hereby waives its rights of recovery from Management
Company or any of its Affiliates (and their respective directors, officers,
shareholders, agents and employees) for loss or damage to the Hotel, and any
resultant interruption of business.
F. Should Owner exercise its right to obtain the insurance described in
this Section 12.05, Owner acknowledges that Management Company is under no
obligation to thereafter include the Hotel in its blanket insurance program
(with respect to the coverage described in Section 12.02.A, B and C) for the
balance of the Term of this Agreement. However, upon a Sale of the Hotel, a
successor Owner shall have the right, notwithstanding the fact that the previous
Owner may have obtained insurance in accordance with this Section 12.05, to have
the Hotel included in Management Company's blanket insurance program (provided
that the Hotel, as of that point in time, satisfies the applicable criteria for
admission to such program, as established by the program's insurance carriers)
by making a written request to Management Company for such inclusion not later
than thirty (30) days after the date on which such party becomes the Owner.
<PAGE>
G. All insurance procured by Owner hereunder shall be obtained from
reputable insurance companies reasonably acceptable to Management Company.
END OF ARTICLE XII
<PAGE>
ARTICLE XIII
TAXES
-----
13.01 Real Estate and Personal Property Taxes
---------------------------------------
A. Except as specifically set forth in subsection B below, all Impositions
which accrue during the Term of this Agreement (or are properly allocable to
such Term under generally accepted accounting principles) shall be paid by
Management Company from Gross Revenues, as a Deduction, before any fine,
penalty, or interest is added thereto or lien placed upon the Hotel or the
Agreement, unless payment thereof is stayed; provided, however, that Management
Company shall not be responsible for any fine, penalty or interest resulting
through no fault of Management Company or caused by Owner. Owner shall within
five (5) business days after the receipt of any invoice, bill, assessment,
notice or other correspondence relating to any Imposition, furnish Management
Company with a copy thereof. Management Company shall, within the earlier of
thirty (30) days of payment or fifteen (15) business days following written
demand by Owner, furnish Owner with copies of official tax bills and assessments
which Management Company has received, and evidence of payment or contest
thereof. Either Owner or Management Company (in which case each party agrees to
sign the required applications and otherwise cooperate with the other party in
expediting the matter) may initiate proceedings to contest any Imposition, and
all reasonable costs of any negotiations or proceedings with respect to any such
contest shall either (i) be
<PAGE>
paid from Gross Revenues and be a Deduction in determining Operating Profit; or
(ii) be considered an Owner Deduction; provided, however that in the event
either Owner or Management Company spends in excess of Five Thousand Dollars
($5,000.00) with respect to such contest, such party shall provide written
notice to the other party and the other party shall approve or disapprove of
such expenditure within ten (10) days following receipt of such notice. Failure
of such party to approve or disapprove such expenditure shall be deemed
approval. In the event that either party's expenditures in excess of Five
Thousand Dollars ($5,000.00) are not approved by the other party such party may
nevertheless proceed to spend whatever funds are necessary with respect to such
contest; provided, however, that any amounts in excess of Five Thousand Dollars
($5,000.00) (or such higher amount as may have been approved by the other party)
shall be at the sole cost of Owner or Management Company, as the case may be,
and shall not be considered an Owner Deduction by Owner nor be considered a
Deduction from Operating Profit by either Owner or Management Company.
B. The word "Impositions", as used in this Agreement, shall not include
the following, all of which shall be paid solely by Owner, not from Gross
Revenues nor from the FF&E Reserve:
1. Any franchise, corporate, estate, inheritance, succession, capital
levy or transfer tax imposed on Owner, or any income tax imposed on any income
of Owner (including distributions to Owner pursuant to Article V hereof);
<PAGE>
2. Special assessments (regardless of when due or whether they are paid
as a lump sum or in installments over time) imposed because of facilities which
are constructed by or on behalf of the assessing jurisdiction (for example,
roads, sidewalks, sewers, culverts, etc.) which directly benefit the Hotel
(regardless of whether or not they also benefit other buildings), which
assessments shall not be treated as Deductions, but rather shall be added to the
Additional Invested Capital as of each payment by Owner with respect thereto;
provided, however, that any installments (after the Effective Date) of any
assessments which were levied or imposed prior to the Effective Date shall be
Deductions;
3. "Impact Fees" (regardless of when due or whether they are paid as a
lump sum or in installments over time) which are required of Owner as a
condition to the issuance of site plan approval, zoning variances or building
permits, which impact fees shall not be treated as Deductions, but rather shall
be added to the Additional Invested Capital as of each payment by Owner with
respect thereto; provided, however, that any installments (after the Effective
Date) of any impact fees which were levied or imposed prior to the Effective
Date shall be Deductions; and
4. "Tax-increment financing" or similar financing whereby the
municipality or other taxing authority has assisted in financing the
construction of the Hotel by temporarily reducing or abating normal Impositions
in return for substantially higher levels of Impositions at later dates.
<PAGE>
C. Owner shall have the right to require Management Company to establish
an escrow account (with either any Qualified Lender or another entity reasonably
acceptable to both Owner and Management Company) from which Impositions will be
paid. Payments into such escrow account will be Deductions. Any interest which
accrues on amounts deposited in such escrow account shall be added to the
balance in such escrow account and used to pay Impositions.
END OF ARTICLE XIII
<PAGE>
ARTICLE XIV
HOTEL EMPLOYEES
---------------
14.01 Employees
---------
A. All personnel employed at the Hotel shall be the employees of
Management Company. Management Company shall have absolute discretion to hire,
promote, supervise, direct, train and discharge all employees at the Hotel, to
fix their compensation and, generally, establish and maintain all policies
relating to employment.
B. Management Company shall decide which, if any, of the Hotel's employees
shall reside at the Hotel (provided that,Owner's prior approval shall be
obtained if more than one (1) such employee and their immediate families reside
at the Hotel), and shall be permitted to provide free accommodations and
amenities to its employees and representatives living at or visiting the Hotel
in connection with its management or operation. No person shall otherwise be
given gratuitous accommodations or services without prior joint approval of
Owner and Management Company except in accordance with usual practices of the
hotel and travel industry.
C. Any proposed settlement of any Employee Claim where the amount proposed
to be offered to the employee by Management Company is in excess of the
Settlement Threshold Amount shall be jointly approved by Management Company and
Owner. Any dispute between Owner and Management Company as to whether
Management Company's settlement recommendation is reasonable, where such
proposed
<PAGE>
settlement is in excess of the Settlement Threshold Amount, shall be resolved by
arbitration under Section 20.13 hereof; provided that Management Company shall
have the right to settle any Employee Claim (prior to the arbitration on the
reasonableness of the settlement, as described in this sentence) based on
Management Company's recommendation, which shall be Management Company's
reasonable estimate, in good faith, by using: (i) funds from Gross Revenues (as
a Deduction) up to the amount of Owner's settlement recommendation, which shall
be Owner's reasonable estimate, in good faith and (ii) Management Company's own
funds to the extent Management Company's recommendation exceeds the amount
described in subparagraph (i) above. Following the settlement of such Employee
Claim, the parties will arbitrate under Section 20.13 the issue of whether
Management Company's settlement recommendation was reasonable under the
circumstances. If the arbitrators decide that Management Company's
recommendation was reasonable, Management Company shall be entitled to reimburse
itself from Gross Revenues (as a Deduction) in the amount of the funds advanced
under subparagraph (ii) above, together with accrued interest thereon at the
Prime Rate. If the arbitrators decide that Management Company's settlement
recommendation was not reasonable, then Management Company shall not be entitled
to any reimbursement of the amounts advanced by it under subparagraph (ii)
above, nor to accrued interest thereon.
D. Management Company shall pay from its own funds, and not from Gross
Revenues, any Employee Claim where the basis of such
<PAGE>
Employee Claim is conduct by Management Company which: (i) is a substantial
violation of the standards of responsible labor relations as generally practiced
by prudent owners or operators of similar hotel properties in the general
geographic area of the Hotel; and (ii) is not the isolated act of individual
employees, but rather is a direct result of corporate policies of Management
Company which either encourage or fail to discourage such conduct. In addition,
Management Company shall indemnify, defend and hold harmless Owner from and
against any fines or judgments arising out of such conduct, and all Litigation
expenses (including reasonable attorneys' fees and expenses) incurred in
connection therewith. Any dispute between Owner and Management Company as to
whether or not certain conduct by Management Company is not in accordance with
the aforesaid standards shall be resolved by arbitration under Section 20.13
hereof. The arbitration proceedings described in the preceding sentence shall
be conducted independently of any arbitration proceedings with respect to such
Employee Claim pursuant to the applicable employee-related contract and/or
pursuant to Section 14.01.C of this Agreement.
E. With respect to all Litigation or arbitration involving Employee Claims
in which both Management Company and Owner are involved as actual or potential
defendants, Management Company shall have exclusive and complete responsibility
(subject to the rights of Owner to approve certain settlements, as set forth in
Section 14.01.C) for the resolution of such Employee Claims. In the event that
any Employee Claim is made against Owner, but not
<PAGE>
against Management Company, Owner shall give notice to Management Company of the
Employee Claim in a timely manner so as to avoid any prejudice to the defense of
the Employee Claim, provided that Management Company shall in all events be so
notified within twenty (20) days after the date such Employee Claim is made
against Owner. Management Company will thereafter assume exclusive and complete
responsibility for the resolution of such Employee Claim.
F. At Termination, other than by reason of an Event of Default of
Management Company hereunder, an escrow fund shall be established from Gross
Revenues (or, if Gross Revenues are not sufficient, with funds provided by
Owner) to reimburse Management Company for all costs and expenses incurred by
Management Company which arise out of either the transfer or the termination of
employment of Management Company's employees at the Hotel, such as reasonable
transfer costs, severance pay, unemployment compensation and other employee
liability costs.
END OF ARTICLE XIV
<PAGE>
ARTICLE XV
DAMAGE, CONDEMNATION AND FORCE MAJEURE
--------------------------------------
15.01 Damage and Repair
-----------------
A. If, during the Term hereof, the Hotel is damaged or destroyed by fire,
casualty or other cause, Owner shall, with all reasonable diligence, to the
extent that proceeds from the insurance described in Section 12.02 are available
(subject to the provisions of any Mortgage encumbering the Hotel, but with the
limitations described in Section 12.03.C) for such purpose, repair or replace
the damaged or destroyed portion of the Hotel to the same condition as existed
previously.
B. In the event damage or destruction to the Hotel from any cause
materially and adversely affects the operation of the Hotel and Owner fails to
timely (subject to Force Majeure, and subject to unreasonable delays caused by
Management Company, including unreasonable delays in adjusting the insurance
claim with the carriers which participate in Management Company's blanket
insurance program) commence and complete the repairing, rebuilding or
replacement of the same so that the Hotel shall be substantially the same as it
was prior to such damage or destruction, such action shall be deemed an Event of
Default by Owner pursuant to Section 16.01.E and Management Company may, at its
option, elect to terminate this Agreement upon one hundred twenty (120) days'
written notice, in addition to its other remedies under Section 16.03.
<PAGE>
15.02 Condemnation
------------
A. In the event all or substantially all of the Hotel shall be taken in
any eminent domain, condemnation, compulsory acquisition, or similar proceeding
by any competent authority for any public or quasi-public use or purpose, or in
the event a portion of the Hotel shall be so taken, but the result is that it is
unreasonable to continue to operate the Hotel, this Agreement shall terminate.
B. In the event a portion of the Hotel shall be taken by the events
described in Section 15.02.A, or the entire Hotel is affected but on a temporary
basis, and the result is not to make it unreasonable to continue to operate the
Hotel, this Agreement shall not terminate. However, so much of any award for
any such partial taking or condemnation as shall be necessary to render the
Hotel equivalent to its condition prior to such event shall be used for such
purpose; the balance of such award, if any, shall be fairly and equitably
apportioned between Owner and Management Company in accordance with their
respective interests. The amount of any award received by Owner and not
applied to restoration of the Hotel pursuant to Section 15.02.B shall be
deducted from the Priority Basis and the Loan Priority Basis at such time as the
award is received by Owner. In addition, the Performance Termination Threshold
shall be reduced by an amount equal to eight percent (8%) of such total amount
(if any) of any award received by Owner pursuant to this Section 15.02.B which
is not used to restore the Hotel.
<PAGE>
C. In the event of any proceeding described in Section 15.02.A or 15.02.B,
Owner and Management Company shall each have the right to initiate such
proceedings as they deem advisable to recover any damages to which they may be
entitled; provided, however, that Management Company shall be entitled to retain
the award or compensation it may obtain through proceedings which are conducted
separately from those of Owner only if such award or compensation does not
reduce the award or compensation otherwise available to Owner. (For this
purpose, any award or compensation received by any Holder shall be deemed to be
an award or compensation received by Owner).
15.03 Force Majeure
-------------
A. The withdrawal or revocation of any License which is material to the
operation of the Hotel in accordance with the Courtyard by Marriott System
Standards, where such withdrawal or revocation: (i) is not due to the fault of
either Management Company or Owner; and (ii) is not otherwise within the
reasonable control of either Management Company or Owner, shall not be an Event
of Default under Article XVI of this Agreement. Management Company and Owner
shall each, in good faith, use all commercially reasonable efforts (including
the diligent pursuit of all available appeals), during the period of one hundred
twenty (120) days after the date of such withdrawal or revocation, to have such
License reinstated. If, notwithstanding such efforts, such License is not
reinstated prior to the expiration of the aforesaid period of one
<PAGE>
hundred twenty (120) days, either Owner or Management Company shall have the
right, at its option, to terminate this Agreement upon no less than sixty (60)
days' notice to the other party; provided, however, that the terminating party
must deliver such notice of Termination to the other party by no later than
ninety (90) days after the expiration of such one hundred twenty (120) day
period; and provided further, that no such Termination shall be effective if,
prior to the effective date of such Termination, such License is reinstated or
such withdrawal or revocation of such License is stayed.
B. If an order, judgment or directive by a court or administrative body
is issued, in connection with any legal or Litigation involving Owner, which
restricts or prevents Management Company, in a material adverse manner, from
operating the Hotel in accordance with the Courtyard by Marriott System
Standards, and which, in Management Company's reasonable opinion, will have a
significant adverse effect upon operations of the Hotel, Management Company
shall be entitled, at its option, to terminate this Agreement upon sixty (60)
days' written notice; provided, however, that upon making such election,
Management Company shall deliver
<PAGE>
such notice of Termination to Owner by no later than ninety (90) days after the
issuance of such order, judgment or directive (or, if such order, judgment or
directive is appealed, within ninety (90) days after the final disposition of
such appeal).
END OF ARTICLE XV
<PAGE>
ARTICLE XVI
DEFAULTS
--------
16.01 Definition of "Default"
-----------------------
Any one or more of the following shall constitute a "Default," to the
extent permitted by applicable law:
A. The filing of a voluntary petition in bankruptcy or insolvency or a
petition for reorganization under any bankruptcy law by either party, or the
admission by either party that it is unable to pay its debts as they become due;
B. The consent to an involuntary petition in bankruptcy or the failure to
vacate, within ninety (90) days from the date of entry thereof, any order
approving an involuntary petition by either party;
C. The entering of an order, judgment or decree by any court of competent
jurisdiction, on the application of a creditor, adjudicating either party as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets, and such order, judgment or decree's continuing unstayed
and in effect for any period of ninety (90) days;
D. The failure of either party to make any payment required to be made in
accordance with the terms of this Agreement, as of the due date which is
specified in this Agreement;
<PAGE>
E. The failure of either party to perform, keep or fulfill any of the
other covenants, undertakings, obligations or conditions set forth in this
Agreement.
16.02 Definition of "Event of Default"
--------------------------------
A. Upon the occurrence of any Default by either party hereto (hereinafter
referred to as the "defaulting party") under Section 16.01.A, B or C, such
Default shall immediately and automatically, without the necessity of any notice
to the defaulting party, constitute an "Event of Default" under this Agreement.
B. Upon the occurrence of any Default by defaulting party under Section
16.01.D, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within ten (10)
days after written notice from the non-defaulting party specifying such Default
and demanding such cure.
C. Upon the occurrence of any Default by either party hereto under Section
16.01.E, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within thirty (30)
days after written notice from the non-defaulting party and demanding such cure,
or, if the Default is such that it cannot reasonably be cured within said thirty
(30) day period of time, if the defaulting party fails to commence the cure of
such Default within said thirty (30) day period of time or thereafter fails to
diligently pursue such efforts to completion.
<PAGE>
16.03 Remedies Upon an Event of Default
---------------------------------
A. Upon the occurrence of an Event of Default under the provisions of
Section 16.02, the non-defaulting party shall have the right to pursue any one
or more of the following courses of action: (i) in the event of a material
breach by the defaulting party of its obligations under this Agreement, to
terminate this Agreement by written notice to the defaulting party, which
termination shall be effective as of the effective date which is set forth in
said notice, provided that said effective date shall be at least thirty (30)
days after the date of said notice; and provided further that, if the defaulting
party is the employer of all or a substantial portion of the employees at the
Hotel, the foregoing period of thirty (30) days shall be extended to
seventy-five (75) days (or such longer period of time as may be necessary under
applicable Legal Requirements pertaining to termination of employment); (ii) to
institute forthwith any and all proceedings permitted by law or equity,
including, without limitation, actions for specific performance and/or damages;
and (iii) to avail itself of any one or more of the other remedies described in
this Section 16.03.
B. Upon the occurrence of a Default by either party under the provisions
of Section 16.01.D, the amount owed to the non-defaulting party shall accrue
interest, at the Interest Rate, from and after the date on which such payment
was originally due to the non-defaulting party.
<PAGE>
C. The rights granted hereunder are intended to be cumulative, and shall
not be in substitution for, but shall be in addition to, any and all rights and
remedies available to the non-defaulting party (including, without limitation,
injunctive relief and damages; provided that the satisfaction of damage awards
against Owner shall be limited by the provisions of Section 16.04) by reason of
applicable provisions of law or equity.
16.04 Owner's Estate
--------------
Notwithstanding any other provisions of this Agreement, in the event of any
Event of Default by Owner pursuant to the terms of this Agreement, Management
Company shall look only to Owner's estate and interest in the Site and the Hotel
(which shall, for this purpose, include (i) amounts deposited in the Operating
Accounts and the FF&E Reserve, and (ii) accounts receivable) for the
satisfaction of a money judgment against Owner resulting from such Event of
Default, and no other property or assets of Owner, or of its partners, officers,
directors, shareholders or principals, shall be subject to levy, execution or
other enforcement procedure for the satisfaction of such judgment. Management
Company's right to look to Owner's estate and interest in the Site and the Hotel
for satisfaction of such a money judgment against Owner shall survive
Termination and shall not be affected by any one or more Sales of the Hotel.
Nothing contained in this Section 16.04 shall be deemed to affect or diminish
Management Company's remedies under
<PAGE>
this Article XVI other than money damages against Owner (including, without
limitation, Termination of this Agreement).
END OF ARTICLE XVI
<PAGE>
ARTICLE XVII
WAIVER AND PARTIAL INVALIDITY
-----------------------------
17.01 Waiver
------
The failure of either party to insist upon a strict performance of any of
the terms or provisions of this Agreement, or to exercise any option, right or
remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
17.02 Partial Invalidity
------------------
If any portion of this Agreement shall be declared invalid by order, decree
or judgment of a court, this Agreement shall be construed as if such portion had
not been inserted herein except when such construction would operate as an undue
hardship on Management Company or Owner, or constitute a substantial deviation
from the general intent and purpose of said parties as reflected in this
Agreement.
END OF ARTICLE XVII
<PAGE>
ARTICLE XVIII
ASSIGNMENT
----------
18.01 Assignment
----------
A. Management Company shall not assign or transfer its management
responsibilities under this Agreement without the prior written consent of
Owner; provided, however, that Management Company shall have the right, without
such consent, to (1) assign its interest in this Agreement to any of its
Affiliates, and any such Affiliate shall be deemed to be the Management Company
for the purposes of this Agreement, and (2) sublease shops or grant Licenses or
concessions at the Hotel so long as the terms of any such subleases, Licenses or
concessions; are consistent with the provisions of Section 2.02 and provided
further that Owner's consent shall be required prior to the execution by
Management Company of any such lease, license or concession which (a) has a term
of more than five (5) years, or (b) involves more than one thousand (1,000)
square feet of space within the Hotel. In the event of such an assignment by
Management Company of its interest in this Agreement to an Affiliate, the
Management Company which is named in the Preamble to this Agreement: (i) shall
automatically be deemed to guarantee the performance of such Affiliate under
this Agreement; (ii) shall, at the request of Owner, execute a guaranty, in form
and substance reasonably satisfactory to both parties, of the performance of
such Affiliate under this Agreement (provided
<PAGE>
that the failure of Owner to obtain an executed guaranty pursuant to this clause
(ii) shall not affect the validity or enforceability of the guaranty which is
automatically created pursuant to clause (i); and provided further, that, when
Owner does so receive an executed guaranty pursuant to this clause (ii), such
executed guaranty shall be deemed to have superseded the guaranty described in
clause (i) above); and (iii) shall make available to such Affiliate, in
connection with the performance by such Affiliate under this Agreement,
Management Company's skill, personnel, facilities and resources.
B. Owner shall not assign or transfer its interest in this Agreement other
than (i) in connection with a Sale of the Hotel which complies with the
provisions of Article XIX hereof, or (ii) as set forth in Section 18.01.C.
C. Nothing contained herein shall prevent: (i) the collateral assignment
of this Agreement by Owner as security for any Mortgage which complies with the
provisions of Section 3.01; or (ii) the transfer of this Agreement in connection
with a merger or consolidation or a sale of all or substantially all of the
assets of either party, provided that (x) if such transfer is by Owner, the
provisions of Article XIX hereof shall be complied with, and (y) if such
transfer is by Management Company, such transfer is being done as a part of a
merger, consolidation, etc., of all or substantially all of the business which
consists of managing the Courtyard by Marriott System.
<PAGE>
D. In the event either party consents to an assignment of this Agreement
by the other, no further assignment shall be made without the express consent in
writing of such party, unless such assignment may otherwise be made without such
consent pursuant to the terms of this Agreement.
E. An assignment (either voluntarily or by operation of law) by Owner of
its interest in this Agreement (in compliance with Article XVIII) shall not
relieve Owner from its obligations under this Agreement which accrued prior to
the date of such assignment, but shall relieve Owner of such obligations
accruing after such date, if the assignment complies with Section 18.01.B and if
Management Company has received an assumption agreement executed by the assignee
(in form and substance reasonably satisfactory to Management Company). An
assignment (either voluntarily or by operation of law) by Management Company of
its interest in this Agreement shall not relieve Management Company from its
obligations under this Agreement, unless Owner so agrees in writing.
<PAGE>
F. Subject to the provisions of this Article XVIII, the terms and
conditions of this Agreement shall inure to the benefit of, and be binding upon,
the respective successors, heirs, legal representatives, or assigns of each of
the parties hereto.
END OF ARTICLE XVIII
<PAGE>
ARTICLE XIX
SALE OF THE HOTEL
-----------------
19.01 Sale of the Hotel
-----------------
A. Owner shall not enter into any Sale of the Hotel to any individual or
entity which: (i) does not have sufficient financial resources and liquidity to
fulfill Owner's obligations under this Agreement; (ii) is in control of or
controlled by persons who have been convicted of felonies involving moral
turpitude in any state or federal court; or (iii) is engaged in the business of
operating or franchising (as distinguished from owning) a branded hotel chain
having fifteen hundred (1,500) or more guest rooms in competition with
Management Company. An individual or entity shall not be deemed to be in the
business of operating hotels in competition with Management Company solely by
virtue of (x) the ownership of such hotels, either directly or indirectly
through subsidiaries, affiliates and partnerships, or (y) holding a Mortgage or
Mortgages secured by one or more hotels. Notwithstanding the foregoing, if
Owner or an Affiliate of Owner is a corporation whose shares are listed on a
public stock exchange, and if a Sale of the Hotel occurs as a result of
purchases of such shares, through such public stock exchange, in sufficient
quantities to cause a transfer of the "controlling interest" in Owner (as
described in the definition of "Sale of the Hotel"), and if such Sale of the
Hotel is not in compliance with the provisions of this Section 19.01.A,
Management Company shall have the right, at its option, to terminate this
<PAGE>
Agreement by written notice to Owner (as more particularly described in Section
19.01.B), but such non-compliance with this Section 19.01.A shall not be an
Event of Default nor shall it subject Owner to claims for damages by Management
Company pursuant to Article XVI.
B. If Owner receives a bona fide written offer to enter into a Sale of the
Hotel, Owner shall give written notice thereof to Management Company, stating
the name of the prospective purchaser or tenant, as the case may be. Such
notice shall include appropriate information relating to such prospective
purchaser or tenant demonstrating compliance with the provisions of Section
19.01.A together with such additional information as Management Company may
reasonably request. If Management Company decides that a Sale of the Hotel to
such prospective purchaser or tenant would violate the provisions of Section
19.01.A, Management Company shall so notify Owner by no later than thirty (30)
days after receipt of such notice from Owner; provided, however, that any
decision by Management Company regarding any such prospective purchaser or
tenant shall not be binding if the information furnished by Owner pursuant to
the preceding sentence is inaccurate. Concurrently with the finalization of
such Sale of the Hotel, the purchaser or tenant, as the case may be, shall, by
appropriate instrument reasonably satisfactory to Management Company, assume all
of Owner's obligations hereunder. An executed copy of such assumption agreement
shall be delivered to Management Company. If the proposed Sale of the Hotel
would violate the provisions of Section
<PAGE>
19.01.A, Owner will not enter into any agreement relating to such Sale of the
Hotel. However, if Owner does enter into such an agreement, Management Company
shall have the right to terminate this Agreement by written notice to Owner,
which notice will set an effective date for such Termination not earlier than
thirty (30) days, nor more than one hundred twenty (120) days, following the
date of the giving of such notice. Management Company shall have the right to
change such effective date of Termination to coincide with the date of the
finalization of the proposed Sale of the Hotel. At Management Company's
election, said notice of Termination shall not be effective if such Sale of the
Hotel is not finalized. If such Termination by Management Company results from
a Default by Owner under Section 19.01.A, such Termination shall not relieve
Owner (except as otherwise set forth to the contrary in the last sentence of
Section 19.01.A) of liability to Management Company for such Default.
C. In connection with the possibility of a Sale of the Hotel achieved by
means of a transfer of the controlling interest in Owner, Owner, upon written
request of Management Company, shall (unless Owner is a publicly-traded
corporation which is registered under Section 12 or Section 15 of the Securities
Act of 1934) furnish Management Company with a list of the names and addresses
of the owners of the capital stock, (but only those owners which hold an
ownership interest of thirty percent (30%) or more), or the partnership
interests, (both (i) general partner and (ii) any limited partner holding an
ownership interest of thirty percent
<PAGE>
(30%) or more, or other ownership interests in Owner. In addition, Owner shall
notify Management Company of any transaction or series of transactions in which
Owner reduces its ownership interest in the Hotel below fifty percent (50%) or
in which the former controlling interest in Owner is reduced below fifty percent
(50%). Management Company agrees to use diligent efforts to keep all such lists
confidential.
D. It is understood that no Sale of the Hotel (which is otherwise in
compliance with the provisions of this Article XIX) shall reduce or otherwise
affect: (i) the current level of Working Capital; (ii) the current amount
deposited in the FF&E Reserve; or (iii) any of the Operating Accounts maintained
by Management Company pursuant to this Agreement. If, in connection with any
Sale of the Hotel, the selling Owner intends to withdraw, for its own use, any
of the cash deposits described in the preceding sentence, the selling Owner must
obtain the contractual obligation of the buying Owner to replenish those
deposits (in the identical amounts) simultaneously with such withdrawal. The
selling Owner is hereby contractually obligated to Management Company to ensure
that such replenishment in fact occurs. The obligations described in this
Section 19.01.D shall survive such Sale of the Hotel and shall survive
Termination.
E. Management Company shall have the right to terminate this Agreement, on
thirty (30) days' written notice, if title to or possession of the Hotel is
transferred by judicial or administrative process (including, without
limitation, a
<PAGE>
Foreclosure, or a sale pursuant to an order of a bankruptcy court, or a sale by
a court-appointed receiver) to an individual or entity which would not qualify
as a permitted transferee under clause (i), (ii) or (iii) of Section 19.01.A,
regardless of whether or not such transfer is the voluntary action of the
transferring Owner, or whether (under applicable law) the Owner is in fact the
transferor; provided, however, that Management Company shall not have the right
to so terminate this Agreement based on the assertion that a Qualified Lender
fails to so qualify as a permitted transferee under said clauses (i), (ii) or
(iii) of Section 19.01.A.
END OF ARTICLE XIX
<PAGE>
ARTICLE XX
MISCELLANEOUS
-------------
20.01 Right to Make Agreement
-----------------------
A. Each party warrants, with respect to itself, that neither the execution
of this Agreement nor the finalization of the transactions contemplated hereby
shall: (i) violate any provision of law or any judgment, writ, injunction,
order or decree of any court or governmental authority having jurisdiction over
it; (ii) result in or constitute a breach or default under any indenture,
contract, other commitment or restriction to which it is a party or by which it
is bound; to the extent that the remedies for such breach or default would have
a material adverse effect on such party's ability to perform under this
Agreement, or (iii) require any consent, vote or approval which has not been
taken, or at the time of the transaction involved shall not have been given or
taken. Each party covenants that it has and will continue to have throughout
the Term of this Agreement and any extensions thereof, the full right to enter
into this Agreement and perform its obligations hereunder.
B. Each party agrees that it will, as of the Effective Date, provide the
other party with: (i) certified copies of the applicable resolutions of its
board of directors (if it is a corporation), or written authorization by all
general partners (if it is a partnership) or other appropriate documentation
establishing its authority to execute this Agreement; and (ii) such
<PAGE>
opinions of counsel as the other party shall reasonably request regarding the
matters described in this Section 20.01.
20.02 Consents
--------
Wherever in this Agreement the consent or approval of Owner or Management
Company is required, such consent or approval shall (except to the extent that
such consent or approval is specifically designated as being "within the
discretion" of a party, or words to that effect, in the applicable provision)
not be unreasonably withheld, shall be in writing and shall be executed by a
duly authorized officer or agent of the party granting such consent or
approval. If either Owner or Management Company fails to respond within thirty
(30) days to a request by the other party for a consent or approval, such
consent or approval shall be deemed to have been given.
20.03 Agency
------
The relationship of Owner and Management Company shall be that of principal
and agent, and nothing contained in this Agreement shall be construed to create
a partnership or joint venture between them or their successors in interest.
Management Company's agency established by this Agreement is coupled with an
interest and may not be terminated by Owner until the expiration of the Term of
this Agreement, except as provided in Section 4.03 and in Articles XV or XVI.
Notwithstanding the agency relationship created by this Agreement, except to the
extent specifically set forth to the
<PAGE>
contrary in Section 20.12, nothing contained herein shall prohibit, limit or
restrict Management Company or any of its Affiliates from developing, owning,
operating, leasing, managing or franchising hotels in the market area where the
Hotel is located.
The agency coupled with an interest herein was created by a complex,
single, integrated transaction between Marriott Corporation (the parent
corporation of Owner and Managment Company as of the Effective Date) and its
subsidiaries whereby Marriott Corporation and its subsidiaries developed,
constructed, own and manage the Hotel. This agency is further intended to
provide security for the covenants, promises and guarantees herein. The agency
was purchased for valuable consideration, and is not terminable except as
specifically allowed by the express provisions of this agreement. The parties
intend for this agency to be coupled with an interest, waive any right to claim
it is terminable at will, and further agree to be equitably estopped from
asserting that the agency is not coupled with an interest.
20.04 Confidentiality
---------------
The parties hereto agree that the matters set forth in this Agreement are
strictly confidential and each party will make every effort to ensure that such
matters are not disclosed to any outside person or entities (including the
press) without the written consent of the other party; provided, however, that
such consent will not be required with respect to: (i) legally required filings
and other disclosures mandated by Legal Requirements; and (ii) in the case of
Owner, disclosure to any Qualified Lender or
<PAGE>
prospective Qualified Lender, or to prospective purchasers of the Hotel (subject
to the provisions of Section 20.05, if applicable).
20.05 Equity Offerings
----------------
No reference to Management Company or to any of its Affiliates will be made
in any prospectus, private placement memorandum, offering circular or offering
documentation related thereto (herein collectively referred to as the
"Prospectus"), issued by Owner or one of its Affiliates, which is designed to
interest potential investors in the Hotel, unless Management Company has
previously received a copy of all such references. However, regardless of
whether Management Company does or does not so receive a copy of all such
references, neither Management Company nor any of its Affiliates will be deemed
a sponsor of the offering described in the Prospectus, nor will it have any
responsibility for the Prospectus, and the Prospectus will so state. Unless
Management Company agrees in advance, the Prospectus will not include: (i) any
Proprietary Mark; or (ii) except as required by applicable securities laws, the
text of this Agreement. Owner shall be entitled, however, to include in the
Prospectus an accurate summary of this Agreement; if there are no Legal
Requirements pursuant to which such information must be disclosed, appropriate
measures shall be taken to ensure entities or individuals receiving such
Prospectus shall acknowledge the confidentiality of such information. Owner
shall indemnify, defend and hold Management Company and its Affiliates (and
their respective directors,
<PAGE>
officers, shareholders, employees and agents) harmless from and against all
loss, costs, liability and damage (including attorneys' fees and expenses, and
the cost of Litigation) arising out of any Prospectus or the offering described
therein.
20.06 Applicable Law
--------------
This Agreement shall be construed under and shall be governed by the laws
of the state where the Hotel is located.
20.07 Recordation
-----------
The terms and provisions of this Agreement shall run with the land
designated as the Site, and with Owner's interest therein, and shall be binding
upon all successors to such interest. At the request of either party, the
parties shall execute an appropriate memorandum of this Agreement in recordable
form and cause the same to be recorded in the jurisdiction where the Hotel is
located. Any cost of such recordation shall be borne by Management Company.
20.08 Headings
--------
Headings of Articles and Sections are inserted only for convenience and are
in no way to be construed as a limitation on the scope of the particular
Articles or Sections to which they refer.
<PAGE>
20.09 Notices
-------
Notices, statements and other communications to be given under the terms of
this Agreement shall be in writing, and shall be either (i) delivered by hand
against receipt, or (ii) sent by certified or registered mail, postage prepaid,
return receipt requested or (iii) sent by either a nationally utilized overnight
delivery service or by facsimile machine (provided that, in either case, a
confirmatory copy is thereafter sent by certified or registered mail):
To Owner:
--------
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department
with a copy to:
---------------
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Asset Management Department 72-1AD-02
To Management Company:
---------------------
Courtyard Management Corporation
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department
with a copy to:
---------------
Courtyard Management Corporation
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Courtyard by Marriott
Vice President - Finance
<PAGE>
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice which is properly mailed, as described
above, shall be deemed to have been served as of three (3) business days after
said posting.
20.10 Environmental Matters
---------------------
A. Management Company shall indemnify, defend and hold Owner and its
Affiliates (and their respective directors, officers, shareholders, employees
and agents) harmless from and against all loss, cost, liability and damage
(including, without limitation, engineers' and attorneys' fees and expenses, and
the cost of Litigation) arising from the placing, discharge, leakage, use or
storage of Hazardous Materials, in violation of applicable Environmental Laws,
on the Site or in the Hotel by Management Company's employees, representatives
or agents during the Term of this Agreement. Regardless of whether or not a
given Hazardous Material is permitted on the Site under applicable Environmental
Law, Management Company shall only bring on the Site such Hazardous Materials as
are needed in the normal course of business of the Hotel.
B. In the event of the discovery of Hazardous Materials on any portion of
the Site or in the Hotel during the Term of this Agreement, Owner shall (except
to the extent such removal is Management Company's responsibility pursuant to
Section 20.10.A) promptly remove (if required by applicable Environmental Law)
such
<PAGE>
Hazardous Materials, together with all contaminated soil and containers, and
shall otherwise remedy the problem in accordance with all Environmental Laws.
Owner shall (except to the extent that the removal of such Hazardous Materials
is Management Company's responsibility pursuant to Section 20.10.A) indemnify,
defend and hold Management Company and its Affiliates (and their respective
directors, officers, shareholders, employees and agents) harmless from and
against all loss, cost, liability and damage (including, without limitation,
engineers' and attorneys' fees and expenses, and the cost of Litigation) arising
from the presence of Hazardous Materials on the Site or in the Hotel.
C. All costs and expenses of the removal of Hazardous Materials from the
Site or the Hotel pursuant to Section 20.10.B, and of the aforesaid compliance
with all Environmental Laws, and any amounts paid to Management Company pursuant
to the indemnity set forth in the last sentence of Section 20.10.B, shall be
paid by Owner from its own funds, not as a Deduction nor from the FF&E Reserve,
and shall be treated as an expenditure by Owner pursuant to Section 8.03.
20.11 Estoppel Certificates
---------------------
Each party to this Agreement shall at any time and from time to time, upon
not less than thirty (30) days' prior notice from the other party, execute,
acknowledge and deliver to such other party, or to any third party specified by
such other party, a statement in writing: (i) certifying that this Agreement is
unmodified and in
<PAGE>
full force and effect (or if there have been modifications, that the same, as
modified, is in full force and effect and stating the modifications); (ii)
stating whether or not to the best knowledge of the certifying party (a) there
is a continuing default by the non-certifying party in the performance or
observance of any covenant, agreement or condition contained in this Agreement,
or (b) there shall have occurred any event which, with the giving of notice or
passage of time or both, would become such a default, and, if so, specifying
each such default or occurrence of which the certifying party may have
knowledge; and (iii) stating such other information as the non-certifying party
may reasonably request. Such statement shall be binding upon the certifying
party and may be relied upon by the non-certifying party and/or such third party
specified by the non-certifying party as aforesaid. The obligations set forth
in this Section 21.11 shall survive Termination (that is, each party shall, on
request, within the time period described above, execute and deliver to the
non-certifying party and to any such third party a statement certifying that
this Agreement has been terminated).
20.12 Trade Area Restriction
----------------------
Neither Management Company nor any of its Affiliates shall own, build,
franchise, manage or operate any Restricted Hotel, under the Courtyard by
Marriott brand name, within the Restricted Area during the period from the
Effective Date through the sixth (6th) anniversary of the Effective Date.
<PAGE>
20.13 Arbitration
-----------
A. In the event of a dispute between Owner and Management Company with
respect to any issue of fact specifically mentioned herein as a matter to be
decided by arbitration, such dispute shall be determined by arbitration as
provided in this Section 20.13.
B. Disputes shall be resolved in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then pertaining. The
decision of the arbitrators shall be binding, final and conclusive on the
parties.
C. Owner and Management Company shall each appoint and pay all fees of a
fit and impartial person as arbitrator who shall have had at least ten (10)
years' recent professional experience in the general subject matter of the
dispute. Notice of such appointment shall be sent in writing by each party to
the other, and the arbitrators so appointed, in the event of their failure to
agree within thirty (30) days after the appointment of the second arbitrator
upon the matter so submitted, shall appoint a third arbitrator. If either Owner
or Management Company shall fail to appoint an arbitrator, as aforesaid, for a
period of twenty (20) days after written notice from the other party to make
such appointment, then the arbitrator appointed by the party having made such
appointment shall appoint a second arbitrator and the two so appointed shall, in
the event of their failure to agree upon any decision within thirty (30) days
thereafter, appoint a third arbitrator. If such arbitrators fail to agree upon
a third
<PAGE>
arbitrator within forty-five (45) days after the appointment of the second
arbitrator, then such third arbitrator shall be appointed by the American
Arbitration Association from its qualified panel of arbitrators, and shall be a
person having at least ten (10) years' recent professional experience as to the
subject matter in question. The fees of the third arbitrator and the expenses
incident to the proceedings shall be borne equally between Owner and Management
Company, unless the arbitrators decide otherwise. The fees of respective counsel
engaged by the parties, and the fees of expert witnesses and other witnesses
called for the parties, shall be paid by the respective party engaging such
counsel or calling or engaging such witnesses.
D. The decision of the arbitrators shall be rendered within thirty (30)
days after appointment of the third arbitrator. Such decision shall be in
writing and in duplicate, one counterpart thereof to be delivered to Owner and
one to Management Company. A judgment of a court of competent jurisdiction may
be entered upon the award of the arbitrators in accordance with the rules and
statutes applicable thereto then obtaining.
20.14 Entire Agreement
----------------
This Agreement, together with other writings signed by the parties which
are expressly stated to be supplemental hereto and together with any instruments
to be executed and delivered pursuant to this Agreement, constitutes the entire
agreement between the parties, and supersedes all prior written and oral
understandings.
<PAGE>
This Agreement may be amended only by a writing signed by both parties hereto.
END OF ARTICLE XX
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
Attest: OWNER:
HMH COURTYARD PROPERTIES, INC.
By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend
-------------------- ----------------------------
Attest: MANAGEMENT COMPANY:
COURTYARD MANAGEMENT CORPORATION
By: /s/ Peter J. Swift By: /s/ James Sullivan
------------------- -------------------
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS ATTACHED TO ORIGINAL AGREEMENT
<S> <C>
Exhibit "A" Location of Hotel and Legal Description
Exhibit "A-1 "Number of Suites and Brief Description of Facilities;
Priority Basis; Performance Termination Threshold; Loan
Priority Basis (number set forth in (i) of Definition); Revenue
Index Threshold
Exhibit "B" Form of Accounting Period Statement
Exhibit "C" [Intentionally Deleted]
Exhibit "D" Map of Restricted Area
Exhibit "D-1" Narrative Description of Restricted Area
Exhibit "E" Proprietary Marks which will remain the property
of Owner after Termination
Exhibit "F" Title Encumbrances; Existing CC&R's
(separately describing those charges thereunder which will be
treated as capital expenditures under Section 8.03); Existing
Ground Lease (if applicable); Existing Mortgages (if any)
Exhibit "G" Form of Annual Operating Statement
Exhibit "H" Form of Annual Operating Projection
</TABLE>
<PAGE>
Exhibit 10.14(iii)
RESIDENCE INN
MANAGEMENT AGREEMENT
--------------------
This Management Agreement ("Agreement") is executed as of the 25th day of
September, 1993 ("Effective Date"), by HMH PROPERTIES, INC., ("Owner"), a
Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda,
Maryland 20817 and RESIDENCE INN BY MARRIOTT, INC. (Management Company"), a
Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda,
Maryland 20817.
R E C I T A L S :
A. Owner is the owner of the Inn (as defined and more fully described in
Section 1.01) which is located as set forth on Exhibit "A" hereto; and
B. Owner desires to have Management Company manage and operate the Inn,
and Management Company is willing to perform such services for the account of
Owner on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
<PAGE>
ARTICLE I
DEFINITION OF TERMS
-------------------
1.01 Definition of Terms
-------------------
The following terms when used in this Agreement shall have the meanings
indicated:
"Accounting Period" shall mean each of the four (4) week accounting periods
-----------------
which are used in Management Company's accounting system, except that an
Accounting Period may occasionally contain five (5) weeks when necessary to
conform Management Company's accounting system to the calendar.
"Accounting Period Statement" shall have the meaning set forth in Section
---------------------------
5.03.
"Additional Invested Capital" shall mean the cumulative total, as of any
---------------------------
given date during the Term, of the following: (i) any expenditures made by Owner
in response to a Building Estimate, pursuant to Section 8.03, and any
expenditures by Owner pursuant to Section 20.10.C; (ii) any contributions by
Owner to the FF&E Reserve (beyond the funding described in Section 8.02.B and
8.02.E); other than those contributions which are reimbursed to Owner under
Section 8.02.F; (iii) any payments by Owner with regard to special assessments
or impact fees, pursuant to Section 13.01.B(2) or 13.01.B(3); and (iv) any
costs, expenses and charges which are described on Exhibit "F" hereto as
"capital charges" pursuant to Section 2.05.A. Owner shall give Management
Company prompt notice of any amounts for which it has provided funding which
constitute "Additional Invested Capital"
2
<PAGE>
together with such evidence of funding as Management Company may reasonably
require.
"Affiliate" shall mean any individual or entity directly or indirectly
---------
through one or more intermediaries, controlling,
controlled by or under common control with a party. The term "control," as
used in the immediately preceding sentence, means, with respect to a
corporation, the right to the exercise, directly or indirectly, of fifty-one
percent (51%) or more of the voting rights attributable to the shares of the
controlled corporation, and, with respect to an entity that is not a
corporation, the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of the controlled entity.
"Agreement" shall have the meaning set forth in the Preamble.
---------
"Annual Operating Budget" shall have the meaning set forth in Section 9.03.
-----------------------
"Annual Operating Statement" shall have the meaning set forth in Section
--------------------------
9.01.
"Available Cash Flow" shall mean an amount, with respect to each Fiscal
-------------------
Year or portion thereof, (prorated for any partial Fiscal Year) during the Term
of this Agreement, equal to the excess, if any, of the Operating Profit for such
Fiscal Year over the sum of: (i) the applicable Owner's Priority in such Fiscal
Year, plus; (ii) the Base Management Fee, plus; (iii) Deferred
3
<PAGE>
Contingent Base Management Fees paid to Manager in such Fiscal Year.
"Base Management Fee" shall mean for each Fiscal Year (prorated for any
-------------------
partial Fiscal Year) during the Term of this Agreement, an amount equal to two
percent (2%) of Gross Revenues, which shall be paid to Management Company as
compensation (in addition to the Residence Inn System Fee and Incentive
Management Fee) for the services performed pursuant to this Agreement.
"Building Estimate" shall have the meaning set forth in Section 8.03.A.
-----------------
"Capitalization Multiple" shall mean the number ten (10).
-----------------------
"Case Goods" shall mean furniture and furnishings used in the Inn,
----------
including, without limitation: chairs, beds, chests, headboards, desks, lamps,
tables, television sets, kitchen equipment, mirrors, pictures, wall decorations
and similar items.
"CC&R's" shall have the meaning set forth in Section 2.05.
------
"Chain Services" shall have the meaning set forth in Section 11.03.
--------------
"Coverage Ratio" shall mean the number one and three-tenths (1.3).
--------------
"Cure Payment" shall have the meaning set forth in Section 4.03.B.
------------
"Deductions" shall have the meaning set forth in the definition of
----------
Operating Profit.
"Default" shall have the meaning set forth in Section 16.01.
-------
4
<PAGE>
"Deferred Contingent Base Management Fees" shall mean an amount equal to
----------------------------------------
(a) the sum of all unpaid Base Management Fees deferred in accordance with
Section 5.02.B less (b) all sums paid to Management Company in accordance with
the provisions of Section 5.02.C.
"Effective Date" shall have the meaning set forth in the Preamble.
--------------
"Employee Claims" shall mean any and all claims (including all fines,
---------------
judgments, penalties, costs, Litigation and/or arbitration expenses, attorneys'
fees and expenses, and costs of settlement with respect to any such claim) by
any employee or employees of Management Company against Owner or Management
Company with respect to the employment at the Inn of such employee or employees.
"Employee Claims" shall include, without limitation, the following: (i) claims
which are eventually resolved by arbitration, by Litigation or by settlement;
(ii) claims which also involve allegations that any applicable
employment-related contracts affecting the employees at the Inn have been
breached; and (iii) claims which involve allegations that one or more of the
Employment Laws has been violated; provided, however, that "Employee Claims"
shall not include claims for worker compensation benefits (which shall be
governed by Article XII hereof) or for unemployment benefits.
"Employment Laws" shall mean any federal, state or local law (including the
---------------
common law), statute, ordinance, rule, regulation, order or directive with
respect to employment, conditions of
5
<PAGE>
employment, benefits, compensation, or termination of employment that currently
exists or may exist at any time during the Term of this Agreement, including,
but not limited to, Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act, the Workers Adjustment and Retraining
Notification Act, the Occupational Safety and Health Act, the Immigration Reform
and Control Act of 1986, the Polygraph Protection Act of 1988 and the Americans
With Disabilities Act of 1990.
"Environmental Laws" shall mean: any federal, state or local law, rule or
------------------
regulation (both present and future) dealing with the use, generation,
treatment, storage, disposal or abatement of Hazardous Materials, including, but
not limited to, (i) the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601 et seq., as amended; (ii) the regulations
-- ---
promulgated thereunder, from time to time; (iii) all federal, state and local
laws, rules and regulations (now or hereafter in effect) dealing with the use,
generation, treatment, storage, disposal or abatement of Hazardous Materials;
and (iv) the regulations promulgated thereunder, from time to time.
"Event of Default" shall have the meaning set forth in Section 16.02.
----------------
"Existing CC&R's" shall have the meaning set forth in Section 2.05.A.
---------------
"Existing Ground Leases" shall mean the ground leases which are listed on
----------------------
Exhibit "F", but for purposes of this Agreement
6
<PAGE>
shall not include any amendments or modifications after the Effective Date.
"Existing Mortgages" shall mean the Mortgages which are listed on Exhibit
------------------
"F", but for purposes of this Agreement shall not include any amendments or
modifications after the Effective Date.
"FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case Goods,
----
Shuttle Vehicles, signage and equipment at the Inn (including, without
limitation, facsimile machines, communication systems, audio-visual equipment,
and all computer and other equipment needed for the reservation system and the
property management system, and all other electronic systems needed for any Inn,
from time to time, as well as similar systems based on other technologies which
may be developed in the future).
"FF&E Estimate" shall have the meaning set forth in Section 8.02.C.
-------------
"FF&E Reserve" shall have the meaning set forth in Section 8.02.A.
------------
"First Notice" shall have the meaning set forth in Section 6.02.
------------
"Fiscal Year" shall mean Management Company's Fiscal Year which now ends at
-----------
midnight on the Friday closest to December 31 in each calendar year; the new
Fiscal Year begins on the Saturday immediately following said Friday. Any
partial Fiscal Year between the Effective Date and the commencement of the first
full
7
<PAGE>
Fiscal Year and any partial Fiscal Year between the end of the last full Fiscal
Year and the Termination of this Agreement, shall constitute a separate Fiscal
Year. If Management Company's Fiscal Year is changed in the future, appropriate
adjustment to this Agreement's reporting and accounting procedures shall be
made; provided, however, that no such change or adjustment shall alter the Term
of this Agreement, or in any way reduce the distributions of Operating Profit or
other payments due Owner hereunder, or otherwise significantly and adversely
affect Owner's rights or obligations under this Agreement.
"Fixed Asset Supplies" shall mean supply items included within "Property
--------------------
and Equipment" under the Uniform System of Accounts, including linen, cleaning
supplies, china, glassware, tableware, uniforms, and similar items.
"Force Majeure" shall mean acts of God, acts of war, civil disturbance,
-------------
governmental action (including the revocation or refusal to grant a License,
where such revocation or refusal is not due to the fault of the party whose
performance is to be excused for reasons of Force Majeure), strikes, lockouts,
fire, unavoidable casualties or any other causes beyond the reasonable control
of either party (excluding, however: (i) lack of financing; or (ii) general
economic and/or market factors).
"Foreclosure" shall mean any exercise of the remedies available to a
-----------
Holder, upon a default under the Secured Loan held by such Holder, which results
in a transfer of title to or possession of the Inn. The term "Foreclosure"
shall include,
8
<PAGE>
without limitation, any one or more of the following events, if they occur in
connection with a default under a Secured Loan: (i) a transfer by judicial
foreclosure; (ii) a transfer by deed in lieu of foreclosure; (iii) the
appointment by a court of a receiver to assume possession of the Inn; (iv) a
transfer of either ownership or control of the Owner, by exercise of a stock
pledge or otherwise; (v) if title to the Inn is held by a tenant under a ground
lease, an assignment of the tenant's interest in such ground lease; or (vi) any
similar judicial or non-judicial exercise of the remedies held by the Holder.
"Foreclosure Date" shall mean the date on which title to or possession of
----------------
the Inn is transferred by means of a Foreclosure.
"Future CC&R's" shall have the meaning set forth in Section 2.05.B.
-------------
"GDP Deflator" shall mean the "Gross Domestic Product Implicit Price
------------
Deflator" issued from time to time by the United States Bureau of Economic
Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not
at such time so prepared and published, any comparable index selected by Owner
and reasonably satisfactory to Management Company (a "Substitute Index") then
prepared and published by an agency of the Government of the United States,
appropriately adjusted for changes in the manner in which such index is prepared
and/or year upon which such index is based. Any dispute regarding the selection
of the Substitute Index or the adjustments to be made thereto shall be settled
by arbitration in accordance with
9
<PAGE>
Section 20.13. Except as otherwise expressly stated herein, whenever a number
or amount is required to be "adjusted by the GDP Deflator", or similar
terminology, such adjustment shall be equal to the percentage increase or
decrease (except that, for purposes of this Agreement, the GDP Deflator shall
not be decreased below its level as of the Effective Date) in the GDP Deflator
which is issued for the month in which such adjustment is to be made (or, if the
GDP Deflator for such month is not yet publicly available, the GDP Deflator for
the most recent month for which the GDP Deflator is publicly available) as
compared to the GDP Deflator which was issued for the month in which the
Effective Date occurred.
"Gross Revenues" shall mean, for each Fiscal Year during the Term of this
--------------
Agreement, all revenues and receipts of every kind derived from operating the
Inn and parts thereof, including, but not limited to: income (from both cash
and credit transactions), before commissions and discounts for prompt or cash
payments, from rental of rooms, stores, offices, meeting, exhibit or sales space
of every kind; parking fees, license, lease and concession fees and rentals (not
including gross receipts of licensees, lessees and concessionaires); income from
vending machines; health club membership fees; food and beverage sales;
wholesale and retail sales of merchandise (other than proceeds from the sale of
FF&E no longer necessary to the operation of the Inn, which shall be deposited
in the FF&E Reserve as set forth in Section 8.02.D hereof); service charges, to
the extent not
10
<PAGE>
distributed to the employees at the Inn as gratuities; and proceeds, if any,
from business interruption or other loss of income insurance; provided, however,
that Gross Revenues shall not include the following: gratuities to Inn
employees; federal, state or municipal excise, sales, use or similar taxes
collected directly from patrons or guests or included as part of the sales price
of any goods or services; insurance proceeds (other than proceeds from business
interruption or other loss of income insurance); condemnation proceeds (other
than for a temporary taking); any proceeds from any Sale of the Inn or from the
refinancing of any debt encumbering the Inn; proceeds from the disposition of
FF&E no longer necessary for the operation of the Inn; interest which accrues on
amounts deposited in either the FF&E Reserve or any escrow accounts which are
established in accordance with Section 13.01.C; or Cure Payments.
"Ground Lease Rental" shall mean the annual rental, as of the Effective
-------------------
Date, under the Existing Ground Lease.
"Ground Lessor" shall mean the landlord under the Existing Ground Lease.
-------------
"Hazardous Materials" shall mean and include any substance or material
-------------------
containing one or more of any of the following: "hazardous material", "hazardous
waste", "hazardous substance", "regulated substance", "petroleum", "pollutant",
"contaminant", or "asbestos", as such terms are defined in any applicable
Environmental Law, in such concentration(s) or amount(s) as may impose clean-up,
removal, monitoring or other responsibility
11
<PAGE>
under any applicable Environmental Laws, or which may present a significant risk
of harm to guests, invitees or employees of the Inn.
"Holder" shall mean any holder, from time to time, of any Secured Loan.
------
"Impositions" shall mean all real estate and personal property taxes,
-----------
levies, assessments and similar charges (other than those which are specifically
excluded pursuant to Section 13.01.B) including, without limitation, the
following: all water, sewer or similar fees, rates, charges, excises or levies;
license fees; permit fees; inspection fees and other authorization fees and
other governmental charges of any kind or nature whatsoever, whether general or
special, ordinary or extraordinary, foreseen or unforeseen, or hereinafter
levied or assessed of every character (including all interest and penalties
thereon), which at any time during or in respect of the Term of this Agreement
may be assessed, levied, confirmed or imposed on Owner with respect to the Inn
or otherwise in respect of or be a lien upon the Inn. Impositions shall not
include any income or franchise taxes payable by Owner or Management Company.
Impositions shall include any taxes, levies, assessments and similar charges
which may be enacted by the applicable governmental authority in lieu of, or in
complete or partial substitution for, Impositions.
"Incentive Management Fee" shall mean, for each Fiscal Year during the Term
------------------------
of this Agreement, the payments which shall be
12
<PAGE>
made to Management Company, as compensation (in addition to the Base Management
Fee and the Residence Inn System Fee) to Management Company for its services
under this Agreement, in the amount of fifty percent (50%) of the Available Cash
Flow in each Fiscal Year (or portion thereof); provided, however, that the
cumulative Incentive Management Fee received by Management Company, from the
Effective Date through any given point in time during the Term of this
Agreement, shall not exceed twenty percent (20%) of the cumulative Operating
Profit from the Effective Date through such point in time; provided further,
however, that in no event shall the aforesaid cumulative limitation require
Management Company to refund to Owner any Incentive Management Fees which were
paid in a previous Fiscal Year and which were within such limitation as of the
time when they were paid.
"Initial Term" shall have the meaning set forth in Section 4.01.
------------
"Inn" shall mean the hotel, containing approximately the number of Suites
---
which are set forth on Exhibit "A"-1 hereto, which Owner owns at the location
specified in Exhibit "A"; the term "Inn" shall include the Site, the
improvements built thereon, and all FF&E, Fixed Asset Supplies and Inventories
installed therein.
"Inn Retention" shall have the meaning set forth in Section 12.03 hereof.
-------------
13
<PAGE>
"Intellectual Property" shall mean: (i) all Software; and (ii) all
---------------------
manuals, brochures and directives issued by Management Company to its employees
at the Inn regarding the procedures and techniques to be used in operating the
Inn.
"Interest Rate" shall mean an annual rate of interest equal to the Prime
-------------
Rate (as adjusted from time to time) plus three hundred (300) basis points
provided; however, that in no event shall the Interest Rate exceed the maximum
rate which is permitted under applicable Legal Requirements.
"Inventories" shall mean "Inventories" as defined in the Uniform System of
-----------
Accounts, such as provisions in storerooms, refrigerators, pantries and
kitchens; beverages in wine cellars and bars; other merchandise intended for
sale; fuel; mechanical supplies; stationery; and other expensed supplies and
similar items.
"Legal Requirement" shall mean any federal, state or local law, code, rule,
-----------------
ordinance, regulation or order of any governmental authority or agency having
jurisdiction over the business or operation of the Inn or the matters which are
the subject of this Agreement, including , without limitation, the following:
(i) any building, zoning or use laws, ordinances, regulations or orders and (ii)
Environmental Laws.
"License" shall mean any license, permit, decree, act, order, authorization
-------
or other approval or instrument which is necessary in order to operate the Inn
in accordance with Legal
14
<PAGE>
Requirements and pursuant to the Residence Inn System Standards and otherwise in
accordance with this Agreement.
"Litigation" shall mean: (i) any cause of action commenced in a federal,
----------
state or local court; and (ii) any claim brought before an administrative agency
or body (for example, without limitation, employment discrimination claims).
"Loan Priority Basis" shall mean the sum total, as of any given point in
-------------------
time during the Term, of: (i) the amount shown on Exhibit "A-1"; plus (ii) any
Additional Invested Capital expended by Owner, less the amount of any
condemnation award received by Owner and not applied to restoration of the Inn
pursuant to Section 15.02.B.
"Management Analysis Report" shall mean a report which, if required
--------------------------
pursuant to Section 9.01.B, shall be prepared by Management Company and
delivered to Owner and shall include a narrative description regarding the
preceding Fiscal Year, of: (i) the Inn's operating performance, including
significant variations from the Annual Operating Budget; (ii) an analysis of any
significant variation of the actual average daily revenue per available room
from what was set forth in the Annual Operating Budget; (iii) a review of the
competitive hotel market; (iv) a calculation of the Revenue Index, and Operating
Profit less Ground Lease Rental, if any, compared to the Performance Termination
Threshold; and (v) such other supplementary information as Owner or Management
Company shall reasonably deem necessary to an understanding of the operation of
the Inn.
15
<PAGE>
"Management Company" shall have the meaning set forth in the Preamble.
------------------
"Management Fees" shall mean the Base Management Fee, the Deferred
---------------
Contingent Base Management Fees, the Residence Inn System Fee and the Incentive
Management Fee.
"Marriott" shall mean Marriott International, Inc., a Delaware corporation
--------
having an address at 10400 Fernwood Road, Bethesda, Maryland 20817.
"Mortgage" shall mean any security instrument which encumbers real
--------
property, including, without limitation, mortgages, deeds of trust, security
deeds and similar instruments.
"Net Operating Profit" shall mean the greater of (i) the excess, if any, of
--------------------
Operating Profit less Owner's Priority, or (ii) zero (0).
"Non-Disturbance Agreement" shall mean an agreement, in recordable form in
-------------------------
the jurisdiction in which the Inn is located, executed and delivered by a Holder
(which agreement shall by its terms be binding upon all Subsequent Owners), for
the benefit of Management Company, pursuant to which, in the event such Holder
or any Subsequent Owner comes into possession of or acquires title to the Inn
either at or following a Foreclosure, such Holder and all Subsequent Owners
shall (x) recognize Management Company's rights under this Agreement, and (y)
shall not name Management Company as a party in any Foreclosure action or
proceeding, and (z) shall not disturb Management Company in its
16
<PAGE>
right to continue to manage the Inn pursuant to this Agreement; provided,
however, that at such time: (i) this Agreement has not expired or otherwise been
earlier terminated in accordance with its terms; (ii) there are no outstanding
Events of Default by Management Company, and (iii) no material event has
occurred and no material condition exists which, after notice or the passage of
time or both, would entitle Owner to terminate this Agreement.
"Operating Accounts" shall have the meaning set forth in Section 9.02.
------------------
"Operating Loss" shall mean a negative Operating Profit.
--------------
"Operating Profit" shall mean, in each Fiscal Year during the Term of this
----------------
Agreement, the excess of Gross Revenues over the following deductions
("Deductions") incurred by Management Company or its Affiliates (or, in the case
of any Owner Deductions, by Owner) in operating the Inn:
1. The cost of sales including, without limitation, salaries, wages,
employee benefits, Employee Claims (except to the extent specifically set forth
to the contrary in Section 14.01.C or 14.01.D), payroll taxes and other costs
related to Inn employees;
2. Departmental expenses; administrative and general expenses; the cost of
Inn advertising and business promotion; all utility costs, including but not
limited to the cost of heat, light, power and water; and the cost of routine
repairs, maintenance and minor alterations which are treated as Deductions under
Section 8.01;
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<PAGE>
3. The cost of Inventories and Fixed Asset Supplies consumed in the
operation of the Inn;
4. A reasonable reserve for uncollectible accounts receivable as
determined by Management Company;
5. All reasonable costs and fees of independent professionals or other
third parties who are retained by Management Company to perform services
required or permitted hereunder; provided that Management Company will notify
Owner at least thirty (30) days in advance of any proposed expenditure under
this paragraph 5 which is in excess of Twenty Thousand Dollars ($20,000) and
which was not specifically identified in the Annual Operating Budget, and
Management Company shall consider in good faith any comments which Owner may
have with respect to such proposed expenditure; and provided, further, that if
such expenditure involves immediately-needed repair work to the Inn or if
immediate action is otherwise required, the above-described requirement
regarding thirty (30) days' prior notice shall be modified to require whatever
notice period is reasonable under the circumstances;
6. The reasonable cost and expense of technical consultants and
operational experts who are employees of Management Company or one of its
Affiliates, and who perform specialized services in connection with non-routine
Inn work; provided, however, that the costs and expenses so incurred shall only
be Deductions to the extent such costs and expenses are reasonable and
competitively priced, as compared to similar work
18
<PAGE>
done by outside consultants or experts; and provided, further, that Management
Company will notify Owner at least thirty (30) days in advance of any proposed
expenditure under this paragraph 6 which is in excess of Twenty Thousand Dollars
($20,000.00) and which was not specifically identified in the Annual Operating
Budget, and Management Company shall consider in good faith any comments which
Owner may have with respect to such proposed expenditure; and provided, further,
that if such expenditure involves immediately-needed repair work to the Inn or
if immediate action is otherwise required, the above-described requirement
regarding thirty (30) days' prior notice shall be modified to require whatever
notice period is reasonable under the circumstances;
7. The Residence Inn System Fee;
8. Subject to Section 11.03.B, the Inn's pro rata share of costs and
expenses incurred by Management Company (or its Affiliate) in providing Chain
Services;
9. Insurance costs and expenses as provided in Section 12.04.B;
10. Taxes, if any, payable by or assessed against Management Company
related to this Agreement or to Management Company's operation of the Inn
(exclusive of Management Company's income taxes or franchise taxes) and all
Impositions assessed against the Inn;
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<PAGE>
11. Amounts which are required to be transferred into the FF&E Reserve in
accordance with the provisions of Section 8.02;
12. Transfers required to be made, as they may change from time to time,
to the System Marketing Fund, in order for the Inn to remain a member of the
System; (such contributions are presently two and one-half percent (2 1/2%) of
Suite Revenues);
13. The reimbursement to Owner of the amount of any Owner Deductions;
14. Lease payments pursuant to the leases of Shuttle Vehicles and
Telephone and Office Equipment (to the extent Management Company has not elected
to make such payments from the FF&E Reserve);
15. The payment to Management Company of the cost of preparing the
Management Analysis Report pursuant to Section 9.01.B; and
16. Such other costs and expenses incurred by Management Company or its
Affiliates (not including the costs and expenses included in the Residence Inn
System Fee) as are specifically provided for elsewhere in this Agreement or are
otherwise reasonably necessary for the proper and efficient operation of the Inn
(including, without limitation, the costs and expenses of all functions
described in Section 2.03, to the extent such costs and expenses are not already
treated as Deductions elsewhere in this definition of Operating Profit, unless,
and to the extent that, any such costs and expenses are
20
<PAGE>
specifically stated not to be Deductions under any provision of this Agreement).
The term "Deductions" shall not include: (i) debt service payments pursuant
to any Secured Loan; nor (ii) rental payments pursuant to any ground lease of
the Site; both of the foregoing shall be paid by Owner from its own funds, and
not from Gross Revenues nor from the FF&E Reserve.
"Owner" shall have the meaning set forth in the Preamble. Subject to
-----
compliance with Articles XVIII and XIX of this Agreement, the term "Owner" shall
include all successors and assigns of the entity identified as the "Owner" in
the Preamble.
"Owner Deductions" shall mean amounts paid by Owner with respect to: (i)
----------------
premiums for the insurance policies described in Section 12.04; and (ii)
reasonable costs of any negotiations or Litigation with respect to any contest
of Impositions, as described in Section 13.01.A; provided, however, that to the
extent Owner spends in excess of Five Thousand Dollars ($5,000.00) with respect
to any contest of Impositions and has not received Management Company's consent
as provided in Section 13.01.A, then any amount in excess of such Five Thousand
Dollars ($5,000.00) or such greater amount as may be approved by Management
Company, shall not be considered an Owner Deduction. Except as specifically set
forth in Section 8.02.F.2, the amount of any Owner Deductions paid by Owner
shall be reimbursed to Owner (as a Deduction) in the Fiscal Year in which they
were paid. Owner shall give Management Company prompt notice of any
21
<PAGE>
amounts it has paid which constitute Owner Deductions together with such
evidence of payment as Management Company may reasonable require.
"Owner's Distribution" shall mean, with respect to each Fiscal Year or
--------------------
portion thereof during the Term, funds distributed to Owner in accordance with
the provisions of Section 5.02 hereof which shall equal Operating Profit less
any Base Management Fees, Deferred Contingent Base Management Fees and Incentive
Management Fees paid to Management Company.
"Owner's Priority" shall mean, with respect to each Fiscal Year (prorated
----------------
for any partial Fiscal Years) during the Term of this Agreement, a dollar amount
equal to ten percent (10%) of the Priority Basis for that Fiscal Year.
If the Inn has an Existing Ground Lease, the annual rental payments for such
Fiscal Year (prorated for any partial Fiscal Year), shall be added to the
Owner's Priority.
"Performance Termination Threshold" shall mean, with respect to each full
---------------------------------
Fiscal Year during the Term of this Agreement, the dollar amount set forth on
Exhibit "A-1", plus eight percent (8%) of any Additional Invested Capital
expended by Owner pursuant to clause (ii) of the definition of Priority Basis;
provided, however, that the aforesaid dollar amount shall be adjusted, as of the
tenth (10th) anniversary of the Effective Date, in an amount equal to
seventy-five percent (75%) of the percentage change in the GDP Deflator between
the Effective Date and the tenth (10th) anniversary of the Effective Date;
provided that, in
22
<PAGE>
no event will the Performance Termination Threshold be lower than it is as of
the Effective Date; and provided further, that in calculating the aforesaid
change in the GDP Deflator during such period of time, both (i) the two (2)
years having the highest annual rates of change in the GDP Deflator during such
period, and (ii) the two (2) years having the lowest annual rates of change in
the GDP Deflator during such period, shall be ignored, and such percentage
change in the GDP Deflator between the Effective Date and the tenth (10th)
anniversary of the Effective Date shall be recalculated, for purposes of this
Agreement, using as the rate of change in the GDP Deflator for each of such four
(4) excluded years (i.e., those years described in clauses (i) and (ii), above)
the average annual rate of change in the GDP Deflator during the non-excluded
years; and provided further that, to the extent that certain portions of the
Performance Termination Threshold, as of immediately prior to such tenth (10th)
anniversary adjustment, reflect expenditures which qualify as Additional
Invested Capital, the aforesaid GDP Deflator adjustment shall be calculated with
respect to such portions by using, as the base, not the GDP Deflator as of the
Effective Date, but rather the GDP Deflator as of either the date of such
expenditure or (if construction is involved) the date on which the items in
question were substantially completed.
"Post-Foreclosure Decision Date" shall have the meaning set forth in
------------------------------
Section 6.06.
23
<PAGE>
"Prime Rate" shall mean the "prime rate" as published in the "Money Rates"
----------
section of The Wall Street Journal; however, if such rate is, at any time during
-----------------------
the Term, no longer so published, the term "Prime Rate" shall mean the average
of the prime interest rates which are announced, from time to time, by the three
(3) largest banks (by assets) headquartered in the United States which publish a
"prime rate."
"Priority Basis" shall mean the sum total, as of any given point in time
--------------
during the Term, of: (i) the dollar amount shown on Exhibit "A-1"; plus (ii)
any Additional Invested Capital expended by Owner; provided that each
expenditure of Additional Invested Capital shall be added to the Priority Basis
at such date or dates as the expenditure occurred, taking into consideration at
what point (or points) during the Fiscal Year such expenditure occurred; less
(iii) the amount of any condemnation award received by Owner and not applied to
restoration of the Inn pursuant to Section 15.02.B.
"Proprietary Marks" shall mean all trademarks, trade names, symbols, logos,
-----------------
slogans, designs, insignia, emblems, devices, service marks and distinctive
designs of buildings and signs, or combinations thereof, which are used to
identify inns in the Residence Inn chain. The names "Marriott", "Residence Inn"
and "Residence Inn By Marriott", and any of the foregoing used in conjunction
with other words or names, are examples without limitation of Proprietary Marks.
The term "Proprietary Marks" shall include all present and future Proprietary
Marks, whether
24
<PAGE>
they are now or hereafter owned by Management Company or one of its Affiliates,
and whether or not they are registered under the laws of the United States or
any other country. The term "Proprietary Marks" shall also include all trade
names, trademarks, symbols, logos, designs, etc. which are used in connection
with the operation of the Inn during the Term (such as, without limitation, the
names of the restaurants and lounges). Notwithstanding the foregoing, those
trade names, trademarks, symbols, logos, designs, etc., which are specifically
set forth on Exhibit "E" hereto shall be deemed to be "Proprietary Marks" only
for so long as this Agreement is in effect, and such Proprietary Marks shall
revert to the exclusive control of Owner as of the date of Termination.
"Proprietary Signage" shall mean any signage used in connection with the
-------------------
Inn (including both interior and exterior signage, and including billboards and
other signage not located on the Site) which contains one or more Proprietary
Marks; any signage which contains the word "Marriott" or "Residence Inn" shall
automatically be deemed to be Proprietary Signage.
"Prospectus" shall have the meaning set forth in Section 20.05.
----------
"Qualified Lender" shall mean any Holder, from time to time, of any
----------------
Qualified Loan with respect to which Management Company has received a written
notice (pursuant to Section 20.09 of this Agreement) stating: (i) the name and
address of such Holder; and
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<PAGE>
(ii) that such Holder is a "Qualified Lender" pursuant to the terms of this
Agreement.
"Qualified Loan" shall mean any Secured Loan in which the initial principal
--------------
amount, as of the date such Secured Loan is incurred, when added to the current
principal balance of all existing Secured Loans as of that date, is less than or
equal to the greater of the following:
(i) Seventy percent (70%) of the Loan Priority Basis; or
(ii) the result obtained by (a) dividing the Operating Profit for the
thirteen (13) most recent full Accounting Periods by the Coverage
Ratio; then, (b) multiplying the result of clause (a) by the
Capitalization Multiple; or
(iii) the existing balance of any Secured Loans encumbering the Inn
immediately prior to the date of the incurrence of such Qualified
Loan, plus commercially reasonable Transaction Costs associated with
such refinancing, up to an amount equal to four percent (4%) of the
principal amount of such Qualified Loan.
In addition, regardless of whether or not the above test set forth in clauses
(i), (ii) and (iii) is satisfied, the existing (as of the Effective Date)
balance of any Secured Loan which is secured by an Existing Mortgage shall be
deemed to be a "Qualified Loan".
"Qualified Loan Acceleration" shall mean the acceleration of the
---------------------------
indebtedness incurred pursuant to any Qualified Loan, as a result of a default
under the terms and conditions of such Qualified Loan.
26
<PAGE>
"Renewal Terms" shall have the meaning set forth in Section 4.01.
-------------
"Residence Inn System Fee" shall during any given Fiscal Year (or portion
------------------------
thereof), be equal to four percent (4%) of Gross Revenues. It shall mean an
amount paid to Management Company for the Residence Inn System Services.
"Residence Inn System" shall mean the Residence Inn hotel system managed by
--------------------
Marriott (or one or more of its Affiliates) which is, as of the Effective Date,
operated under the trade name "Residence Inn by Marriott" or Marriott Residence
Inn".
"Residence Inn System Services" shall mean the following services which are
-----------------------------
paid for by the Residence Inn System Fee: System financial planning and policy
services; product planning and development; human resources management and
planning for the Residence Inn System (but not any particular inn within the
Residence Inn System); protection of the "Marriott Residence Inn" "Residence Inn
by Marriott," and "Residence Inn" trade names, trademarks, logos and
servicemarks; and the development and implementation of Management Company's
technical and operational programs designed for the periodic inspection and
consultation visits to the inns in the Residence Inn System (but not the
services of the personnel of the Architecture and Construction Division of
Management Company providing architectural, technical or procurement services
for the Inn, which shall be treated as a Deduction described in paragraph 6 of
the definition of "Operating Profit").
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<PAGE>
"Residence Inn System Standards" shall mean both the operational standards
------------------------------
(for example, staffing, amenities offered to guests, advertising, etc.) and the
physical standards (for example, the quality, condition, utility and age of the
FF&E, etc.) of Residence Inn hotels in the Marriott chain as such operational
and physical standards may fluctuate from time to time (provided, however, that
the Residence Inn System Standards shall in no event be lower than the
operational and physical standards, as of the date in question, of comparable
extended stay hotels in other hotel systems which are comparable to the
Residence Inn System).
"Restricted Area" shall mean that area which is shown on the map attached
---------------
hereto as Exhibit "D", as described in the narrative which is set forth in
Exhibit "D-1".
"Restricted Inn" shall mean any hotel whose size, facilities and market
--------------
positioning are such that, if such hotel had been operated by Management Company
or one of its Affiliates as of the Effective Date, it would have been operated
as a member of the Residence Inn System (that is, as an extended-stay hotel, as
opposed to a full service hotel or one of the other limited service brands also
operated by Affiliates of Management Company i.e. Courtyard by Marriott or
Fairfield Inn). The term "Restricted Inn" shall not include any one or more of
the following: (i) any existing (as of the Effective Date) member of the
Residence Inn System which is within the Restricted Area; (ii) any Courtyard by
Marriott (or other similar moderate-price
28
<PAGE>
lodging product) or any Fairfield Inn (or other similar economy-priced lodging
product); (iii) any full service, suite or resort hotel; (iv) any hotel or
hotels which are members of a chain of hotels (provided that such chain has a
minimum of four (4) or more hotels in operation), all or substantially all (but
in no event less than four (4) hotels) of which is acquired by, or merged with,
or franchised by or joined through marketing agreement with, Management Company
or one of its Affiliates (or the operation of which is transferred to Management
Company or one of its Affiliates); (v) any hotel or hotels which are members of
a group of hotels which is (in a single transaction with a single seller or
transferor) acquired by or merged with, or franchised by or joined through
marketing agreement, with Management Company or one of its Affiliates (or the
operation of which is transferred to Management Company or one of its
Affiliates), provided that such group of hotels contains no fewer than four (4)
hotels; (vi) any future lodging product developed by Management Company or one
of its Affiliates which is not a lodging product which would have been included
within the Residence Inn System, as such system existed as of the Effective
Date; or (vii) any existing non-Marriott hotel within the Restricted Area which
is specifically designated on Exhibit D-1 as not being a Restricted Inn.
"Revenue Data Publication" shall mean Smith's STAR Report, a monthly
------------------------
publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee or
an alternative source, reasonably
29
<PAGE>
satisfactory to both parties, of data regarding the Revenue Per Room of hotels
in the general trade area of the Inn. The "competitive set" for the Inn shall
be determined (with periodic adjustments) by Management Company, subject to
Owner's approval (such approval not to be unreasonably withheld). If such
Smith's STAR Report is discontinued in the future, or ceases (in the reasonable
opinion of either Owner or Management Company) to be a satisfactory source of
data regarding the Revenue Per Room of various hotels in the general trade area
of the Inn, Management Company shall select an alternative source, subject to
Owner's approval (such approval not to be unreasonably withheld). If the
parties fail to agree on either such competitive set or such alternative source,
as the case may be, within a reasonable period of time, the matter shall be
resolved by arbitration pursuant to Section 20.13.
"Revenue Index" shall mean that fraction which is equal to (a) the Revenue
-------------
Per Room for the Inn, divided by (b) the average Revenue Per Room for the hotels
in the Inn's competitive set (including the Inn), as set forth in the Revenue
Data Publication. Appropriate adjustments shall be made in the event of a major
renovation of the Inn.
"Revenue Index Threshold" shall mean the number set forth on Exhibit "A-1"
-----------------------
hereto. However, if the entry of a new hotel into the Inn's competitive set (or
the removal of a hotel from such competitive set) causes significant variations
in the Revenue Index which do not reflect the Inn's true position in the
30
<PAGE>
relevant market, appropriate adjustments shall be made to the Revenue Index
Threshold by mutual consent of Owner and Management Company (neither such
consent to be unreasonably withheld).
"Revenue Per Room" shall mean, (i) the term "revenue per room" as defined
----------------
by the Revenue Data Publication; or (ii) if the Revenue Data Publication is no
longer being used (as more particularly set forth in the definition of "Revenue
Data Publication"), the aggregate gross room revenues of the hotel in question
for a given period of time divided by the total room nights for such period. If
clause (ii) of the preceding sentence is being used, a "room" shall be a hotel
guest room which is keyed as a single unit, and shall include rooms which are
temporarily unavailable due to: (i) maintenance, or (ii) ongoing renovation
work.
"Sale/Leaseback Transaction" shall have the meaning set forth in Section
--------------------------
6.10.
"Sale of the Inn" shall mean any sale, assignment, transfer or other
---------------
disposition, for value or otherwise, voluntary or involuntary, of Owner's title
to the Inn or the Site (either fee or leasehold title, as the case may be), but
shall not include a collateral assignment intended to provide security for a
loan. For purposes of this Agreement, a "Sale of the Inn" shall also include a
lease (or sublease) of the entire Inn or Site. The phrase "Sale of the Inn"
shall also include any sale, transfer, or other disposition, for value or
otherwise, in a single transaction or a series of related transactions, of the
31
<PAGE>
controlling interest in Owner. If Owner is a corporation, the phrase
"controlling interest" shall mean the right to exercise, directly or indirectly,
fifty percent (50%) or more of the voting rights attributable to the shares of
Owner (through ownership of such shares or by contract). If Owner is not a
corporation, the phrase "controlling interest" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of Owner. Notwithstanding the foregoing, the term "Sale
of the Inn" shall not include any sale, assignment, transfer or other
disposition of the Inn or the Site by Owner to an Affiliate of Owner.
"Second Notice" shall have the meaning set forth in Section 6.02.
-------------
"Secured Loan" shall mean and include: (i) any indebtedness secured by a
------------
Mortgage encumbering the Inn or all or any part of Owner's interest therein; and
(ii) all amendments, modifications, supplements and extensions of any such
Mortgage.
"Settlement Threshold Amount" shall mean the greater of (i) One Hundred
---------------------------
Thousand Dollars ($100,000) ( as adjusted by the GDP Deflator); or (ii) a dollar
amount (to be re-determined whenever reasonably necessary) equal to the highest
amount paid in a representative sampling of Employee Claims, which have been
settled within the preceding twelve (12) months where each of such settlements
can be reasonably characterized as being (i) within the normal course of
business at the Inn, and (ii) within the range of similar settlements at other
hotels comparable to
32
<PAGE>
the Inn. Any dispute between the parties as to the appropriate amount under
clause (ii) of the preceding sentence shall be submitted to arbitration under
Section 20.13.
"Shuttle Vehicles" shall mean any car, van, bus or similar motor vehicle
----------------
used primarily for the purpose of transporting Inn guests.
"Site" shall mean the parcel or parcels of land described in Exhibit "A"
----
attached hereto.
"Soft Goods" shall mean all fabric, textile and flexible plastic products
----------
(not including items which are classified as "Fixed Asset Supplies" under the
Uniform System of Accounts) which are used in furnishing the Inn, including,
without limitation: carpeting, drapes, bedspreads, wall and floor coverings,
mats, shower curtains and similar items.
"Software" shall mean all computer software and accompanying documentation
--------
(including all future upgrades, enhancements, additions, substitutions and
modifications thereof), other than computer software which is commercially
available, which are used by Management Company in connection with the property
management system, the reservation system and all future electronic systems
developed by Management Company for use in the Inn.
"Subsequent Owner" shall mean any individual or entity which acquires title
----------------
to or possession of the Inn at or through a Foreclosure.
"Suite" shall mean a lodging unit in the Inn.
-----
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<PAGE>
"Suite Revenues" shall mean that portion of the Gross Revenues of the Inn
--------------
which is attributable to the rental of Suites.
"System Marketing Fund" shall mean that certain fund (or any successor to
---------------------
such fund) maintained by Management Company or one of its Affiliates, in its
capacity as franchisor of the System, to pay for the following System costs:
all costs associated with developing, preparing, producing, directing,
administering, conducting, maintaining and disseminating advertising, marketing,
promotional and public relations materials, programs, campaigns, sales and
marketing seminars and training programs, and similar activities of every kind
and nature, including the Residence Inn directory; conducting market research;
and paying the central operational costs of the Residence Inn reservation
system; provided, however, that any costs described in this definition of System
Marketing Fund may, at the option of the Management Company and The Residence
Inn Association, be charged directly to each inn in the System on the basis of
actual use by or benefit to each inn and, in such event, shall become
Deductions.
"Telephone and Office Equipment" shall mean the following equipment used in
------------------------------
the Inn and all ancillary equipment: (i) telephones; (ii) miscellaneous office
equipment such as copiers, postage meters, etc.; (iii) television sets; and (iv)
audio-visual equipment.
"Term" shall mean the Initial Term plus all Renewal Terms.
----
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<PAGE>
"Termination" shall mean the expiration or sooner cessation of this
-----------
Agreement.
"The Residence Inn Association" (TRIA) is an advisory council to owners and
-----------------------------
franchisees of the Residence Inn System with respect to advertising, marketing,
reservations and other matters relating to Residence Inn System hotels. All
owners, franchisees of the Residence Inn System and Owner shall be members of
TRIA.
"Transaction Costs" shall mean, with respect to the incurring of any
-----------------
Secured Loan, all normal transaction costs (to the extent actually incurred)
including, without limitation, the following: state and local transfer taxes;
escrow fees; recording costs; Mortgage recording taxes; costs of any survey
required by the Holder; reasonable fees of the Holder's outside attorneys and
accountants; appraisal fees; title insurance premiums; financing costs
(including "points"); reasonable attorneys' fees of Owner in connection with
such Secured Loan; environmental inspection, testing and reporting fees to the
extent required by the Holder; and brokerage commissions (provided that no such
brokerage commissions shall be recognized as "Transaction Costs" hereunder if
they are made to a person or entity affiliated with Owner, to the extent (if
any) that such payments exceed the normal customary amounts).
"Uniform System of Accounts" shall mean the Uniform System of Accounts for
--------------------------
Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of
New York City, Inc.
35
<PAGE>
"Working Capital" shall mean assets which are used in the day-to-day
---------------
operation of the Inn's business, including, without limitation, amounts kept in
petty cash funds, amounts deposited in operating bank accounts, receivables,
prepaid expenses and funds expended to purchase Inventories, less accounts
payable and accrued current liabilities.
END OF ARTICLE I
36
<PAGE>
ARTICLE II
APPOINTMENT OF MANAGEMENT COMPANY
---------------------------------
2.01 Appointment
-----------
Owner hereby appoints and employs Management Company as Owner's exclusive
agent to supervise, direct and control the management and operation of the Inn
for the Term provided in Article IV. Management Company accepts said
appointment and agrees to manage the Inn during the Term of this Agreement in
accordance with the terms and conditions hereinafter set forth. The performance
of all activities by Management Company hereunder shall be for the account of
Owner.
2.02 Delegation of Authority
-----------------------
Except as otherwise specifically set forth in this Agreement, Inn
operations shall be under the exclusive supervision and control of Management
Company which, shall be responsible for the proper and efficient operation of
the Inn. Management Company shall have discretion and control, free from
interference, interruption or disturbance, but in all respects subject to the
provisions of this Agreement, in all matters relating to management and
operation of the Inn, including, without limitation, the following: charges for
Suites and commercial space; credit policies; food and beverage services;
employment policies; granting of leases, parking services, licenses and
concessions for shops and agencies within the Inn
37
<PAGE>
(provided that the term of any such lease, license or concession shall not
exceed the Term of this Agreement; and provided further that Owner's consent
shall be required prior to the execution by Management Company of any such
lease, license or concession which pertains to the Inn, and which (i) has a term
of more than five (5) years; or (ii) involves more than five hundred (500)
square feet of space within the Inn); receipt, holding and disbursement of
funds; maintenance of bank accounts; procurement of Inventories, supplies and
services; promotion and publicity; and, generally, all activities necessary for
operation of the Inn.
2.03 Operational Standards
---------------------
In accordance with the Residence Inn System Standards and the other terms
of this Agreement, Management Company shall, in connection with the Inn, perform
each of the following functions (provided that in all cases, except as otherwise
specifically set forth in this Agreement, the costs and expenses of performing
such functions shall be Deductions):
A. Obtain and keep in full force and effect, either in its own name on
behalf of Owner or in Owner's name, as may be required by the Legal
Requirements, any and all Licenses to the extent same is within the control of
Management Company (or, if same is not within the control of Management Company,
Management Company shall use all due diligence and reasonable efforts to obtain
and keep same in full force and effect).
38
<PAGE>
B. Recruit, employ, supervise, direct and (when appropriate) discharge all
of the employees at the Inn.
C. Establish and revise, as necessary, administrative policies and
procedures, including policies and procedures for the control of revenue and
expenditures, for the purchasing of supplies and services, for the control of
credit, and for the scheduling of maintenance, and verify that the foregoing
procedures are operating in a sound manner.
D. Plan, execute, and supervise repairs and maintenance at the Inn.
E. Procure (as agent for Owner) all Fixed Asset Supplies and Inventories.
F. Maintain the Operating Accounts.
G. Prepare and deliver Accounting Period Statements, Annual Operating
Statements, Annual Operating Budgets, Building Estimates, FF&E Estimates, and
such other budgets and reports as are required by this Agreement.
H. Establish prices, rates and charges for services provided in the Inn,
including Suite rates.
I. As agent for Owner, negotiate and enter into leases, concessions and
licenses for shops and other facilities within the Inn.
J. Administer the leases, concessions and licenses for shops and other
facilities within the Inn (whether entered into pursuant to subsection I, above,
or otherwise).
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K. Provide services included in the Residence Inn System Fee and the Chain
Services.
L. Provide, or cause to be provided, risk management services relating to
the types of insurance required to be obtained or provided by Management Company
under this Agreement, provided that the costs and expenses of providing such
services are to be paid as described in Section 12.04.B.
M. Reasonably cooperate with Owner concerning: (i) disputes with any
Holder regarding the Inn, (ii) contests of Impositions and Legal Requirements;
and (iii) adjustments of insurance claims and condemnation awards involving the
Inn.
N. Reasonably cooperate (provided that Management Company shall not,
except as otherwise specifically set forth in Section 6.01, be obligated to
enter into any amendments of this Agreement) with Owner in any attempt(s) by
Owner to effectuate a Sale of the Inn (provided that nothing herein shall affect
the provisions of Section 20.05), or to obtain any Secured Loan. If given
reasonable notice, such cooperation shall include, without limitation: (i)
answering any reasonable questions by prospective purchasers and Holders; (ii)
preparing lists and schedules of leases, concessions, FF&E, Fixed Asset
Supplies, Inventories, and similar items (but specifically excluding customer
lists); and (iii) making such certifications and representations to Owner, to
such purchasers and to such Holders, regarding the Inn and the operation
thereof, as Owner may reasonably request (taking into account the extent of
Management
40
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Company's control and responsibility provided for hereunder). Owner shall
promptly reimburse Management Company, from its own funds and not as a
Deduction, for the reasonable costs and expenses incurred by Management Company
in connection with any actions necessary to comply with the requirements of this
Section 2.03.N, provided that such actions are not otherwise required under
other provisions of this Agreement.
O. Arrange for and supervise public relations and advertising, and prepare
annual marketing plans.
P. Endeavor to manage the timing of expenditures to replenish Inventories,
Fixed Asset Supplies, payments on accounts payable and collections of accounts
receivable, so as to avoid or minimize any cash deficits with respect to Inn
operations, which deficits would otherwise require additional funding of Working
Capital by Owner.
Q. Comply with all provisions in the Existing Ground Lease and in any
Existing Mortgages which are by their terms applicable to the operation of the
Inn; provided, however, that all practices and procedures used by Management
Company in the operation of the Inn as of the Effective Date shall be deemed to
be in compliance with the Existing Ground Lease and all Existing Mortgages; and
provided further, that if either the Ground Lessor or any Holder under an
Existing Mortgage shall, from time to time, notify Management Company that it
has determined that certain practices and procedures which are used by
Management Company in the operation of the Inn are not in compliance with
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the provisions of the Existing Ground Lease or such Existing Mortgage (as the
case may be), Management Company shall promptly alter such practices and
procedures to ensure such compliance; and provided further, that if such
compliance would require work by Management Company which is beyond the normal
course of Inn operations, or would impose additional financial burdens on the
Inn which are beyond the normal course of Inn operations, Owner (from its own
funds, not as a Deduction) shall compensate Management Company for such work and
such additional burdens.
2.04 Limitations on Authority
------------------------
A. Notwithstanding anything in Section 2.02 or elsewhere in this Agreement
to the contrary (unless otherwise stated in this Section 2.04), and in addition
to the various other provisions of this Agreement which prohibit Management
Company from taking certain actions or which allow certain actions only if
Owner's consent thereto has been obtained, Management Company shall not, without
the prior written approval of Owner, which approval Owner may withhold in its
sole discretion, perform any of the following actions in connection with the Inn
and on behalf of or burdening Owner:
1. Acquiring any land or interest therein;
2. Acquiring any capital assets or interest therein except: (i) items
in the approved Building Estimate, and (ii) FF&E, Fixed Asset Supplies and
Inventories (to the extent the
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same constitute capital assets) in the ordinary course of business as expressly
provided for in this Agreement;
3. Financing, refinancing or mortgaging of any portion of the Inn or
the revenue due to Owner therefrom;
4. Selling (other than dispositions of FF&E, Fixed Asset Supplies and
Inventories in the ordinary course of business as expressly provided for in this
Agreement), leasing (other than as expressly provided for in this Agreement,
including without limitation, Section 2.02 of this Agreement) or other
transferring of, or the pledging or placing of any lien or encumbrance on, any
part of the Inn;
5. In the event of a total or partial condemnation, consenting to any
award or participating in any condemnation proceeding, except as expressly
provided for in this Agreement;
6. Entering into, modifying or terminating any lease, concession or
License, except to the extent permitted under Section 2.02;
7. Adjusting any claim or settling any Litigation which (i) is not
covered by any of the insurance policies described in Article XII and is not an
Employee Claim, and which would result in a Deduction or payment in excess of
Two Hundred Fifty Thousand Dollars ($250,000.00) in any Fiscal Year, as adjusted
by the GDP Deflator, or (ii) would impose on Owner any material liability or
obligation other than the payment of money, or would require Owner to make any
material admission; or
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8. Adjusting any claim, under the applicable property insurance
policies, regarding injury or damage to the Inn or its contents, where the
estimated cost of restoration is in excess of Five Hundred Thousand Dollars
($500,000.00), as adjusted by the GDP Deflator.
2.05 Covenants, Conditions or Restrictions
-------------------------------------
A. As of the Effective Date, there are existing covenants, conditions,
restrictions and/or agreements, including reciprocal easements or cost-sharing
arrangements (all of the foregoing types of encumbrances on the Inn, or
agreements relating to the Inn, whether existing as of the Effective Date or
not, shall be collectively referred to as "CC&R's"; those CC&R's which are in
existence as of the Effective Date shall be referred to in this Agreement as
"Existing CC&R's"). Management Company hereby gives its consent to all Existing
CC&R's. Except as otherwise specifically set forth to the contrary in Exhibit
"F" hereto, all costs, expenses and charges which are imposed on the Inn under
the Existing CC&R's shall be paid from Gross Revenues as Deductions. Those
certain costs, expenses and charges which are described on Exhibit "F" hereto as
"capital charges" shall be paid by Owner, from its own funds, and all such
payments shall be treated for purposes of this Agreement as Additional Invested
Capital expended by Owner.
B. CC&R's which are entered into, or become encumbrances on the Inn and/or
the Site, after the Effective Date shall be
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referred to in this Agreement as "Future CC&R's". Owner agrees that it will give
Management Company, for Management Company's prior approval, written notice of
its intention to execute any Future CC&R's, such notice to be reasonably in
advance of the execution thereof. Owner covenants that, during the Term of this
Agreement, there will not be (unless Management Company has given its prior
written consent thereto) any Future CC&R's affecting the Site or the Inn: (i)
which purport to impose any material financial obligations on the Inn; (ii)
which would prohibit or limit Management Company from operating the Inn in
accordance with the Residence Inn System Standards; or (iii) which would allow
Inn facilities (for example, parking spaces) to be used by persons other than
guests, invitees or employees of the Inn.
C. All financial obligations imposed on Owner or on Management Company or
on the Inn pursuant to any Future CC&R's shall be paid by Owner from its own
funds, and not from Gross Revenues or from the FF&E Reserve, unless Management
Company has given its prior written consent to such Future CC&R's. Management
Company agrees that it will not unreasonably withhold its consent to any such
Future CC&R's; provided, however, that Management Company shall be entitled to
withhold its consent in its discretion if a proposed Future CC&R would have a
material impact on the operation of the Inn, as described in clauses (i), (ii)
or (iii) of Section 2.05.B. Upon receipt of such consent from Management
Company, such sums shall be Deductions in computing Operating Profit.
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D. Owner shall not waive any protections which benefit the Hotel pursuant
to existing restrictive covenants without the prior written consent of
Management Company which consent shall not be unreasonably withheld, conditioned
or delayed.
2.06 Licenses and Permits
--------------------
Owner agrees that, upon request by Management Company, it will sign
promptly and without charge applications for Licenses.
END OF ARTICLE II
46
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ARTICLE III
OWNERSHIP OF THE INN
--------------------
3.01 Ownership of the Inn
--------------------
A. Each party acknowledges that the status of title to the Site and to the
Inn is as described on Exhibit "F" hereto; neither party will hold the other
party responsible for any defects in said status of title, and each party hereby
releases the other party from all claims stemming from any such defects.
B. Owner hereby covenants that, throughout the Term of this Agreement,
it will not change the status of title to the Site from that which is described
on Exhibit "F" hereto, except that Owner shall have the right either (i) to
effectuate a Sale of the Inn in accordance with Article XIX, or (ii) to encumber
the Site and the Inn with the following:
1. Mortgages which are given to secure any one or more Qualified
Loans;
2. Liens for Impositions or other public charges not yet due or
which are being contested in good faith; and
3. Easements or other encumbrances (not including those described in
subsection 1 or 2 above) which do not adversely affect the operation of the Inn
by Management Company and which are not prohibited pursuant to Section 2.05.B of
this Agreement.
C. Owner shall indemnify, defend and hold Management Company and its
Affiliates harmless from claims by entities which
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have loaned money to Owner that Management Company (or any of such Affiliates)
owes any such lender all or any portion of such indebtedness.
D. Management Company shall indemnify, defend and hold Owner and its
Affiliates harmless from claims by entities which have loaned money to
Management Company that Owner (or any of such Affiliates) owes any such lender
all or any portion of such indebtedness.
END OF ARTICLE III
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ARTICLE IV
TERM
----
4.01 Term
----
A. The initial term ("Initial Term") of this Agreement shall commence with
the Effective Date and, unless sooner terminated as herein provided, shall
continue until the expiration of Fiscal Year 2013. The Term shall thereafter be
automatically renewed for each of three (3) successive periods of ten (10) full
Fiscal Years each ("Renewal Terms"), unless either: (i) Management Company, at
its option, notifies Owner, in accordance with Section 20.09, at any time within
the period of eighteen (18) months prior to the expiration of the Initial Term
or the then current Renewal Term, as the case may be, of its intention not to
renew; or (ii) Management Company has committed an Event of Default, and has
been notified by Owner of such Event of Default, under Article XVI of this
Agreement, as of the date of any such renewal.
B. If Management Company so notifies Owner of its intention not to renew
pursuant to Section 4.01.A, Management Company shall continue to manage the Inn
pursuant to this Agreement until the termination date set forth in such notice,
provided that such termination date shall be: (i) no less than twelve (12)
months after the date of such notice; and (ii) in no event earlier than the
expiration date of the Initial Term or the then current Renewal Term, as the
case may be. Such termination date may be
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after the expiration of the Initial Term or the then current Renewal Term, as
the case may be, provided that the requirements of the preceding sentence are
satisfied. However, if Management Company has so notified Owner of its
intention not to renew, Owner may, at its option, by written notice to
Management Company at least ninety (90) days prior to the date on which Owner
desires Termination to occur, reduce the period of time prior to Termination to
any shorter period of time which Owner desires, provided that such shorter
period of time shall be at least the greater of: (a) ninety (90) days (beginning
as of the date of such notice from Owner), or (b) the minimum period of time
which Management Company reasonably decides is prudent, given the requirements
of the applicable Employment Laws regarding employee discharges. In no event
shall the fact that Management Company may, pursuant to the preceding sentence,
be managing the Inn after the expiration of the Initial Term or the then current
Renewal Term, as the case may be, be construed as an election by Management
Company to renew the Term, if Management Company has elected (in accordance with
this Section 4.01) in writing not to so renew.
C. If Owner has the right, under the provisions of the Existing Ground
Lease, to elect to renew or extend the term of the Existing Ground Lease, Owner
shall so notify Management Company at least one hundred eighty (180) days (but
no more than one (1) year) prior to the expiration of the period within which
Owner is obligated to notify the Ground Lessor of its election to
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renew or extend the term of the Existing Ground Lease. Such notice from Owner
shall contain all of the relevant facts about the impending election to renew or
extend, including the length of the period of renewal or extension. Unless
Management Company notifies Owner, within a period of ninety (90) days after
receipt of the foregoing notice from Owner, that Management Company disapproves
the renewal or extension of the term of the Existing Ground Lease, Owner will,
by proper notice to the Ground Lessor, within the applicable time period under
the Existing Ground Lease, elect to renew or extend the term of the Existing
Ground Lease.
D. If, after proper notice from Owner in accordance with Section 4.01 C,
Management Company fails to disapprove the renewal or extension of the term of
the Existing Ground Lease, the Term of this Agreement shall be deemed to be
automatically extended to the later of: (i) the expiration of the term of the
Existing Ground Lease, as renewed or extended in accordance with Section 4.01 C;
or (ii) the date on which the Term of this Agreement would otherwise have
expired absent this sentence. If, in order to comply with the preceding
sentence, it is necessary for Management Company to waive its option not to
renew with respect to one or more Renewal Terms, such waiver shall be deemed to
have been given; however, Management Company shall retain the right not to renew
(as more particularly described in Section 4.01 A) as to any portion of such
Renewal Term(s) which would
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occur after the expiration of the term of the Existing Ground Lease, as renewed
or extended in accordance with Section 4.01 C.
E. If, after proper notice from Owner in accordance with Section 4.01 C,
Management Company disapproves the renewal or extension of the term of the
Existing Ground Lease, the Term of this Agreement shall be deemed to be
automatically reduced to the earlier of: (i) the expiration of the term of the
Existing Ground Lease; or (ii) the date on which the Term of this Agreement
would otherwise have expired absent this sentence.
4.02 Actions to be Taken Upon Termination
------------------------------------
Upon a Termination of this Agreement, the following shall be applicable:
A. Management Company shall, within sixty (60) days after Termination of
this Agreement, prepare and deliver to Owner a final accounting statement with
respect to the Inn, as more particularly described in Section 9.01 hereof, along
with a statement of any sums due from Owner to Management Company pursuant
hereto, dated as of the date of Termination. Within thirty (30) days after the
receipt by Owner of such final accounting statement, the parties will make
whatever cash adjustments are necessary pursuant to such final statement. The
cost of preparing such final accounting statement shall be a Deduction, unless
the Termination occurs as a result of an Event of Default by either party, in
which case the defaulting party
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shall pay such cost. Management Company and Owner acknowledge that there may be
certain adjustments for which the necessary information will not be available at
the time of such final accounting, and the parties agree to readjust such
amounts and make the necessary cash adjustments when such information becomes
available; provided, however, that (unless there are ongoing disputes of which
each party has received notice) all accounts shall be deemed final as of one
hundred eighty (180) days after such Termination.
B. As of the date of the final accounting referred to in subsection A
above, Management Company shall release and transfer to Owner any of Owner's
funds which are held or controlled by Management Company with respect to the
Inn, with the exception of funds to be held in escrow pursuant to Section 12.04,
and Section 14.01.F. During the period between the date of Termination and the
date of such final accounting, Management Company shall pay (or reserve against)
all Deductions which accrued (but were not paid) prior to the date of
Termination, using for such purpose any Gross Revenues prior to the date of
Termination.
C. Management Company shall make available to Owner such books and
records respecting the Inn (including those from prior years, subject to
Management Company's reasonable records retention policies) as will be needed by
Owner to prepare the accounting statements, in accordance with the Uniform
System of Accounts, for the Inn for the year in which the Termination occurs and
for any subsequent year. Such books and records shall
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not include: (i) employee records which must remain confidential either under
Legal Requirements or under reasonable system-wide corporate policies of
Management Company; or (ii) any Intellectual Property; or (iii) customer lists.
D. Management Company shall (to the extent permitted by Legal
Requirements) assign to Owner or any other manager employed by Owner to operate
and manage the Inn, all Licenses for the Inn which have been issued in
Management Company's name; provided that if Management Company has expended any
of its own funds in the acquisition or transfer of any of such Licenses, Owner
shall reimburse Management Company therefor if it has not done so already.
E. All Proprietary Signage shall be removed by Management Company from
the Inn and from the Site (and from any locations other than the Site). The
cost of such removal shall
be a Deduction, unless the Termination occurs either: (i) as a result of an
Event of Default by either party, in which case the defaulting party shall pay
the cost of such removal from its own funds, and not as a Deduction; or (ii) as
a result of Management Company's election not to renew the Term, as of the
expiration of either the Initial Term or any Renewal Term (as the case may be),
in which case Management Company shall pay the cost of such removal from its own
funds, and not as a Deduction.
F. Various other actions shall be taken, as described in this Agreement,
including, but not limited to, the actions
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described in Sections 7.01, 10.02, 10.03, 10.04, 12.04.B, and 14.01.F.
G. Management Company shall peacefully vacate and surrender the Inn to
Owner.
The provisions of this Section 4.02 shall survive any Termination.
4.03 Performance Termination
-----------------------
A. Subject to the provisions of Section 4.03.B below, Owner shall have
the option to terminate this Agreement if:
1. With respect to any two (2) consecutive full Fiscal Years (not
including any Fiscal Year prior to Fiscal Year 1996), Operating Profit less the
amount of Ground Lease Rental, if applicable, for each of such two (2) Fiscal
Years is less than the Performance Termination Threshold; and
2. The Revenue Index of the Inn during each of such two (2) consecutive
Fiscal Years; is less than the Revenue Index Threshold; and
3. The fact that the Inn is not meeting the tests set forth in Section
4.03.A(1) and (2) is not the result of either (x) Force Majeure, or (y) any
major renovation of the Inn.
Such option to terminate shall be exercised by serving written notice thereof on
Management Company no later than sixty (60) days after the receipt by Owner of
the annual accounting under Section 9.01 hereof for the second (2nd) of the two
(2) Fiscal Years referred to in Section 4.03.A(1). If Management Company does
not
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elect to avoid such Termination pursuant to Section 4.03.B below, this Agreement
shall terminate as of the end of the fourth (4th) full Accounting Period
following the date on which Management Company receives Owner's written notice
of its intent to terminate this Agreement; provided that such period of time
shall be extended as required by applicable Legal Requirements pertaining to the
termination of the employment of the employees at the Inn. Owner's failure to
exercise its right to terminate this Agreement pursuant to Section 4.03.A with
respect to any given Fiscal Year shall not be deemed an estoppel or waiver of
Owner's right to terminate this Agreement with respect to subsequent Fiscal
Years to which this Section 4.03.A may apply.
B. Upon receipt of Owner's written notice of Termination under Section
4.03.A, Management Company shall have the option, to be exercised within sixty
(60) days after receipt of said notice, to avoid such Termination by paying
Owner an amount (the "Cure Payment") equal to one hundred five percent (105%) of
the amount by which Operating Profit less Ground Lease Rental, if any, for
either of the two (2) Fiscal Years in question (i.e., the two (2) Fiscal Years
referred to in Section 4.03.A(1)) was less than the Performance Termination
Threshold. Any such Cure Payment shall be accounted for as a fee to Owner in
connection with the avoidance of such Termination. In the event Management
Company makes a Cure Payment pursuant to this Section 4.03.B, the Fiscal Year
with respect to which such Cure Payment was made shall thereafter not be
treated, for purposes of subsequent elections by Owner pursuant
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to Section 4.03.A, as a Fiscal Year in which the circumstances described in
Section 4.03.A(1) have occurred. If Management Company exercises such option to
make such Cure Payment, then the foregoing Owner's election to terminate this
Agreement under Section 4.03.A shall be cancelled and of no force or effect with
respect to the two (2) Fiscal Years in question and this Agreement shall not
terminate. Such cancellation, however, shall not affect the right of Owner, as
to each subsequent Fiscal Year to which Section 4.03.A applies, to again elect
to terminate this Agreement pursuant to the provisions of Section 4.03.A (which
subsequent election shall again be subject to Management Company's rights under
this Section 4.03.B). If Management Company does not exercise its option to
make the Cure Payment then this Agreement shall be terminated as of the date set
forth in Section 4.03.A. Any Cure Payment which is paid by Management Company
pursuant to this Section 4.03.B shall not be recoverable by Management Company.
Any Cure Payment which is paid by Management Company pursuant to this Section
4.03.B shall only operate to cancel Owner's election to terminate this Agreement
under Section 4.03.A, and shall not operate to cure any outstanding Defaults by
Management Company under Article XVI.
END OF ARTICLE IV
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ARTICLE V
COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS
-------------------------------------------------
5.01 Management Fees
---------------
A. In consideration of services to be performed during the Term of this
Agreement, Management Company shall retain the Management Fees. Owner's
Priority and the Management Fees shall be appropriately prorated for any partial
Fiscal Year.
B. Notwithstanding the provisions of Article IX of this Agreement
permitting the consolidation of reports and co-mingling of certain funds with
other hotels owned by Owner, the Base Management Fee, Deferred Contingent Base
Management Fees, Residence Inn System Fee and Incentive Management Fee shall be
calculated based on the revenues generated by the Inn and not on a consolidated
basis with any other hotels which may be owned by Owner.
5.02 Distribution of Operating Profit
--------------------------------
In each Fiscal Year, Operating Profit shall be distributed to Owner and
Management Company in accordance with the following priorities:
A. Owner shall first receive an amount equal to the lesser of: (i)
Owner's Priority; or (ii) Operating Profit.
B. Management Company shall next receive the Base Management Fee;
provided, however, that if, in any Fiscal Year the Base Management Fee exceeds
Net Operating Profit, such Base
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Management Fee shall be deferred to the extent of such excess and such deferred
sums shall become "Deferred Contingent Base Fees".
C. Management Company shall next receive an amount equal to the Deferred
Contingent Base Fees to the extent that Net Operating Profit is otherwise
sufficient for such purposes.
D. Management Company shall next receive an amount equal to the
Incentive Management Fee.
E. Owner shall receive all Operating Profit remaining after the
distributions made pursuant to the preceding subparagraphs of this Section 5.02.
5.03 Accounting and Interim Payments
-------------------------------
A. On or before the twentieth (20th) day after the close of each
Accounting Period, Management Company shall deliver to Owner a reasonably
detailed accounting statement (the "Accounting Period Statement") in
substantially the form set forth in Exhibit "B" hereto. Upon Owner's written
request therefor, Management Company shall forward copies of any such Accounting
Period Statement to any Holders or Ground Lessors, at the addresses specified by
Owner. Such Accounting Period Statement shall set forth the results of the
operations of the Inn for the preceding Accounting Period and for the Fiscal
Year-to-date, all in accordance with generally accepted accounting principles
applied on a consistent basis. Each Accounting Period Statement shall be
accompanied by a statement, by the Controller, Assistant Controller or Vice
President of the Management Company that, to the best of his or
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her knowledge and belief, and subject to routine year-end audit and adjustment,
such Accounting Period Statement is true and correct in all material respects.
Each Accounting Period Statement shall include: (i) calculations of Gross
Revenues, Deductions, Operating Profit, the Management Fees; and (ii)
comparisons with the applicable categories for the prior Fiscal Year. With each
such Accounting Period Statement, Management Company shall transfer any interim
Owner's Distribution due to Owner, and shall retain any interim Management Fees
due to Management Company. Calculations and payments of the Management Fees and
the Owner's Distribution with respect to each Accounting Period within a Fiscal
Year shall be accounted for cumulatively.
B. Within seventy-five (75) days after the close of each Fiscal Year,
Management Company shall submit an Annual Operating Statement, as more fully
described in Section 9.01, for such Fiscal Year to Owner, which Annual Operating
Statement shall be controlling over the interim Accounting Period Statements.
Any adjustments or payments required by any such Annual Operating Statement
shall be made promptly by the parties. Operating Losses shall not be carried
forward or backward to subsequent or prior Fiscal Years.
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5.04 Accounting for Period Prior to Effective Date
---------------------------------------------
A. It shall be a general principle in the accounting for the Inn that all
liabilities incurred and/or income generated prior to the Effective Date, or
properly allocated to the period prior to the Effective Date under generally
accepted accounting principles, shall be included in the Accounting Period
Statements and the Annual Operating Statements for the Inn pursuant to this
Agreement for the Fiscal Year in which such liabilities are paid or such income
is received, provided, however, that the foregoing shall not be reflected in the
computation of Operating Profit for purposes of Section 4.03.
B. As of the Effective Date, the cash on hand at the Inn shall be
deposited in one of the Operating Accounts set up by Management Company pursuant
to Section 9.02, and shall be treated as part of the Working Capital described
in Section 7.01.
END OF ARTICLE V
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ARTICLE VI
FINANCING OF THE INN
--------------------
6.01 Amendments of Management Agreement
----------------------------------
A. If requested by any Qualified Lender or prospective Qualified Lender
(in which event such amendments shall take effect as of the funding of such
Qualified Loan), Management Company agrees to execute and deliver any amendment
of this Agreement which is reasonably required by such Qualified Lender or
prospective Qualified Lender, provided that Management Company shall be under no
obligation to amend this Agreement if the result of such amendment would be:
(i) to reduce, defer or delay the amount of any payment to be made to Management
Company hereunder; (ii) to materially increase Management Company's obligations
under this Agreement; (iii) to change the Term of this Agreement; (iv) to cause
the Inn to be operated other than pursuant to the Residence Inn System
Standards; (v) to amend either Section 8.02 or Section 14.01; or (vi) to
otherwise materially affect Management Company's rights under this Agreement.
Any such amendment shall take effect as of the funding of such Qualified Loan.
B. In addition to the provisions of Section 6.01.A, if a Qualified Lender
or prospective Qualified Lender requests that Management Company enter into an
amendment of this Agreement, and if such amendment would impose additional
duties (for example, an increase in the reporting requirements or in the
record-keeping
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requirements, or adding the obligation to prepare parallel accounting statements
using a different fiscal year) on Management Company or would otherwise
adversely affect Management Company's rights under this Agreement, but not to
the degree described in clauses (i) through (vi) of Section 6.01.A, Management
Company hereby agrees that it will execute and deliver such requested amendment
of this Agreement, provided that Owner compensates Management Company for the
additional burden imposed by such amendment out of Owner's funds and not as a
Deduction. It is understood that the word "burden", as used in the preceding
sentence, shall encompass not only additional work to be performed by Management
Company, but also any adverse effect on the Incentive Management Fee which would
be caused by requiring increased services by third parties. Any dispute as to
whether Management Company is entitled to any compensation pursuant to this
Section 6.01.B, or as to the amount of such compensation, shall be resolved by
arbitration pursuant to Section 20.13.
C. Proposed amendments to this Agreement which are requested by any
Qualified Lender or prospective Qualified Lender, and which would affect the
insurance provisions set forth in Article XII, shall be governed exclusively by
Article XII.
6.02 Notice and Opportunity to Cure
------------------------------
A. In the event of: (i) a Default by Owner in the performance or
observance of any of the terms and conditions of this Agreement; or (ii) any
other occurrence which entitles
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Management Company to terminate this Agreement, and in the event that Management
Company gives written notice thereof to Owner pursuant to Article XVI of this
Agreement, Management Company shall also give a duplicate copy (herein referred
to as the "First Notice") of such notice to, each Qualified Lender, at the
address previously provided to Management Company. Any such notice will be sent
in the manner described in Section 20.09 hereof. In addition, in the event that
such Default is not cured within the applicable cure period under Article XVI of
this Agreement, and Management Company intends to exercise its remedy of
terminating this Agreement, Management Company shall send a second notice (the
"Second Notice") to each Qualified Lender, at the same address and in the same
manner applicable to the First Notice stating Management Company's intention to
terminate this Agreement. Management Company shall forbear from taking any
action to terminate this Agreement for a period of thirty (30) days after the
service of the First Notice, and for an additional period of thirty (30) days
after the service of the Second Notice (if such Second Notice is required, as
set forth above).
B. In the event of a Default by Owner under the provisions of this
Agreement, Management Company agrees to accept performance by any Qualified
Lender with the same force and effect as if same were performed by Owner, in
accordance with the provisions and within the cure periods prescribed in this
Agreement (except that each Qualified Lender shall have such additional cure
periods, not available to Owner, as are set forth in this Section 6.02).
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C. No notice given by Management Company to Owner shall be effective as a
notice under Article XVI of this Agreement unless the applicable duplicate
notice to each Qualified Lender which is required under Section 6.02.A (either
the First Notice or the Second Notice, as the case may be) has been given. It
is understood that any failure by Management Company to give such a duplicate
notice (either the First Notice or the Second Notice, as the case may be) to any
Qualified Lender shall not itself be a Default by Management Company under this
Agreement, but rather shall operate only to void the effectiveness of any such
notice by Management Company to Owner under Article XVI of this Agreement.
D. Except as specifically limited by this Section 6.02, nothing herein
shall preclude Management Company from exercising any of its rights or remedies
against Owner with respect to any Default by Owner under this Agreement.
6.03 Collateral Assignment of Management Agreement
---------------------------------------------
Owner shall have the right to collaterally assign to any Qualified Lender,
as additional security for the indebtedness evidenced by a Qualified Loan, all
of Owner's right, title and interest in and to distributions payable to Owner
pursuant to Article V thereof. If, pursuant to any such assignment (or
subsequent loan documentation entered into between Owner and a Qualified Lender
with a similar purpose), and provided that Management Company has previously
received a copy of such assignment and such subsequent documentation, Management
Company
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may receive (from time to time) a notice or notices from such Qualified Lender
directing Management Company to pay to such Qualified Lender subsequent
distributions under Article V of this Agreement which would otherwise be payable
to Owner, Management Company shall comply with any such notice. Management
Company shall continue to make payments in compliance with any such notice from
such Qualified Lender until Management Company receives written instructions to
the contrary from such Qualified Lender. Owner hereby gives its consent to any
such payments by Management Company to such Qualified Lender which are in
compliance with any such notice. The foregoing consent by Owner shall be deemed
to be irrevocable until the entire Qualified Loan has been discharged, as
evidenced either by the recordation of a satisfaction or release executed by
such Qualified Lender, or by the delivery of a written statement to that effect
from such Qualified Lender to Management Company. Management Company shall
comply with the direction set forth in any such notice without any necessity to
investigate why such Qualified Lender sent such notice, or to confirm whether or
not Owner is in fact in default under the terms of such Qualified Loan. If
Management Company receives such notices from more than one Qualified Lender,
Management Company shall (at its option) either: (i) comply with the provisions
of the notice sent by the Qualified Lender whose Qualified Loan has the senior
lien priority; or (ii) institute Litigation for a declaratory judgment to
determine to whom payments under this
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Agreement shall be made (in which case, the costs and expenses of such
Litigation, including attorneys' fees, shall be Deductions).
6.04 Subordination of Management Agreement
-------------------------------------
A. This Agreement, and Management Company's right to continue to manage
and operate the Inn pursuant to this Agreement, are and shall be subject and
subordinate to the lien of any Qualified Loan, (i.e., upon a Foreclosure of any
such Qualified Lender, at its option, unless such Qualified Lender has otherwise
agreed to the contrary in a Non-Disturbance Agreement shall have the right to
terminate this Agreement). Notwithstanding the foregoing, during the Term of
this Agreement, all debt service (including increased or accelerated payments
after a default) payable with respect to any Qualified Loan shall be paid
exclusively from Owner's Distribution.
B. Section 6.04.A is intended to be, and is, fully effective and
binding, as between Management Company and any such Qualified Lender; however,
Management Company agrees to execute such confirmatory documentation (in
recordable form in the jurisdiction in which the Inn is located) as such
Qualified Lender shall reasonably request.
C. Notwithstanding the possible termination of this Agreement which is set
forth in the foregoing provisions of this Section 6.04, it is understood that,
until such time as this Agreement is validly terminated either (i) pursuant to
the applicable provision of this Agreement, or (ii) pursuant to a
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court order in connection with the Foreclosure of a Qualified Loan (assuming
that such termination does not breach any binding Non-Disturbance Agreement),
the Holder of each Qualified Loan will honor and recognize the right of
Management Company to operate the Inn in accordance with this Agreement
(including the right of Management Company to collect all Gross Revenues and to
make expenditures in accordance with this Agreement).
6.05 Non-Disturbance Agreement
-------------------------
A. Owner agrees that, in connection with the obtaining by Owner of any
Secured Loan or Secured Loans, from time to time, Owner will use good faith
reasonable efforts to obtain a Non-Disturbance Agreement from each Holder or
Holders. The phrase "good faith reasonable efforts" shall be determined by
reference to the following: (i) normal loan underwriting procedures and
practices (including those practices relating to non-disturbance agreements)
which are generally being implemented by entities which are making loans similar
to such Secured Loan, as of that point in time; and (ii) the concessions which
Management Company is, as of that point in time, reasonably prepared to make in
order to satisfy the objectives of lenders in connection with the lender-manager
relationship after a Foreclosure. In no event, however, shall the failure of
Owner to obtain such a Non-Disturbance Agreement affect or modify any of the
responsibilities of Management Company toward Qualified Lenders which are
contained elsewhere in this Article VI.
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B. Notwithstanding Section 6.05.A, Owner agrees that, prior to obtaining
any Qualified Loan, it will obtain from each prospective Holder or Holders
thereof a Non-Disturbance Agreement pursuant to which Management Company's
rights under this Agreement will not be disturbed as a result of a loan default
stemming from non-monetary factors which (i) relate to Owner and (ii) are not
Defaults by Management Company under Article XVI of this Agreement.
6.06 Attornment
----------
A. Management Company agrees that, subject to the provisions of Section
6.06.B, upon a Foreclosure of any Qualified Loan, provided that this Agreement
has not expired or otherwise been earlier terminated in accordance with its
terms, Management Company shall attorn to any Subsequent Owner and shall remain
bound by all of the terms, covenants and conditions of this Agreement for the
balance of the remaining Term (including any Renewal Terms) with the same force
and effect as if such Subsequent Owner were the "Owner" under this Agreement;
provided, however, that Management Company shall be under no such obligation to
so attorn, and, to the contrary, shall thereupon have the right to terminate
this Agreement on thirty (30) days' prior written notice to both Owner and such
Subsequent Owner: (i) if such Subsequent Owner would not qualify as a permitted
transferee under Section 19.01.A of this Agreement; or (ii) unless such
Subsequent Owner, within twenty (20) days after the
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Foreclosure Date (or, in the event such Subsequent Owner acquires title to the
Inn after the Foreclosure Date, within twenty (20) days after the date of such
acquisition of title to the Inn), assumes all of the obligations of the "Owner"
under this Agreement which arise from and after the Foreclosure Date (or such
later date of acquisition of title to the Inn), pursuant to a written assumption
agreement which shall be delivered to Management Company. Upon the written
request of any Qualified Lender, Management Company shall periodically execute
and deliver a statement, in a form reasonably satisfactory to such Qualified
Lender, reaffirming Management Company's obligation to attorn as set forth in
this Section 6.06.A.
B. It is understood by the parties that, in view of the fact that a
Qualified Lender will have the right to terminate this Agreement on a
Foreclosure under the provisions of Section 6.04, Management Company has an
interest in being informed, within a reasonable period of time after a Qualified
Loan Acceleration, of whether or not such Qualified Lender intends to exercise
such right of termination. Accordingly, if, by no later than that date (the
"Post-Foreclosure Decision Date") which is ninety (90) days after the date of
any Qualified Loan Acceleration, Management Company has not received a
Non-Disturbance Agreement executed by the Holder of such Qualified Loan,
Management Company shall, as of the Post-Foreclosure Decision Date and
thereafter, no longer be under any obligation to attorn (pursuant to the
provisions of Section 6.06.A) with
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respect to any Foreclosure of that Qualified Loan, and Management Company shall
have the option to terminate this Agreement, by written notice to both Owner and
the Holder of each existing Qualified Loan, at any time within the sixty (60)
day period immediately following the Post-Foreclosure Decision Date.
6.07 No Modification or Termination of Agreement
-------------------------------------------
If the documents evidencing and securing a Qualified Loan require the
consent of the Qualified Lender to any amendment or modification of this
Agreement which materially affects such Qualified Lender, no such amendment or
modification of this Agreement shall be binding or effective unless such
Qualified Lender shall have consented in writing thereto.
6.08 Owner's Right to Finance the Inn
--------------------------------
Owner shall have the right, from time to time, without Management Company's
prior consent or approval, to obtain Qualified Loans, and to encumber the Inn
with Mortgages securing such Qualified Loans. Owner shall not, without the
prior consent of Management Company, have the right to obtain Secured Loans
which are not Qualified Loans.
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6.09 Cross Collateralization
-----------------------
A. In connection with obtaining Qualified Loans, Owner shall have the
right to cross collateralize the Inn with other inns which it owns in the
Residence Inn System, provided that:
1. the inns to be the subject of the Qualified Loans are owned by
Owner or an Affiliate of Owner;
2. the Qualified Loans are secured only by inns in the Residence
Inn System which are managed by Management Company or its Affiliates and are not
cross collateralized with any property other than inns managed by Management
Company or its Affiliates in the Residence Inn System;
3. the basic terms and conditions of the Qualified Loans for the Inn
and each other inn securing such loan are intended to be part of an integrated
transaction; and
4. the closing of the Qualified Loans shall take place within six (6)
months of each other.
B. Any Mortgage secured by the Inn shall contain a provision requiring
Holder to provide Management Company prior written notice of any default under
such Mortgage. Further, upon receipt of any notice of default by such Holder,
Owner shall forward a copy of such notice to Management Company within three (3)
days thereafter, in accordance with the notice provisions set forth in Section
20.09.
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6.10 Sale/Leaseback Transactions
---------------------------
Any single transaction or related series of transactions in which (i)
Owner's interest in the Inn is sold or transferred by the then Owner ("Seller")
to a buyer ("Buyer"), and (ii) the Buyer (as "landlord") leases the Inn to the
Seller (as "tenant"), is hereby defined as a "Sale/Leaseback Transaction".
With respect to each Sale/Leaseback Transaction during the Term of this
Agreement, the following provisions will apply: (a) the sale or transfer of the
Inn will be considered a Sale of the Inn; however, the Seller (as tenant under
the aforesaid lease), not the Buyer, shall thereafter be treated as the "Owner"
for purposes of this Agreement; (b) the purchase price will not be a Secured
Loan, but any mortgage financing placed (either at the time of the transaction
or later) on the Buyer's interest in the Inn will be treated as a Secured Loan,
and the proceeds of each such Secured Loan will be aggregated with all
outstanding Secured Loans, which encumber either the Buyer's interest in the Inn
or the Seller's leasehold interest in the Inn, for purposes of determining
whether a given Secured Loan qualifies as a Qualified Loan; (c) payments
pursuant to such lease shall not be treated as Deductions, except for
Impositions and similar items which would have been treated as Deductions in the
absence of such Sale/Leaseback Transaction; and (d) all subsequent sales,
transfers or assignments of either Buyer's interest in the Inn or Seller's
interest in the Inn will be treated as Sales of the Inn. Owner will not enter
into any Sale/Leaseback Transaction unless
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Management Company and the proposed Buyer have previously executed a mutually
satisfactory attornment agreement pursuant to which, as of the date of the
termination of Seller's leasehold interest, the provisions of this Agreement
will (unless there has been an Event of Default or other event entitling either
party to terminate this Agreement) be binding both on Management Company and on
Buyer (as the successor "Owner"); such attornment agreement will also contain an
immediately-effective provision which will incorporate the terms of Section 6.08
of this Agreement, binding both on Management Company and on Buyer.
END OF ARTICLE VI
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ARTICLE VII
WORKING CAPITAL AND FIXED ASSET SUPPLIES
----------------------------------------
7.01 Working Capital
---------------
A. Owner shall, from time to time during the Term of this Agreement,
provide Management Company, within thirty (30) days after Owner's receipt of
written request therefor by Management Company, with the funds necessary to
maintain Working Capital at levels determined by Management Company to be
reasonably necessary to operate the Inn in accordance with the Residence Inn
System Standards. Any such request by Management Company shall be accompanied
by a detailed explanation of the reasons for the request. If Owner fails to
respond to any such request within thirty (30) days after Owner's receipt
thereof, Management Company shall be entitled, at its option, without affecting
other remedies which may be available pursuant to Article XVI, to lend Owner the
necessary additional Working Capital from Management Company's own funds, which
loan will bear interest at the Interest Rate (compounded annually), and will be
secured by a security interest subordinate to any Qualified Loan encumbering all
Working Capital previously or thereafter provided by either Owner or Management
Company, and will be repaid in accordance with such terms and conditions as
Management Company shall at that time reasonably determine.
B. Management Company will manage the Working capital of the Inn
prudently and in accordance with the Residence Inn System
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Standards. Management Company shall review and analyze the Working Capital needs
of the Inn on an annual basis. If Management Company reasonably determines that
there is excess Working Capital, such excess shall be returned to Owner.
C. Working Capital provided by Owner pursuant to this Section 7.01 shall
remain the property of Owner throughout the Term of this Agreement. Upon
Termination, Owner shall retain any of its unused Working Capital, except for
Inventories purchased by Management Company pursuant to Section 10.02.
D. If Owner owns other inns in the Residence Inn By Marriott System
which are operated by Management Company, Management Company, at its option, may
co-mingle the Working Capital for the Inn with the Working Capital account for
Owner's other inn(s) in a single bank account.
7.02 Fixed Asset Supplies
--------------------
As of the Effective Date, Owner shall provide the Inn with the Fixed Asset
Supplies which are necessary to operate the Inn in accordance with the Residence
Inn System Standards. Owner shall, from time to time thereafter during the Term
of this Agreement, provide Management Company, within thirty (30) days after
Owner's receipt of written request therefor by Management Company, with any
additional funds necessary to maintain Fixed Asset Supplies at levels determined
by Management Company to be necessary to operate the Inn in accordance with the
Residence Inn System Standards. Fixed Asset Supplies shall remain the property
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of Owner throughout the Term of this Agreement, except for Fixed Asset Supplies
purchased by Management Company pursuant to Section 10.02.
END OF ARTICLE VII
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ARTICLE VIII
REPAIRS, MAINTENANCE AND REPLACEMENTS
-------------------------------------
8.01 Routine Repairs and Maintenance
-------------------------------
Management Company shall maintain the Inn in good repair and condition, to
a standard comparable with competitive hotels and in conformity with applicable
Legal Requirements and the Residence Inn System Standards, and shall make or
cause to be made such routine maintenance, repairs and minor alterations, the
cost of which can be expensed under generally accepted accounting principles, as
it, from time to time, deems reasonably necessary for such purposes. The cost
of such maintenance, repairs and alterations shall be paid from Gross Revenues
and shall be treated as a Deduction in determining Operating Profit.
8.02 FF&E Reserve
------------
A. Management Company shall establish a reserve account (the "FF&E
Reserve") in a bank designated by Management Company (and approved by Owner,
such approval not to be unreasonably withheld) to cover the cost of:
1. Replacements and renewals to the Inn's FF&E;
2. Certain routine repairs and maintenance to the Inn building which
are normally capitalized under generally accepted accounting principles, such as
exterior and interior repainting, resurfacing building walls, floors, roofs and
parking areas, and replacing folding walls and the like (but which are not major
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repairs, alterations, improvements, renewals or replacements to the Inn's
buildings' structure, roof, or exterior facade, or to its mechanical,
electrical, heating, ventilating, air conditioning, plumbing or vertical
transportation systems, the cost of which shall be governed exclusively by
Section 8.03); and 3. At Management Company's option, lease payments for
Telephone and Office Equipment, Shuttle Vehicles and computer equipment used in
connection with the operation of the Inn.
Management Company agrees that it will, from time to time, execute such
reasonable documentation as may be requested by any Qualified Lender to assist
such Qualified Lender in establishing or perfecting its security interest in the
funds which are in the FF&E Reserve; provided, however, that no such
documentation shall contain any amendment or modification of any of the
provisions of this Agreement, including this Section 8.02.
B. During the period of time from the Effective Date
through the Termination of this Agreement, subject to the provisions of Sections
8.02.E and 8.02.F, Management Company shall transfer (as of the end of each
Accounting Period) into the FF&E Reserve an amount equal to five percent (5%) of
Gross Revenues for that Accounting Period. All such amounts transferred into
the FF&E Reserve after the Effective Date shall be paid from Gross Revenues and
shall constitute Deductions in determining Operating Profit.
C. Each year, at the same time as Management Company submits the Annual
Operating Budget described in Section 9.03,
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Management Company shall prepare an estimate (the "FF&E Estimate") of the
expenditures necessary for (i) replacements and renewals to the Inn's FF&E, (ii)
repairs to the Inn building of the nature described in Section 8.02.A.2, and
(iii) lease payments for Telephone and Office Equipment, Shuttle Vehicles and
computer equipment used in connection with the operation of the Inn, during the
ensuing Fiscal Year, and shall submit such FF&E Estimate to Owner for its
review. All expenditures from the FF&E Reserve will be (as to both the amount
of each such expenditure and the timing thereof) both reasonable and necessary,
given the objective that the Inn will be maintained and operated to a standard
comparable with competitive hotels and in accordance with the Residence Inn
System Standards. Notwithstanding the foregoing, Management Company shall not be
required to enumerate on the FF&E Estimate any individual project which will
cost less than Ten Thousand Dollars ($10,000.00) as adjusted by the GDP Deflator
on each anniversary of the Effective Date.
D. Management Company shall from time to time make such (i) replacements
and renewals to the Inn's FF&E, (ii) repairs to the Inn building of the nature
described in Section 8.02.A.2, as it deems necessary, and (iii) lease payments
for Telephone and Office Equipment, Shuttle Vehicles and computer equipment as
set forth in Section 8.03.A as it deems necessary, provided that Management
Company shall not expend more than the balance in the FF&E Reserve without the
prior approval of Owner. Management Company will endeavor to follow the
applicable FF&E Estimate, but
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shall be entitled to depart therefrom, in its reasonable discretion, provided
that: (a) such departures from the applicable FF&E Estimate result from
circumstances which could not reasonably have been foreseen at the time of the
submission of such FF&E Estimate; and (b) such departures from the applicable
FF&E Estimate are in the best interest of the Inn; and (c) if the deviations
from the FF&E Estimate are greater than Ten Thousand Dollars ($10,000) as
adjusted by the GDP Deflator on each anniversary of the Effective Date,
Management Company has submitted to Owner a revised FF&E Estimate setting forth
and explaining such departures. At the end of each Fiscal Year, any amounts
remaining in the FF&E Reserve shall be retained in the FF&E Reserve, and shall
be carried forward to the next Fiscal Year. Upon a Sale of the Inn funds in the
FF&E Reserve will not be affected (or, if withdrawn, will be replaced as set
forth in Section 19.01.D), and all dispositions of such funds (both before and
after such Sale of the Inn) will continue to be made exclusively pursuant to the
provisions of this Agreement. Proceeds from the sale of FF&E no longer necessary
to the operation of the Inn shall be deposited in the FF&E Reserve, as shall any
interest which accrues on amounts placed in the FF&E Reserve. Neither (i)
proceeds from the disposition of FF&E, nor (ii) interest which accrues on
amounts held in the FF&E Reserve, shall either (x) result in any reduction in
the required contributions to the FF&E Reserve set forth in subsection B above,
or (y) be included in Gross Revenues. Telephone and
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Office Equipment, as well as Shuttle Vehicles and computer equipment used in
connection with the operation of the Inn are the only items of FF&E which
Management Company is authorized to lease (rather than purchase). At Management
Company's option, lease payments with respect to Telephone and Office Equipment,
and Shuttle Vehicles and computer equipment used in connection with the
operation of the Inn shall be paid out of the FF&E Reserve, as set forth in
Section 8.02.A above. If Management Company proposes that other items of FF&E
(other than Telephone and Office Equipment, as well as Shuttle Vehicles and
computer equipment used in connection with the operation of Inn) should be
leased rather than purchased, Management Company shall submit such proposal to
Owner for Owner's approval (not to be unreasonably withheld); in connection with
the foregoing, it is understood that the failure of a Qualified Lender to
approve such leasing proposal shall justify Owner in withholding its approval
thereof, regardless of whether withholding such approval would otherwise be
deemed to be unreasonable.
E. The percentage contribution for the FF&E Reserve which is described in
Section 8.02.B is an estimate. As the Inn ages, this percentage may not be
sufficient to keep the FF&E Reserve at the levels necessary to make the
replacements and renewals to the Inn's FF&E, or to make the repairs to the Inn
building of the nature described in Section 8.02.A.2, which are required to
maintain the Inn in accordance with the Residence Inn System Standards and
comparable with competitive hotels. If (i) any
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FF&E Estimate prepared in good faith by Management Company exceeds the available
funds in the FF&E Reserve or would cause a shortfall to occur in future years ,
and (ii) Management Company has prepared and delivered to Owner a financial plan
describing the shortages in the available funding in the FF&E Reserve for the
Fiscal Years in question, Management Company will have the right, during the
time periods described in such financial plan, to increase the percentage of
Gross Revenues set forth in Section 8.02.B to a higher percentage, provided that
in no event will such percentage exceed six percent (6%) of Gross Revenues per
Fiscal Year.
F. If any FF&E Estimate which is prepared in accordance with clauses (i)
and (ii) of Section 8.02.E would require funding in excess of six percent (6%)
of Gross Revenues per Fiscal Year, Owner may either:
1. Agree to increase the percentages of Gross Revenues set forth in
Section 8.02.B to provide the additional funds required; or
2. Make a lump-sum contribution to the FF&E Reserve in the necessary
amount (in which case, such lump-sum contribution shall be an Owner Deduction
and shall be reimbursed to Owner in equal annual payments over the useful life
of the FF&E which is purchased, and such reimbursements shall be Deductions).
If Owner elects not to agree to either option 1 or option 2 above within
thirty (30) days after the submission of such FF&E
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Estimate (or, if Owner has elected option 2, and has not funded the required
amount within sixty (60) days after expiration of the aforesaid thirty (30) day
period), Management Company shall be entitled, at its option, to terminate this
Agreement by written notice to Owner, (with a copy to each Qualified Lender)
which notice shall be delivered no later than ninety (90) days after the
expiration of the sixty (60) day period described in the preceding sentence.
The effective date of such Termination shall be the date set forth in such
notice, provided that in no event shall the effective date of such Termination
be less than one hundred eighty (180) days, and no more than three hundred sixty
five (365) days after the date of such notice. Such failure to fund by Owner
shall not be deemed a Default by Owner under Article XVI, and Management Company
shall not be entitled to any remedies with respect to such failure other than
such termination of this Agreement and as set forth in Section 8.03.E.
G. If Owner owns any other inn(s) in the Residence Inn By Marriott
System which is (are) operated by Management Company, Management Company shall
co-mingle the FF&E Reserve for the Inn with the FF&E reserve account for Owner's
other inn(s) in a single bank account unless such co-mingling is prohibited by
any Qualified Lender.
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8.03 Building Alterations, Improvements, Renewals, and Replacements
--------------------------------------------------------------
A. Management Company shall prepare an annual estimate (the "Building
Estimate") of the expenditures necessary for major
repairs, alterations, improvements, renewals and replacements (which repairs,
alterations, improvements, renewals and replacements are not among those
referred to in Section 8.02.A.2) to the structure or exterior facade of the Inn,
or to the mechanical, electrical, heating, ventilating, air conditioning,
plumbing, or vertical transportation elements of the Inn building. Management
Company shall submit each such Building Estimate to Owner for its approval at
the same time the Annual Operating Budget is submitted, and Management Company
shall not make any expenditures for such purposes without the prior written
consent of Owner. Owner shall not unreasonably withhold its consent with
respect to such changes, repairs, alterations, improvements, renewals or
replacements to the Inn as are required by reason of any Legal Requirement, or
required under Management Company's current life-safety standards (provided
that, in order for any such life-safety standards to be "required" within the
meaning of this Section 8.03.A, such standards must be both required and in the
process of being implemented at a majority of the inns within the Residence Inn
System operated by Management Company which are comparable to the Inn), or
otherwise required for the continued safety of guests or prevention of material
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damage to property, including the removal of Hazardous Materials in compliance
with all Environmental Laws pursuant to Section 20.10).
B. In the event of the receipt by Management Company of a governmental
order or other circumstances described in Section 8.03.A above, Management
Company shall give Owner notice thereof within five (5) business days thereafter
or sooner if circumstances reasonably warrant. Management Company shall then be
authorized (but not obligated) to take appropriate remedial action without
receiving Owner's prior consent as follows: (i) in an emergency threatening the
Inn, its guests, invitees or employees; or (ii) if the continuation of the given
condition could (in Management Company's reasonable judgment) subject Management
Company and/or Owner to either criminal or more than de minimis civil
----------
liability, and Owner has either failed to remedy the situation or has failed to
take appropriate legal action to stay the effectiveness of any applicable Legal
Requirement. Management Company shall cooperate with Owner in the pursuit of
any such action and shall have the right to participate therein. Owner shall
reimburse Management Company for any costs incurred by Management Company in
connection with any such remedial action within thirty (30) days after Owner's
receipt of notice from Management Company of the amount of such costs.
C. The cost of all changes, repairs, alterations, improvements, renewals
or replacements referred to in Section
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8.03.A or 8.03.B (including the expenses incurred by either Owner or Management
Company in connection with any civil or criminal proceeding described above)
shall be borne solely by Owner, and shall not be paid from Gross Revenues or
from the FF&E Reserve. Any failure of Owner to either (i) approve and provide
funding for any proposed expenditures pursuant to the last sentence of Section
8.03.A, within seventy-five (75) days after Management Company's request
therefor, or (ii) in the case of any Legal Requirement which is described in
Section 8.03.B, to either comply therewith or to stay the effectiveness of such
Legal Requirement during the period of any contesting thereof, shall be a
Default by Owner. In such event, Management Company shall be entitled (without
affecting its other remedies under Article XVI) to terminate this Agreement upon
ninety (90) days' written notice to Owner; (with a copy to each Qualified
Lender); provided, however, that Management Company shall have the right to
stipulate such shorter period of time as may be appropriate, given the time
periods which are mandated by Legal Requirements, as described in Section
8.03.A, or given Management Company's good faith concerns about its own civil
and/or criminal liability.
D. Management Company shall have the right, from time to time, to set
forth in any Building Estimate (in addition to the expenditures described in
Section 8.03.A) such changes, alterations or improvements to the Inn as are
required, in Management Company's reasonable judgment, to keep the Inn in a
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competitive, efficient and economical operating condition, in accordance with
the Residence Inn System Standards (which Management Company shall substantiate
by demonstrating a reasonable return on the proposed investment to be made by
Owner). The cost of all changes, alterations or improvements referred to in
this Section 8.03.D shall be paid, to the extent reasonably possible (given the
requirement, set forth in Section 8.02, that the balance in the FF&E Reserve be
maintained at a level sufficient to maintain the Inn in accordance with the
Residence Inn System Standards) from the FF&E Reserve, and Owner shall pay such
costs from its own funds only to the extent there are not adequate funds for
such purpose in the FF&E Reserve. Any failure of Owner to approve and fund the
Owner's portion of any proposed expenditures pursuant to Section 8.03.D, as
described in the preceding sentence, or provide funding for items in Section
8.03.A (other than those items included in the last sentence of Section 8.03.A)
within sixty (60) days after Management Company's request therefor, shall not be
a Default by Owner but shall entitle Management Company to terminate this
Agreement and receive payment of the fee set forth in Section 8.03.E. Such
Termination shall be evidenced by written notice to Owner, (with a copy to each
Qualified Lender) which notice shall be delivered to Owner no later than ninety
(90) days after the expiration of the sixty (60) day period described in the
preceding sentence. The effective date of such Termination shall be the date
stated by Management Company in such notice, provided that such
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effective date shall be no less than one hundred eighty (180) days, and no more
than three hundred sixty (360) days, after the date of such notice. It is
understood that "alterations" and "improvements" which either (a) increase or
decrease the number of guest rooms in the Inn, or (b) involve changing the
architectural footprint of the Inn or involve other significant changes in the
structural design of the Inn, in any case by more than a de minimis amount, are
-- -------
beyond the scope of this Article VIII, and would require an amendment of this
Agreement prior to implementation by either party.
E. Notwithstanding anything to the contrary in Section 8.02.F or 8.03.D,
if Owner owns five (5) or fewer inns in the Residence Inn System which are
managed by Management Company, and Management Company elects to terminate the
Management Agreement due to: (i) Owner's failure to elect either option 1 or 2
in Section 8.02.F; (ii) Owner's failure to fund the required amount in Section
8.02.F, having elected option 2, or (iii) Owner's failure to fund pursuant to
Section 8.03.D, as applicable, then upon Management Company's election to
terminate the Management Agreement, which pursuant to both Sections 8.02.F and
8.03.D must (a) be made within ninety (90) days following the expiration of the
time period in which Owner must provide such additional funds, and (b) set forth
an effective date of such Termination which is no less than one hundred eighty
(180) days and no more than three hundred sixty five (365) days after the date
of such notice, then, Owner agrees to pay to Management Company a fee
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equal to three (3) times the Base Management Fee for the prior Fiscal Year
(regardless of whether said Base Management Fee was actually paid to Management
Company); provided, however, that if, within ten (10) days from receipt of
Management Company's notice to terminate, Owner provides the funds required
pursuant to Section 8.02.F or 8.03.D, as applicable, then upon receipt of such
funds by Management Company, Management Company's notice to terminate shall be
deemed null and void and this Agreement shall continue in full force and effect.
Said fee shall be paid to Management Company upon the termination date set forth
in the written notice from Management Company to Owner terminating this
Agreement. This fee shall be compensation for lost revenue and expenses and not
as a penalty. If Owner fails to pay such fee within the time period set forth
herein, then Management Company shall have the right (without affecting
Management Company's other right under this Agreement) to withhold the amount of
such fee from Owner's Distribution.
8.04 Liens
-----
Management Company and Owner shall use their best efforts to prevent any
liens from being filed against the Inn which arise from any maintenance,
repairs, alterations, improvements, renewals or replacements in or to the Inn.
They shall cooperate fully in obtaining the release of any such liens, and the
cost thereof, if the lien was not occasioned by the fault of either party, shall
be treated the same as the cost of the matter to
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which it relates. If the lien arises as a result of the fault of either party,
then the party at fault shall bear the full cost (including without limitation,
all legal fees, court costs, bonding fees and underlying debt) of obtaining the
lien release.
8.05 Ownership of Replacements,Etc.
-----------------------------
All repairs, alterations, improvements, renewals or replacements of the Inn
which are made pursuant to Article VIII or otherwise shall be the property of
Owner. Subject to the provisions of Section 8.02, the funds in the FF&E Reserve
shall be the property of Owner.
END OF ARTICLE VIII
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ARTICLE IX
BOOKKEEPING AND BANK ACCOUNTS
-----------------------------
9.01 Books and Records
-----------------
A. Books of control and account shall be kept on the accrual basis and in
material respects in accordance with the Uniform System of Accounts, with the
exceptions provided in this Agreement. Owner may at reasonable intervals during
Management Company's normal business hours examine such records. Within
seventy-five (75) days following the close of each Fiscal Year, Management
Company shall furnish Owner a statement (the "Annual Operating Statement") in
reasonable detail summarizing the Inn operations for such Fiscal Year and a
certificate of Management Company's chief accounting officer (or its controller
or any vice-president), certifying that to the best of his or her knowledge and
belief such year-end Annual Operating Statement is true and correct. Owner
shall have sixty (60) days after receipt to examine or review (at Owner's sole
expense, and not as a Deduction) said Annual Operating Statement. If Owner
raises no objections within said sixty (60) day period, the Annual Operating
Statement shall be deemed to have been accepted by Owner as true and correct,
and Owner shall have no further right to question its accuracy. If Owner does
raise such an objection, by notice to Management Company, Owner shall arrange
for an audit to be commenced within sixty (60) days after the date of such
objection, and shall diligently cause such audit to be completed
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within a reasonable period of time. Owner shall pay all costs and expenses of
such audit at its sole expense (and not as a Deduction); however, if such audit
establishes that Management Company has understated the Operating Profit for
that Fiscal Year by five percent (5%) or more, the reasonable costs and expenses
of such audit shall be paid as a Deduction.
B. Upon written request by Owner, but in no event more frequently than
annually, Management Company shall prepare and deliver to Owner the Management
Analysis Report. In addition, Management Company shall, in connection with an
impending Sale of the Inn or proposed commitment by a Qualified Lender to make a
Qualified Loan, within thirty (30) days after written request therefor from
Owner, prepare and deliver to Owner an updated Management Analysis Report
describing significant changes since the effective date of the most recent
Management Analysis Report; provided, however that Management Company shall not
be required to prepare such updated Management Analysis Report if a report has
been delivered within the previous one hundred twenty (120) days. The cost and
expense of preparing the Management Analysis Report shall be paid as a
Deduction.
C. Owner shall have the right to require that any given Annual Operating
Statement will include a reasonably detailed report setting forth the components
of Chain Services, the amounts billed for each such component during the Fiscal
Year in question and the method of allocation for each such component; provided,
however, that Owner must request Management Company to
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prepare such report by no later than thirty (30) days prior to the date of such
Annual Operating Statement.
9.02 Inn Accounts, Expenditures
--------------------------
A. All funds derived from operation of the Inn shall be deposited by
Management Company in Inn bank accounts (the "Operating Accounts") in a bank or
banks designated by Management Company and approved by Owner. Withdrawals from
said accounts shall be made only by representatives of Management Company whose
signatures have been authorized. Reasonable petty cash funds shall be
maintained at the Inn.
B. All payments made by Management Company hereunder shall be made from
authorized bank accounts, petty cash funds, or from Working Capital provided by
Owner pursuant to Section 7.01. Management Company shall not be required to make
any advance or payment to or for the account of Owner except out of such funds,
and Management Company shall not be obligated to incur any liability or
obligation for Owner's account without assurances that necessary funds for the
discharge thereof will be provided by Owner. Debts and liabilities incurred by
Management Company as a result of its operation and management of the Inn
pursuant to the terms hereof, whether asserted before or after the Termination
of this Agreement, will be paid by Owner to the extent funds are not available
to Management Company for that purpose from Gross Revenues.
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9.03 Annual Operating Budget
-----------------------
A. Management Company shall submit to Owner for its review, at least
thirty (30) days prior to the beginning of each full Fiscal Year after the
Effective Date, a preliminary draft of the projection of the estimated financial
results of the operation of the Inn during the next Fiscal Year (the "Annual
Operating Budget"). Such Annual Operating Budget shall project the estimated
Gross Revenues and Operating Profit for the forthcoming Fiscal Year for the Inn.
In preparing the Annual Operating Budget for each Fiscal Year, Management
Company's goal will be the maximization of the long-term Operating Profit of the
Inn, in keeping with the Residence Inn System Standards and the general
standards of the hotel industry for similar properties. At Owner's request,
Management Company agrees to take reasonable steps to ensure that qualified
personnel from Management Company's staff are available to explain the
preliminary draft of the Annual Operating Budget, including any material items
which have been budgeted at significantly different amounts from the amounts
actually experienced (or projected) for the same items in the preceding Fiscal
Year. A meeting (or meetings) for such purpose shall be held, at Owner's
request, within a reasonable period of time after the submission to Owner of the
preliminary draft of the Annual Operating Budget. Management Company will at all
times give good faith consideration to Owner's suggestions regarding any Annual
Operating Budget. Management Company shall
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thereafter submit to Owner, within ten (10) days after the beginning of such
Fiscal Year, the final Annual Operating Budget.
B. Management Company shall use its best efforts to adhere to the Annual
Operating Budget. It is understood, however, that the Annual Operating Budget
is an estimate only and that unforeseen circumstances such as, but not limited
to, the costs of labor, materials, services and supplies, casualty, operation of
law, or economic and market conditions may make adherence to the Annual
Operating Budget impracticable, and Management Company shall be entitled to
depart therefrom for such reasons.
9.04 Operating Losses; Credit
------------------------
A. To the extent there is an Operating Loss, additional funds in the
amount of any such Operating Loss shall be provided by Owner within thirty (30)
days after Management Company has given written notice thereof to Owner;
provided, however, that if Owner has already received a request from Management
Company for additional Working Capital pursuant to Section 7.01.A, and if such
request under Section 7.01.A reflects fundamentally the same cash shortage which
resulted in a request under this Section 9.04.A, Owner and Management Company
shall mutually discuss the extent to which the requests under Section 7.01.A and
Section 9.04.A may overlap, and such requests shall be modified accordingly.
B. In no event shall either party borrow money in the name of or pledge
the credit of the other.
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9.05 Consolidated Reports
---------------------
With respect to Management Company's reports, books and records required
to be kept and provided to Owner pursuant to Sections 9.01.A, 9.01.B and 9.03.A
hereof provided that Owner is also the owner of other hotels in the Residence
Inn System and that said Inns are managed by Management Company, Management
Company shall have the right, at Management Company's option, to prepare said
reports on a consolidated basis rather than by individual inn; provided, however
that if Owner reasonably determines that it requires individual reports for each
individual inn and requests individual reports from Management Company in
writing, together with Owner's reasons for requesting such individual reports,
Management Company shall comply with such request.
END OF ARTICLE IX
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ARTICLE X
PROPRIETARY MARKS; INTELLECTUAL PROPERTY
----------------------------------------
10.01 Proprietary Marks
-----------------
A. During the Term of this Agreement, the Inn shall be known as a
"Residence Inn", "Residence Inn by Marriott" or "Marriott Residence Inn" with
such additional identification as may be agreed to by Owner and Management
Company to provide local identification. If the name of the "Residence Inn
System" is changed, Management Company shall have the right to change the name
of the Inn to conform thereto.
B. The name "Marriott", "Residence Inn", "Residence Inn by Marriott" and
"Marriott Residence Inn" whether used alone or in connection with another word
or words, and all other Proprietary Marks shall in all events remain the
exclusive property of Management Company and its Affiliates. Owner shall have
no right to use the Marriott or Residence Inn name or any other Proprietary
Mark; provided, however, that Owner shall have the right, during the Term of
this Agreement, to have Proprietary Signage installed (in strict conformance
with the specifications provided by Management Company prior to the Effective
Date, or subsequent specifications provided by Management Company from time to
time during the Term) in the Inn and on the Site.
C. Except as provided in Section 10.02, upon Termination, any use of or
right to use the Marriott or Residence Inn name or any other Proprietary Mark
under this Agreement by Owner shall
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immediately cease. As of the date of Termination, Management Company shall
remove all Proprietary Signage from the Inn and from the Site (and from any
locations other than the Site). The cost of such removal shall be paid as set
forth in Section 4.02.E.
D. Notwithstanding the foregoing, those trademarks, trade names, symbols,
logos and designs which are specifically listed on Exhibit "E" shall be deemed
"Proprietary Marks" only during the Term of this Agreement; upon a Termination,
the exclusive control of such Proprietary Marks shall revert to Owner.
10.02 Purchase of Inventories and Fixed Asset Supplies
------------------------------------------------
Upon Termination, Management Company shall have the option, to be exercised
no later than thirty (30) days prior to Termination, to elect to purchase, at
their then book value, any items of the Inn's Inventories and Fixed Asset
Supplies as may be marked with the Marriott or Residence Inn name or any other
Proprietary Mark. In the event Management Company does not exercise such
option, Owner agrees that it will use any such items not so purchased
exclusively in connection with the Inn until they are consumed.
10.03 Computer Software and Equipment
-------------------------------
A. All Software is and shall remain the exclusive property of Management
Company or one of its Affiliates (or the licensor
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of such Software, as the case may be), and Owner shall have no right to use, or
to copy, any Software.
B. Upon Termination, Management Company shall have the right to remove
from the Inn, without compensation to Owner, all Software. Furthermore, upon
Termination, Management Company shall be entitled to remove from the Inn any
computer equipment which is utilized as part of a centralized reservation or
property management system or is otherwise considered proprietary by Management
Company. If any of such removed computer equipment is owned by Owner,
Management Company shall reimburse Owner for all previous expenditures made by
Owner for the purchase of such equipment, subject to a reasonable allowance for
depreciation.
10.04 Intellectual Property
---------------------
All Intellectual Property shall at all times be proprietary to Management
Company or its Affiliates, and shall be the exclusive property of Management
Company or its Affiliates. During the Term of this Agreement, Management Company
shall be entitled to take all reasonable steps to ensure that the Intellectual
Property remains confidential and is not disclosed to anyone other than
Management Company's employees at the Inn. Upon Termination, all Intellectual
Property shall be removed from the Inn by Management Company, without
compensation to Owner.
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10.05 Breach of Covenant
------------------
Management Company and/or its Affiliates shall be entitled, in case of any
breach of the covenants of Article X by Owner or others claiming through it, to
injunctive relief and to any other right or remedy available at law. Article X
shall survive Termination.
END OF ARTICLE X
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ARTICLE XI
POSSESSION AND USE OF INN
-------------------------
11.01 Quiet Enjoyment
---------------
Owner covenants that, so long as: (i) an Event of Default by Management
Company has not occurred under Article XVI of this Agreement; and (ii) Owner
does not have the right to terminate this Agreement under any other Section of
this Agreement, Management Company shall quietly hold, occupy and enjoy the Inn
throughout the Term hereof free from hindrance or ejection by Owner or other
party claiming under, through or by right of Owner (except as may be otherwise
set forth in Section 6.04). Owner agrees to pay and discharge any payments and
charges and, at its expense, to prosecute all appropriate actions, judicial or
otherwise, necessary to assure such free and quiet occupation. Nothing set forth
in the preceding sentence, however, shall be deemed to create a recourse
obligation by Owner to pay any payment or charge pursuant to a contract which is
non-recourse to Owner.
11.02 Use
---
A. Management Company shall use the Inn solely for the operation of a
hotel pursuant to the Residence Inn System Standards, and for all activities in
connection therewith which are customary and usual to such an operation.
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B. Management Company shall comply with and abide by all applicable Legal
Requirements pertaining to its operation of the Inn, provided that: (i) all
costs and expenses (other than those which are specifically described in clauses
(ii) or (iii) of this Section 11.02.B) of such compliance shall be paid from
Gross Revenues as Deductions in the computation of Operating Profit; (ii) all
costs and expenses of compliance with Environmental Laws shall be paid as set
forth in Section 20.10; (iii) all costs and expenses of compliance with the
Legal Requirements which are described in Section 8.03.A shall be paid as set
forth in Section 8.03; and (iv) Management Company shall have the right, but not
the obligation, in its reasonable discretion, to contest or oppose, by
appropriate proceedings, any such Legal Requirements (provided that the consent
of Owner, not to be unreasonably withheld, shall be obtained prior to initiating
any such proceedings which directly involve Owner's ownership interest in the
Inn in a material manner. The reasonable expenses of any such contest shall be
paid from Gross Revenues as Deductions.
11.03 Chain Services
--------------
A. Management Company shall, beginning with the Effective Date and
thereafter during the Term of this Agreement, cause to be furnished to the Inn
certain services ("Chain Services") which are furnished generally on a central
or regional basis to other Residence Inn hotels in the Residence Inn System
managed by the Manager. Chain Services shall include: (i) national sales
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office services; central training services; career development; and the
Residence Inn computer payroll and central accounting services; and (ii) such
additional central or regional services as are or may be, from time to time,
furnished for the benefit of hotels in the Residence Inn System or in
substitution for services now performed at individual inns which may be more
efficiently performed on a group basis; including, but not limited to, regional
managers and accounting staff; provided, however, that services not currently
included in chain services pursuant to subsections 11.03.A(i) and 11.03.A(ii)
above, shall only be added to "Chain Services" if, and to the extent that, such
services: (a) are not services included in the Residence Inn System Fee (it
being understood that Management Company's sole compensation for providing the
Residence Inn System Services shall be receipt of the Residence Inn System Fee);
(b) are not services relating to non-routine work (it being understood that the
cost and expense of such non-routine services shall be Deductions as set forth
in paragraph 6 of the definition of Operating Profit); and (c) are either (x)
new services (i.e., not previously performed at or for the Inn) or (y) services
which theretofore had been performed at the Inn, but which can be performed more
efficiently and economically on a centralized or regional basis.
B. Costs and expenses incurred in the providing of Chain Services shall be
allocated on a fair and equitable basis among all Residence Inns owned, leased
or managed by Management Company
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in the United States. Such allocation shall be made without regard to any
"caps" or other limitations on the amount which Management Company or its
Affiliates may charge to a given inn, pursuant to agreements which Management
Company (or its Affiliates) may have with the owner of such inn. Any excess of
that portion of such costs and expenses which is fairly allocated to a given inn
over the "cap" which may be in effect with regard to that inn shall be paid by
Management Company from its own funds. Management Company shall make no profit
from Chain Services. Upon Owner's written request, an explanation of the
current Chain Services will be given to Owner, and the basis for the allocation
of the charge for each Chain Service will be explained to Owner, in reasonable
detail, at the time of the submission of the Annual Operating Statement (as more
particularly set forth in Section 9.01). In no event will the total charge for
all of the Chain Services which are described in clause (i) of Section 11.03.A
for any given Fiscal Year, exceed three percent (3%) of Gross Revenues for such
Fiscal Year. The parties hereby stipulate that the limitation set forth in the
preceding sentence is intended to apply only to the services which are currently
listed (as of the Effective Date) in Section 11.03.A(i); accordingly, if there
are types of expenditures which were originally treated as Deductions (other
than pursuant to paragraph 8 of the definition of "Operating Profit" in Section
1.01), but which are later determined to be more properly treated as Chain
Services, such expenditures shall be treated as
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Deductions pursuant to said paragraph 8 of the definition of "Operating Profit"
without regard to the aforesaid limitation.
11.04 Owner's Right to Inspect
------------------------
Owner or its agents shall have access to the Inn at all reasonable times
for the purpose of inspection or showing the Inn to prospective purchasers,
tenants or Holders.
11.05 Indemnity
---------
A. Management Company shall indemnify and hold harmless Owner (and any
officer, director, employee, advisor, partner or shareholder of Owner) in
respect of, and, at Owner's request, shall defend any action, cause of action,
suit, debt, cost, expense (including, without limitation, reasonable attorneys'
fees), claim or demand whatsoever brought or asserted by any third person
whomsoever, at law or in equity, arising by reason of: (i) liabilities stemming
from general corporate matters of Management Company or its Affiliates, to the
extent the same are not directly and primarily related to the Inn; (ii)
infringement and other claims relating to the Proprietary Marks; (iii) if
Management Company intentionally or negligently fails to maintain insurance
coverage that it is required to maintain pursuant to this Agreement, the excess
of the amount of any liability or loss that would have been covered over the
amount of any applicable deductible; and (iv) the bad faith or willful
misconduct of
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Management Company or its Affiliates, or any of their employees, servants or
agents or other persons for whom they are responsible, resulting in a claim for
bodily injury, death or property damage occurring on, in or in conjunction with
the business of the Inn, to the extent that such claim exceeds the insurance
proceeds (including Inn Retentions) which are available to pay such claim.
B. If any claim, action or proceeding is made or brought against Owner,
against which claim, action or proceeding Management Company shall be obligated
to indemnify pursuant to the terms of this Agreement, then, upon demand by the
Owner, Management Company, at its sole cost and expense, shall resist or defend
such claim, action or proceeding (in Owner's name, if necessary), using such
attorneys as the Owner shall approve, which approval shall not be unreasonably
withheld. If, in the Owner's reasonable opinion, (i) there exists a conflict of
interest which would make it inadvisable to be represented by counsel for
Management Company, or (ii) there are legal defenses available to Management
Company that are different from or inconsistent with those available to Owner,
or (iii) there are claims at issue which are not covered by Management Company's
insurance, Owner shall be entitled to retain its own attorneys, and Management
Company shall pay the reasonable fees and disbursements of such attorneys.
C. Matters with respect to which Management Company has specifically
agreed to indemnify Owner under other provisions of
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this Agreement (for example, Section 14.01 regarding "Employee Claims", and
Section 20.11 regarding environmental matters) are to be treated exclusively
under such other provisions and not under this Section 11.05.
END OF ARTICLE XI
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ARTICLE XII
INSURANCE
---------
12.01 Interim Insurance
-----------------
[Intentionally omitted]
12.02 Property and Operational Insurance
----------------------------------
Management Company shall, commencing with the Effective Date and thereafter
during the Term of this Agreement, procure and maintain, either with insurance
companies of recognized responsibility or by legally qualifying itself as a self
insurer, a minimum of the following insurance:
A. Property insurance on the Inn building(s) and contents against loss or
damage by fire, lightning and all other risks covered by the usual extended
coverage endorsement, all in an amount not less than one hundred percent (100%)
of the replacement cost thereof (excluding the cost of foundations and
excavations);
B. Boiler and machinery insurance against loss or damage from explosion of
boilers or pressure vessels to the extent applicable to the Inn;
C. Business interruption insurance covering loss of profits and necessary
continuing expenses for interruptions caused by any occurrence covered by the
insurance referred to in Section 12.02 A and B, which shall be of a type and in
such amounts (but such coverage shall in no event be for less than one (1) year)
as are
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generally established by Management Company at similar hotels it owns, leases or
manages under the Residence Inn name in the United States;
D. General liability insurance against claims for bodily injury, death or
property damage occurring on, in, or in conjunction with the business of the
Inn, and automobile liability insurance on vehicles operated in conjunction with
the Inn, with a combined single limit for each occurrence of not less than
Twenty-Five Million Dollars ($25,000,000.00); representatives of Management
Company and Owner shall meet, at Owner's request, at intervals of approximately
once every five (5) years, to review the adequacy of such limit;
E. Workers' compensation and employer's liability insurance as may be
required under applicable laws covering all of Management Company's employees at
the Inn;
F. Fidelity bonds, with reasonable limits to be determined by Management
Company, covering its employees in job classifications normally bonded in other
similar hotels it leases or manages under the Residence Inn name in the United
States or as otherwise required by law, and comprehensive crime insurance to the
extent Management Company and Owner mutually agree it is necessary for the Inn;
and
G. Such other insurance in amounts as Management Company and Owner, in
their reasonable judgment, mutually deem advisable for protection against
claims, liabilities and losses arising out of or connected with the operation of
the Inn.
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12.03 General Insurance Provisions
----------------------------
A. All insurance described in Section 12.02 may be obtained by Management
Company by endorsement or equivalent means under its blanket insurance policies,
provided that such blanket policies substantially fulfill the requirements
specified herein. Upon the request of either Owner or any Qualified Lender,
representatives of the requesting party shall be entitled to examine, at
Management Company's corporate headquarters, all insurance policies maintained
by Management Company regarding the Inn.
B. Management Company may self insure or otherwise retain such risks or
portions thereof as it does with respect to other similar hotels it owns, leases
or manages under the Residence Inn name in the United States.
C. All policies of insurance required under Section 12.02 shall be carried
in the name of Management Company. The policies required under Sections
12.02.A, B, C and D shall include the Owner as an additional insured. Upon
notice by the Owner, Management Company shall also have the policies required
under Sections 12.02.A, B, C and D include any Qualified Lender as an additional
insured. Any property losses thereunder shall be payable to the respective
parties as their interests may appear. Any Mortgage on the Inn shall contain
provisions to the effect that proceeds of the insurance policies required to be
carried under Section 12.02.A and B shall, with respect to any casualty
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involving less than fifty percent (50%) of the replacement cost of the Inn, be
available for repair and restoration of the Inn.
D. Management Company shall deliver to the Owner certificates of insurance
with respect to all policies so procured and, in the case of insurance policies
about to expire, shall deliver certificates with respect to the renewal thereof.
E. All certificates of insurance provided for under Article XII shall, to
the extent obtainable, state that the insurance shall not be cancelled or
materially changed without at least thirty (30) days' prior written notice to
Owner.
F. The term "Inn Retention" shall mean the amount of any loss or reserve
under Management Company's blanket insurance or self-insurance programs which is
allocated to the Inn, not to exceed the higher of (a) the maximum per occurrence
limit established for similar hotels participating in such programs, or (b) the
insurance policy deductible on any loss which may fall within high hazard
classifications as mandated by the insurer (e.g., earthquake, flood, windstorm
on coastal properties, etc.). If the Inn is not a participant under Management
Company's blanket insurance or self-insurance programs, "Inn Retention" shall
mean the amount of any loss or reserve allocated to the Inn, not to exceed the
insurance policy deductible.
12.04 Cost and Expense
----------------
A. [Intentionally omitted]
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B. Insurance premiums and any other costs or expenses with respect to the
insurance or self-insurance required under Section 12.02, including any Inn
Retention, shall be paid from Gross Revenues as Deductions. To the extent that
such costs or expenses include reimbursement by Management Company of its own
costs or expenses, or those of one of its Affiliates, such costs or expenses
shall be generally competitive (as calculated over the Term of this Agreement)
with costs and expenses of non-affiliated entities providing similar services.
Such premiums and costs shall be allocated on an equitable basis to the hotels
participating under Management Company's blanket insurance or self-insurance
programs. Any reserves, losses, costs or expenses which are uninsured shall be
treated as a cost of insurance and shall be Deductions. Upon Termination, an
escrow fund in an amount reasonably acceptable to Management Company shall be
established from Gross Revenues (or, if Gross Revenues are not sufficient, with
funds provided by Owner) to cover the amount of any Inn Retention and all other
costs which will eventually have to be paid by either Owner or Management
Company with respect to pending or contingent claims, including those which
arise after Termination for causes arising during the Term of this Agreement.
Upon the final disposition of all such pending or contingent claims, any
unexpended funds remaining in such escrow shall be paid to Owner.
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12.05 Owner's Option to Obtain Certain Insurance
------------------------------------------
Owner may, at its option, by written notice to Management Company which
shall be delivered no later than ninety (90) days prior to the natural
expiration of the insurance policies which Management Company has obtained
pursuant to Section 12.02.A, B and C, procure and maintain the insurance
specified in Section 12.02.A, B and C (in which case Management Company shall
allow such policies obtained by it under Section 12.02.A, B, and C to expire),
subject to the following terms and conditions:
A. All such policies of insurance shall be carried in the name of Owner,
with Management Company as an additional insured. Any property losses thereunder
shall be payable to the respective parties as their interests may appear. The
documentation with respect to each Secured Loan shall contain provisions to the
effect that proceeds of the insurance policies required to be carried under
Section 12.01.A and B shall be available for repair and restoration of the Inn,
to the extent required pursuant to Section 12.03.C. However, any Holder of such
Secured Loan shall be entitled to impose reasonable conditions on the
disbursement of insurance proceeds for the repair and/or restoration of the Inn,
including a demonstration by Owner and/or Management Company that the amount of
such proceeds (together with other funds Owner agrees to make available) is
sufficient for such purpose.
B. Owner shall deliver to Management Company certificates of insurance
with respect to all policies so procured and, in the
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case of insurance policies about to expire, shall deliver certificates with
respect to the renewal thereof.
C. All such certificates of insurance shall, to the extent obtainable,
state that the insurance shall not be canceled or materially changed without at
least thirty (30) days' prior written notice to the certificate holder.
D. Premiums for such insurance coverage shall be treated as Deductions,
provided that if the cost of such insurance procured by Owner exceeds the cost
of Management Company's comparable coverage by more than ten percent (10%), all
such excess costs shall be the sole responsibility of Owner and shall not be a
Deduction.
E. Should Owner exercise its option to procure the insurance described in
this Section 12.05, Owner hereby waives its rights of recovery from Management
Company or any of its Affiliates (and their respective directors, officers,
shareholders, agents and employees) for loss or damage to the Inn, and any
resultant interruption of business.
F. Should Owner exercise its right to obtain the insurance described in
this Section 12.05, Owner acknowledges that Management Company is under no
obligation to thereafter include the Inn in its blanket insurance program (with
respect to the coverage described in Section 12.02.A, B and C) for the balance
of the Term of this Agreement. However, upon a Sale of the Inn, a successor
Owner shall have the right, notwithstanding the fact that the previous Owner may
have obtained insurance in accordance
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with this Section 12.05, to have the Inn included in Management Company's
blanket insurance program (provided that the Inn, as of that point in time,
satisfies the applicable criteria for admission to such program, as established
by the program's insurance carriers) by making a written request to Management
Company for such inclusion not later than thirty (30) days after the date on
which such party becomes the Owner.
G. All insurance procured by Owner hereunder shall be obtained from
reputable insurance companies reasonably acceptable to Management Company.
END OF ARTICLE XII
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ARTICLE XIII
TAXES
-----
13.01 Real Estate and Personal Property Taxes
---------------------------------------
A. Except as specifically set forth in subsection B below, all Impositions
which accrue during the Term of this Agreement (or are properly allocable to
such Term under generally accepted accounting principles) shall be paid by
Management Company from Gross Revenues, as a Deduction, before any fine,
penalty, or interest is added thereto or lien placed upon the Inn or the
Agreement, unless payment thereof is stayed; provided, however, that Management
Company shall not be responsible for any fine, penalty or interest resulting
through no fault of Management Company or caused by Owner. Owner shall within
five (5) business days after the receipt of any invoice, bill, assessment,
notice or other correspondence relating to any Imposition, furnish Management
Company with a copy thereof. Management Company shall, within the earlier of
thirty (30) days of payment or five (5) business days following written demand
by Owner, furnish Owner with copies of official tax bills and assessments which
Management Company has received, and evidence of payment or contest thereof.
Either Owner or Management Company (in which case each party agrees to sign the
required applications and otherwise cooperate with the other party in expediting
the matter) may initiate proceedings to contest any Imposition, and all
reasonable costs of any negotiations or proceedings with
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respect to any such contest shall either (i) be paid from Gross Revenues and be
a Deduction in determining Operating Profit; or (ii) be considered an Owner
Deduction; provided, however that in the event either Owner or Management
Company spends in excess of Five Thousand Dollars ($5,000.00) with respect to
such contest, such party shall provide written notice to the other party and the
other party shall approve or disapprove of such expenditure within ten (10) days
following receipt of such notice. Failure of such party to approve or
disapprove such expenditure shall be deemed approval. In the event that either
party's expenditures in excess of Five Thousand Dollars ($5,000.00) are not
approved by the other party such party may nevertheless proceed to spend
whatever funds are necessary with respect to such contest; provided, however,
that any amounts in excess of Five Thousand Dollars ($5,000.00) (or such higher
amount as may have been approved by the other party) shall be at the sole cost
of Owner or Management Company, as the case may be, and shall not be considered
an Owner Deduction by Owner nor be considered a Deduction from Operating Profit
by either Owner or Management Company.
B. The word "Impositions", as used in this Agreement, shall not include
the following, all of which shall be paid solely by Owner, not from Gross
Revenues nor from the FF&E Reserve:
1. Any franchise, corporate, estate, inheritance, succession, capital
levy or transfer tax imposed on Owner, or any
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income tax imposed on any income of Owner (including distributions to Owner
pursuant to Article V hereof);
2. Special assessments (regardless of when due or whether they are
paid as a lump sum or in installments over time) imposed because of facilities
which are constructed by or on behalf of the assessing jurisdiction (for
example, roads, sidewalks, sewers, culverts, etc.) which directly benefit the
Inn (regardless of whether or not they also benefit other buildings), which
assessments shall not be treated as Deductions, but rather shall be added to the
Additional Invested Capital as of each payment by Owner with respect thereto;
provided, however, that any installments (after the Effective Date) of any
assessments which were levied or imposed prior to the Effective Date shall be
Deductions;
3. "Impact Fees" (regardless of when due or whether they are paid as a
lump sum or in installments over time) which are required of Owner as a
condition to the issuance of site plan approval, zoning variances or building
permits, which impact fees shall not be treated as Deductions, but rather shall
be added to the Additional Invested Capital as of each payment by Owner with
respect thereto; provided, however, that any installments (after the Effective
Date) of any impact fees which were levied or imposed prior to the Effective
Date shall be Deductions; and
4. "Tax-increment financing" or similar financing whereby the
municipality or other taxing authority has assisted in financing the
construction of the Inn by temporarily reducing
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or abating normal Impositions in return for substantially higher levels of
Impositions at later dates.
C. Owner shall have the right to require Management Company to establish
an escrow account (with either any Qualified Lender or another entity reasonably
acceptable to both Owner and Management Company) from which Impositions will be
paid. Payments into such escrow account will be Deductions. Any interest which
accrues on amounts deposited in such escrow account shall be added to the
balance in such escrow account and used to pay Impositions.
END OF ARTICLE XIII
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ARTICLE XIV
INN EMPLOYEES
-------------
14.01 Employees
---------
A. All personnel employed at the Inn shall be the employees of Management
Company. Management Company shall have absolute discretion to hire, promote,
supervise, direct, train and discharge all employees at the Inn, to fix their
compensation and, generally, establish and maintain all policies relating to
employment.
B. Management Company shall decide which, if any, of the Inn's employees
shall reside at the Inn (provided that Owner's prior approval shall be obtained
if more than one such employee and his or her immediate families reside at the
Inn), and shall be permitted to provide free accommodations and amenities to its
employees and representatives living at or visiting the Inn in connection with
its management or operation. No person shall otherwise be given gratuitous
accommodations or services without prior joint approval of Owner and Management
Company except in accordance with usual practices of the hotel and travel
industry.
C. Any proposed settlement of any Employee Claim where the amount proposed
to be offered to the employee by Management Company is in excess of the
Settlement Threshold Amount shall be jointly approved by Management Company and
Owner. Any dispute between Owner and Management Company as to whether
Management Company's settlement recommendation is reasonable, where such
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proposed settlement is in excess of the Settlement Threshold Amount shall be
resolved by arbitration under Section 20.13 hereof; provided that Management
Company shall have the right to settle any Employee Claim (prior to the
arbitration on the reasonableness of the settlement, as described in this
sentence) based on Management Company's recommendation, which shall be
Management Company's reasonable estimate, in good faith, by using: (i) funds
from Gross Revenues (as a Deduction) up to the amount of Owner's settlement
recommendation, which shall be Owner's reasonable estimate, in good faith; and
(ii) Management Company's own funds to the extent Management Company's
recommendation exceeds the amount described in subparagraph (i) above.
Following the settlement of such Employee Claim, the parties will arbitrate
under Section 20.13 the issue of whether Management Company's settlement
recommendation was reasonable under the circumstances. If the arbitrators decide
that Management Company's recommendation was reasonable, Management Company
shall be entitled to reimburse itself from Gross Revenues (as a Deduction) in
the amount of the funds advanced under subparagraph (ii) above, together with
accrued interest thereon at the Prime Rate. If the arbitrators decide that
Management Company's settlement recommendation was not reasonable, then
Management Company shall not be entitled to any reimbursement of the amounts
advanced by it under subparagraph (ii) above, nor to accrued interest thereon.
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D. Management Company shall pay from its own funds, and not from Gross
Revenues, any Employee Claim where the basis of such Employee Claim is conduct
by Management Company which: (i) is a substantial violation of the standards of
responsible labor relations as generally practiced by prudent owners or
operators of similar hotel properties in the general geographic area of the Inn;
and (ii) is not the isolated act of individual employees, but rather is a direct
result of corporate policies of Management Company which either encourage or
fail to discourage such conduct. In addition, Management Company shall
indemnify, defend and hold harmless Owner from and against any fines or
judgments arising out of such conduct, and all Litigation expenses (including
reasonable attorneys' fees and expenses) incurred in connection therewith. Any
dispute between Owner and Management Company as to whether or not certain
conduct by Management Company is not in accordance with the aforesaid standards
shall be resolved by arbitration under Section 20.13 hereof. The arbitration
proceedings described in the preceding sentence shall be conducted independently
of any arbitration proceedings with respect to such Employee Claim pursuant to
the applicable employee-related contract and/or pursuant to Section 14.01.C of
this Agreement.
E. With respect to all Litigation or arbitration involving Employee Claims
in which both Management Company and Owner are involved as actual or potential
defendants, Management Company shall have exclusive and complete responsibility
(subject to the
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rights of Owner to approve certain settlements, as set forth in Section 14.01.C)
for the resolution of such Employee Claims. In the event that any Employee
Claim is made against Owner, but not against Management Company, Owner shall
give notice to Management Company of the Employee Claim in a timely manner so as
to avoid any prejudice to the defense of the Employee Claim, provided that
Management Company shall in all events be so notified within twenty (20) days
after the date such Employee Claim is made against Owner. Management Company
will thereafter assume exclusive and complete responsibility for the resolution
of such Employee Claim.
F. At Termination, other than by reason of an Event of Default of
Management Company hereunder, an escrow fund shall be established from Gross
Revenues (or, if Gross Revenues are not sufficient, with funds provided by
Owner) to reimburse Management Company for all costs and expenses incurred by
Management Company which arise out of either the transfer or the termination of
employment of Management Company's employees at the Inn, such as reasonable
transfer costs, severance pay, unemployment compensation and other employee
liability costs.
END OF ARTICLE XIV
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ARTICLE XV
DAMAGE, CONDEMNATION AND FORCE MAJEURE
--------------------------------------
15.01 Damage and Repair
-----------------
A. If, during the Term hereof, the Inn is damaged or destroyed by fire,
casualty or other cause, Owner shall, with all reasonable diligence, to the
extent that proceeds from the insurance described in Section 12.02 are available
(subject to the provisions of any Mortgage encumbering the Inn, but with the
limitations described in Section 12.03.C) for such purpose, repair or replace
the damaged or destroyed portion of the Inn to the same condition as existed
previously.
B. In the event damage or destruction to the Inn from any cause materially
and adversely affects the operation of the Inn and Owner fails to timely
(subject to Force Majeure, and subject to unreasonable delays caused by
Management Company, including unreasonable delays in adjusting the insurance
claim with the carriers which participate in Management Company's blanket
insurance program) commence and complete the repairing, rebuilding or
replacement of the same so that the Inn shall be substantially the same as it
was prior to such damage or destruction, such action shall be deemed an Event of
Default by Owner pursuant to Section 16.01.E and Management Company may, at its
option, elect to terminate this Agreement upon one hundred twenty (120) days'
written notice in addition to its remedies under Section 16.03.
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15.02 Condemnation
------------
A. In the event all or substantially all of the Inn shall be taken in any
eminent domain, condemnation, compulsory acquisition, or similar proceeding by
any competent authority for any public or quasi-public use or purpose, or in the
event a portion of the Inn shall be so taken, but the result is that it is
unreasonable to continue to operate the Inn, this Agreement shall terminate.
B. In the event a portion of the Inn shall be taken by the events
described in Section 15.02.A, or the entire Inn is affected but on a temporary
basis, and the result is not to make it unreasonable to continue to operate the
Inn, this Agreement shall not terminate. However, so much of any award for any
such partial taking or condemnation as shall be necessary to render the Inn
equivalent to its condition prior to such event shall be used for such purpose;
the balance of such award, if any, shall be fairly and equitably apportioned
between Owner and Management Company in accordance with their respective
interests. The amount of any award received by Owner pursuant to Section
15.02.B and not applied to restoration of the Inn shall be deducted from the
Priority Basis and the Loan Priority Basis at such time as the award is
received by Owner. In addition, the Performance Termination Threshold shall be
reduced by an amount equal to eight percent (8%) of such total amount (if any)
of any award received by Owner pursuant to this Section 15.02.B which is not
used to restore the Inn.
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C. In the event of any proceeding described in Section 15.02.A or 15.02.B,
Owner and Management Company shall each have the right to initiate such
proceedings as they deem advisable to recover any damages to which they may be
entitled; provided, however, that Management Company shall be entitled to retain
the award or compensation it may obtain through proceedings which are conducted
separately from those of Owner only if such award or compensation does not
reduce the award or compensation otherwise available to Owner. (For this
purpose, any award or compensation received by any Holder shall be deemed to be
an award or compensation received by Owner).
15.03 Force Majeure
-------------
A. The withdrawal or revocation of any License which is material to the
operation of the Inn in accordance with the Residence Inn System Standards,
where such withdrawal or revocation: (i) is not due to the fault of either
Management Company or Owner, and (ii) is not otherwise within the reasonable
control of either Management Company or Owner, shall not be an Event of Default
under Article XVI of this Agreement. Management Company and Owner shall each,
in good faith, use all commercially reasonable efforts (including the diligent
pursuit of all available appeals), during the period of one hundred twenty (120)
days after the date of such withdrawal or revocation, to have such License
reinstated. If, notwithstanding such efforts, such License is not reinstated
prior to the expiration of the
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aforesaid period of one hundred twenty (120) days, either Owner or Management
Company shall have the right, at its option, to terminate this Agreement upon no
less than sixty (60) days' notice to the other party; provided, however, that
the terminating party must deliver such notice of Termination to the other party
by no later than ninety (90) days after the expiration of such one hundred
twenty (120) day period; and provided further, that no such Termination shall be
effective if, prior to the effective date of such Termination, such License is
reinstated or such withdrawal or revocation of such License is stayed.
B. If an order, judgment or directive by a court or administrative body is
issued, in connection with any legal or Litigation involving Owner, which order,
judgement or directive restricts or prevents Management Company, in a material
adverse manner, from operating the Inn in accordance with the Residence Inn
System Standards, and which, in Management Company's reasonable opinion, will
have a significant adverse effect upon operations of the Inn, Management Company
shall be entitled, at its option, to terminate this Agreement upon sixty (60)
days' written notice; provided, however, that Management Company shall (if it so
elects) deliver such notice of Termination to Owner by
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no later than ninety (90) days after the issuance of such order, judgment or
directive (or, if such order, judgment or directive is appealed, within ninety
(90) days after the final disposition of such appeal).
END OF ARTICLE XV
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ARTICLE XVI
DEFAULTS
--------
16.01 Definition of "Default"
-----------------------
Any one or more of the following shall constitute a "Default," to the
extent permitted by applicable law:
A. The filing of a voluntary petition in bankruptcy or insolvency or a
petition for reorganization under any bankruptcy law by either party, or the
admission by either party that it is unable to pay its debts as they become due;
B. The consent to an involuntary petition in bankruptcy or the failure to
vacate, within ninety (90) days from the date of entry thereof, any order
approving an involuntary petition by either party;
C. The entering of an order, judgment or decree by any court of competent
jurisdiction, on the application of a creditor, adjudicating either party as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets, and such order, judgment or decree's continuing unstayed
and in effect for any period of ninety (90) days;
D. The failure of either party to make any payment required to be made in
accordance with the terms of this Agreement, as of the due date which is
specified in this Agreement;
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E. The failure of either party to perform, keep or fulfill any of the
other covenants, undertakings, obligations or conditions set forth in this
Agreement.
16.02 Definition of "Event of Default"
--------------------------------
A. Upon the occurrence of any Default by either party hereto (hereinafter
referred to as the "defaulting party") under Section 16.01.A, B or C, such
Default shall immediately and automatically, without the necessity of any notice
to the defaulting party, constitute an "Event of Default" under this Agreement.
B. Upon the occurrence of any Default by a defaulting party under Section
16.01.D, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within ten (10)
days after written notice from the non-defaulting party specifying such Default
and demanding such cure.
C. Upon the occurrence of any Default by either party hereto under Section
16.01.E, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within thirty (30)
days after written notice from the non-defaulting party and demanding such cure,
or, if the Default is such that it cannot reasonably be cured within said thirty
(30) day period of time, if the defaulting party fails to commence the cure of
such Default within said thirty
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(30) day period of time or thereafter fails to diligently pursue such efforts to
completion.
16.03 Remedies Upon an Event of Default
---------------------------------
A. Upon the occurrence of an Event of Default under the provisions of
Section 16.02, the non-defaulting party shall have the right to pursue any one
or more of the following courses of action: (i) in the event of a material
breach by the defaulting party of its obligations under this Agreement, to
terminate this Agreement by written notice to the defaulting party, which
termination shall be effective as of the effective date which is set forth in
said notice, provided that said effective date shall be at least thirty (30)
days after the date of said notice; and provided further that, if the defaulting
party is the employer of all or a substantial portion of the employees at the
Inn, the foregoing period of thirty (30) days shall be extended to seventy-five
(75) days (or such longer period of time as may be necessary under applicable
Legal Requirements pertaining to termination of employment); (ii) to institute
forthwith any and all proceedings permitted by law or equity, including, without
limitation, actions for specific performance and/or damages; and (iii) to avail
itself of any one or more of the other remedies described in this Section 16.03.
B. Upon the occurrence of a Default by either party under the provisions
of Section 16.01.D, the amount owed to the non-defaulting party shall accrue
interest, at the Interest Rate,
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from and after the date on which such payment was originally due to the
non-defaulting party.
C. The rights granted hereunder are intended to be cumulative, and shall
not be in substitution for, but shall be in addition to, any and all rights and
remedies available to the non-defaulting party (including, without limitation,
injunctive relief and damages; provided that the satisfaction of damage awards
against Owner shall be limited by the provisions of Section 16.04) by reason of
applicable provisions of law or equity.
16.04 Owner's Estate
--------------
Notwithstanding any other provision of this Agreement, in the event of any
Event of Default by Owner pursuant to the terms of this Agreement, Management
Company shall look only to Owner's estate and interest in the Site and the Inn
(which shall for this purpose, include (i) amounts deposited in the Operating
Accounts and the FF&E Reserve, and (ii) accounts receivable) for the
satisfaction of a money judgment against Owner resulting from such Event of
Default, and no other property or assets of Owner, or of its partners, officers,
directors, shareholders or principals, shall be subject to levy, execution or
other enforcement procedure for the satisfaction of such judgment. Management
Company's right to look to Owner's estate and interest in the Site and the Inn
for satisfaction of such a money judgment against Owner shall survive
Termination and shall not be affected
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by any one or more Sales of the Inn. Nothing contained in this Section 16.04
shall be deemed to affect or diminish Management Company's remedies under this
Article XVI other than money damages against Owner (including, without
limitation, Termination of this Agreement).
END OF ARTICLE XVI
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ARTICLE XVII
WAIVER AND PARTIAL INVALIDITY
-----------------------------
17.01 Waiver
------
The failure of either party to insist upon a strict performance of any of
the terms or provisions of this Agreement, or to exercise any option, right or
remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
17.02 Partial Invalidity
------------------
If any portion of this Agreement shall be declared invalid by order, decree
or judgment of a court, this Agreement shall be construed as if such portion had
not been inserted herein except when such construction would operate as an undue
hardship on Management Company or Owner, or constitute a substantial deviation
from the general intent and purpose of said parties as reflected in this
Agreement.
END OF ARTICLE XVII
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ARTICLE XVIII
ASSIGNMENT
----------
18.01 Assignment
----------
A. Management Company shall not assign or transfer its management
responsibilities under this Agreement without the prior written consent of
Owner; provided, however, that Management Company shall have the right, without
such consent, to: (i) assign its interest in this Agreement to any of its
Affiliates and any such Affiliate shall be deemed to be the Management Company
for the purposes of this Agreement, and (ii) sublease shops or grant Licenses or
concessions at the Inn so long as the terms of any such subleases, Licenses or
concessions are consistent with the provisions of Section 2.02 and provided
further that Owner's consent shall be required prior to the execution by
Management Company of any such lease, License or concession which (a) has a term
of more than five (5) years, or (b) involves more than five hundred (500) square
feet of space within the Inn. In the event of such an assignment by Management
Company of its interest in this Agreement to an Affiliate, the Management
Company which is named in the Preamble to this Agreement: (i) shall
automatically be deemed to guarantee the performance of such Affiliate under
this Agreement; (ii) shall, at the request of Owner, execute a guaranty, in form
and substance reasonably satisfactory to both parties, of the performance of
such Affiliate under this Agreement (provided that
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the failure of Owner to obtain an executed guaranty pursuant to this clause (ii)
shall not affect the validity or enforceability of the guaranty which is
automatically created pursuant to clause (i); and provided further, that, when
Owner does so receive an executed guaranty pursuant to this clause (ii), such
executed guaranty shall be deemed to have superseded the guaranty described in
clause (i) above); and (iii) shall make available to such Affiliate, in
connection with the performance by such Affiliate under this Agreement,
Management Company's skill, personnel, facilities and resources.
B. Owner shall not assign or transfer its interest in this Agreement other
than (i) in connection with a Sale of the Inn which complies with the provisions
of Article XIX hereof; or (ii) as set forth in Section 18.01.C.
C. Nothing contained herein shall prevent: (i) the collateral assignment
of this Agreement by Owner as security for any Mortgage which complies with the
provisions of Section 3.01; or (ii) the transfer of this Agreement in connection
with a merger or consolidation or a sale of all or substantially all of the
assets of either party, provided that (x) if such transfer is by Owner, the
provisions of Article XIX hereof shall be complied with, and (y) if such
transfer is by Management Company, such transfer is being done as a part of a
merger, consolidation, etc., of all or substantially all of the business which
consists of managing the Residence Inn System.
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D. In the event either party consents to an assignment of this Agreement
by the other, no further assignment shall be made without the express consent in
writing of such party, unless such assignment may otherwise be made without such
consent pursuant to the terms of this Agreement.
E. An assignment (either voluntarily or by operation of law) by Owner of
its interest in this Agreement (in compliance with Article XVIII) shall not
relieve Owner from its obligations under this Agreement which accrued prior to
the date of such assignment, but shall relieve Owner of such obligations
accruing after such date, if the assignment complies with Section 18.01.B and if
Management Company has received an assumption agreement executed by the assignee
(in form and substance reasonably satisfactory to Management Company). An
assignment (either voluntarily or by operation of law) by Management Company of
its interest in this Agreement shall not relieve Management Company from its
obligations under this Agreement, unless Owner so agrees in writing.
F. Subject to the provisions of this Article XVIII, the terms and
conditions of this Agreement shall inure to the benefit of, and be binding upon,
the respective successors, heirs, legal representatives, or assigns of each of
the parties hereto.
END OF ARTICLE XVIII
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ARTICLE XIX
SALE OF THE INN
---------------
19.01 Sale of the Inn
---------------
A. Owner shall not enter into any Sale of the Inn to any individual or
entity which: (i) does not have sufficient financial resources and liquidity to
fulfill Owner's obligations under this Agreement; (ii) is in control of or
controlled by persons who have been convicted of felonies involving moral
turpitude in any state or federal court; or (iii) is engaged in the business of
operating or franchising (as distinguished from owning) a branded hotel chain
having five hundred (500) or more guest rooms in competition with Management
Company. An individual or entity shall not be deemed to be in the business of
operating hotels in competition with Management Company solely by virtue of (x)
the ownership of such hotels, either directly or indirectly through
subsidiaries, affiliates and partnerships, or (y) holding a Mortgage or
Mortgages secured by one or more hotels. Notwithstanding the foregoing, if
Owner or an Affiliate of Owner is a corporation whose shares are listed on a
public stock exchange, and if a Sale of the Inn occurs as a result of purchases
of such shares, through such public stock exchange, in sufficient quantities to
cause a transfer of the "controlling interest" in Owner (as described in the
definition of "Sale of the Inn"), and if such Sale of the Inn is not in
compliance with the provisions of this Section 19.01.A, Management Company shall
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have the right, at its option, to terminate this Agreement by written notice to
Owner (as more particularly described in Section 19.01.B), but such
non-compliance with this Section 19.01.A shall not be an Event of Default nor
shall it subject Owner to claims for damages by Management Company pursuant to
Article XVI.
B. If Owner receives a bona fide written offer to enter into a Sale of the
Inn, Owner shall give written notice thereof to Management Company, stating the
name of the prospective purchaser or tenant, as the case may be. Such notice
shall include appropriate information relating to such prospective purchaser or
tenant demonstrating compliance with the provisions of Section 19.01.A together
with such additional information as Management Company shall reasonably request.
If Management Company decides that a Sale of the Inn to such prospective
purchaser or tenant would violate the provisions of Section 19.01.A, Management
Company shall so notify Owner by no later than thirty (30) days after receipt of
such notice; provided, however, that any decision by Management Company
regarding any such prospective purchaser or tenant shall not be binding if the
information furnished by Owner pursuant to the preceding sentence is inaccurate.
Concurrently with the finalization of such Sale of the Inn, the purchaser or
tenant, as the case may be, shall, by appropriate instrument reasonably
satisfactory to Management Company, assume all of Owner's obligations hereunder.
An executed copy of such assumption agreement shall be delivered to
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Management Company. If the proposed Sale of the Inn would violate the
provisions of Section 19.01.A, Owner will not enter into any agreement relating
to such Sale of the Inn. However, if Owner does enter into such an agreement,
Management Company shall have the right to terminate this Agreement by written
notice to Owner, which notice will set an effective date for such Termination
not earlier than thirty (30) days, nor more than one hundred twenty (120) days,
following the date of the giving of such notice. Management Company shall have
the right to change such effective date of Termination to coincide with the date
of the finalization of the proposed Sale of the Inn. At Management Company's
election, said notice of Termination shall not be effective if such Sale of the
Inn is not finalized. If such Termination by Management Company results from a
Default by Owner under Section 19.01.A, such Termination shall not relieve Owner
(except as otherwise set forth to the contrary in the last sentence of Section
19.01.A) of liability to Management Company for such Default.
C. In connection with the possibility of a Sale of the Inn achieved by
means of a transfer of the controlling interest in Owner, Owner, upon written
request of Management Company, shall (unless Owner is a publicly-traded
corporation which is registered under Section 12 or Section 15 of the Securities
Act of 1934) furnish Management Company with a list of the names and addresses
of the owners of the capital stock, (but only those owners which hold an
ownership interest of thirty percent (30%)
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or more), or the partnership interests (both (i) general partner, and (ii) any
limited partner holding an ownership interest of thirty percent (30%) or more),
or other ownership interests in Owner. In addition, Owner shall notify
Management Company of any transaction or series of transactions in which Owner
reduces its ownership interest in the Inn below fifty percent (50%) or in which
the former controlling interest in Owner is reduced below fifty percent (50%).
Management Company agrees to use diligent efforts to keep all such lists
confidential in accordance with the provisions of Section 12.04.
D. It is understood that no Sale of the Inn (which is otherwise in
compliance with the provisions of this Article XIX) shall reduce or otherwise
affect: (i) the current level of Working Capital; (ii) the current amount
deposited in the FF&E Reserve; or (iii) any of the Operating Accounts maintained
by Management Company pursuant to this Agreement. If, in connection with any
Sale of the Inn, the selling Owner intends to withdraw, for its own use, any of
the cash deposits described in the preceding sentence, the selling Owner must
obtain the contractual obligation of the buying Owner to replenish those
deposits (in the identical amounts) simultaneously with such withdrawal. The
selling Owner is hereby contractually obligated to Management Company to ensure
that such replenishment in fact occurs. The obligations described in this
Section 19.01.D shall survive such Sale of the Inn and shall survive
Termination.
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E. Management Company shall have the right to terminate this Agreement, on
thirty (30) days' written notice, if title to or possession of the Inn is
transferred by judicial or administrative process (including, without
limitation, a Foreclosure, or a sale pursuant to an order of a bankruptcy court,
or a sale by a court-appointed receiver) to an individual or entity which would
not qualify as a permitted transferee under clause (i), (ii) or (iii) of Section
19.01.A, regardless of whether or not such transfer is the voluntary action of
the transferring Owner, or whether (under applicable law) the Owner is in fact
the transferor; provided, however, that Management Company shall not have the
right to so terminate this Agreement based on the assertion that a Qualified
Lender fails to so qualify as a permitted transferee under said clauses (i),
(ii) or (iii) of Section 19.01.A.
END OF ARTICLE XIX
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ARTICLE XX
MISCELLANEOUS
-------------
20.01 Right to Make Agreement
-----------------------
A. Each party warrants, with respect to itself, that neither the execution
of this Agreement nor the finalization of the transactions contemplated hereby
shall: (i) violate any provision of law or any judgment, writ, injunction,
order or decree of any court or governmental authority having jurisdiction over
it; (ii) result in or constitute a breach or default under any indenture,
contract, other commitment or restriction to which it is a party or by which it
is bound to the extent that the remedies for such breach or default would have a
material adverse effect on such party's ability to perform under this Agreement;
or (iii) require any consent, vote or approval which has not been taken, or at
the time of the transaction involved shall not have been given or taken. Each
party covenants that it has and will continue to have throughout the Term of
this Agreement and any extensions thereof, the full right to enter into this
Agreement and perform its obligations hereunder.
B. Each party agrees that it will, as of the Effective Date, provide the
other party with: (i) certified copies of the applicable resolutions of its
board of directors (if it is a corporation), or written authorization by all
general partners (if it is a partnership) or other appropriate documentation
establishing its authority to execute this Agreement; and (ii)
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such opinions of counsel as the other party shall reasonably request regarding
the matters described in this Section 20.01.
20.02 Consents
--------
Wherever in this Agreement the consent or approval of Owner or Management
Company is required, such consent or approval shall (except to the extent that
such consent or approval is specifically designated as being "within the
discretion" of a party, or words to that effect, in the applicable provision)
not be unreasonably withheld, shall be in writing and shall be executed by a
duly authorized officer or agent of the party granting such consent or approval.
If either Owner or Management Company fails to respond within thirty (30) days
to a request by the other party for a consent or approval, such consent or
approval shall be deemed to have been given.
20.03 Agency
------
The relationship of Owner and Management Company shall be that of principal
and agent, and nothing contained in this Agreement shall be construed to create
a partnership or joint venture between them or their successors in interest.
Management Company's agency established by this Agreement is coupled with an
interest and may not be terminated by Owner until the expiration of the Term of
this Agreement, except as provided in Section 4.03 and in Articles XV or XVI.
Notwithstanding the agency relationship created by this Agreement, except to the
extent
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specifically set forth to the contrary in Section 20.12, nothing contained
herein shall prohibit, limit or restrict Management Company or any of its
Affiliates from developing, owning, operating, leasing, managing or franchising
hotels in the market area where the Inn is located.
The agency coupled with an interest herein was created by a complex,
single, integrated transaction between Marriott Corporation (the parent
corporation of Owner and Management Company as of the Effective Date) and its
subsidiaries whereby Marriott Corporation and its subsidiaries developed,
constructed, own and manage the Hotel. This agency is further intended to
provide security for the covenants, promises and guarantees herein. The agency
was purchased for valuable consideration, and is not terminable except as
specifically allowed by the express provisions of this Agreement. The parties
intend for this agency to be coupled with an interest, waive any right to claim
it is terminable at will, and further agree to be equitably estopped from
asserting that the agency is not coupled with an interest.
20.04 Confidentiality
---------------
The parties hereto agree that the matters set forth in this Agreement are
strictly confidential and each party will make every effort to ensure that such
matters are not disclosed to any outside person or entities (including the
press) without the written consent of the other party; provided, however, that
such consent will not be required with respect to: (i) legally
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required filings and other disclosures mandated by Legal Requirements; and (ii)
in the case of Owner, disclosure to any Qualified Lender or prospective
Qualified Lender, or to prospective purchasers of the Inn (subject to the
provisions of Section 20.05, if applicable).
20.05 Equity Offerings
----------------
No reference to Management Company or to any of its Affiliates will be made
in any prospectus, private placement memorandum, offering circular or offering
documentation related thereto (herein collectively referred to as the
"Prospectus"), issued by Owner or one of its Affiliates, which is designed to
interest potential investors in the Inn, unless Management Company has
previously received a copy of all such references. However, regardless of
whether Management Company does or does not so receive a copy of all such
references, neither Management Company nor any of its Affiliates will be deemed
a sponsor of the offering described in the Prospectus, nor will it have any
responsibility for the Prospectus, and the Prospectus will so state. Unless
Management Company agrees in advance, the Prospectus will not include: (i) any
Proprietary Mark; or (ii) except as required by applicable securities laws, the
text of this Agreement. Owner shall be entitled, however, to include in the
Prospectus an accurate summary of this Agreement; If there are no Legal
Requirements pursuant to which such information must be disclosed, appropriate
measures shall be taken to ensure that
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<PAGE>
entities or individuals receiving such Prospectus shall acknowledge the
confidentiality of such information. Owner shall indemnify, defend and hold
Management Company and its Affiliates (and their respective directors, officers,
shareholders, employees and agents) harmless from and against all loss, costs,
liability and damage (including attorneys' fees and expenses, and the cost of
Litigation) arising out of any Prospectus or the offering described therein.
20.06 Applicable Law
--------------
This Agreement shall be construed under and shall be governed by the laws
of the state where the Inn is located.
20.07 Recordation
-----------
The terms and provisions of this Agreement shall run with the land
designated as the Site, and with Owner's interest therein, and shall be binding
upon all successors to such interest. At the request of either party, the
parties shall execute an appropriate memorandum of this Agreement in recordable
form and cause the same to be recorded in the jurisdiction where the Inn is
located. Any cost of such recordation shall be borne by Management Company.
20.08 Headings
--------
Headings of Articles and Sections are inserted only for convenience and are
in no way to be construed as a limitation on
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<PAGE>
the scope of the particular Articles or Sections to which they refer.
20.09 Notices
-------
Notices, statements and other communications to be given under the terms of
this Agreement shall be in writing, and shall be either: (i) delivered by hand
against receipt; or (ii) sent by certified or registered mail, postage prepaid,
return receipt requested or (iii) sent by either a nationally utilized overnight
delivery service or by "facsimile" machine (provided that, in either case, a
confirmatory copy is thereafter sent by certified or registered mail):
To Owner:
--------
c/o Host Marriott, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department
with a copy to:
--------------
c/o Host Marriott, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Asset Management Department 72-1AD-2
To Management Company:
---------------------
Residence Inn by Marriott, Inc.
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department - Hotel Operations
Residence Inn by Marriott, Inc.
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<PAGE>
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Residence Inn, Vice President, Finance
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice which is properly mailed, as described
above, shall be deemed to have been served as of three (3) business days after
said posting.
20.10 Environmental Matters
---------------------
A. Management Company shall indemnify, defend and hold Owner and its
Affiliates (and their respective directors, officers, shareholders, employees
and agents) harmless from and against all loss, cost, liability and damage
(including, without limitation, engineers' and attorneys' fees and expenses, and
the cost of Litigation) arising from the placing, discharge, leakage, use or
storage of Hazardous Materials, in violation of applicable Environmental Laws,
on the Site or in the Inn by Management Company's employees, representatives or
agents during the Term of this Agreement. Regardless of whether or not a given
Hazardous Material is permitted on the Site under applicable Environmental Law,
Management Company shall only bring on the Site such Hazardous Materials as are
needed in the normal course of business of the Inn.
B. In the event of the discovery of Hazardous Materials on any portion of
the Site or in the Inn during the Term of this Agreement, Owner shall (except to
the extent such removal is
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<PAGE>
Management Company's responsibility pursuant to Section 20.10.A) promptly remove
(if required by applicable Environmental Law) such Hazardous Materials, together
with all contaminated soil and containers, and shall otherwise remedy the
problem in accordance with all Environmental Laws. Owner shall (except to the
extent that the removal of such Hazardous Materials is Management Company's
responsibility pursuant to Section 20.10.A) indemnify, defend and hold
Management Company and its Affiliates (and their respective directors, officers,
shareholders, employees and agents) harmless from and against all loss, cost,
liability and damage (including, without limitation, engineers' and attorneys'
fees and expenses, and the cost of Litigation) arising from the presence of
Hazardous Materials on the Site or in the Inn.
C. All costs and expenses of the removal of Hazardous Materials from the
Site or the Inn pursuant to Section 20.10.B, and of the aforesaid compliance
with all Environmental Laws, and any amounts paid to Management Company pursuant
to the indemnity set forth in the last sentence of Section 20.10.B, shall be
paid by Owner from its own funds, not as a Deduction nor from the FF&E Reserve,
and shall be treated as an expenditure by Owner pursuant to Section 8.03.
20.11 Estoppel Certificates
---------------------
Each party to this Agreement shall at any time and from time to time, upon
not less than thirty (30) days' prior notice from the other party, execute,
acknowledge and deliver to such other
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<PAGE>
party, or to any third party specified by such other party, a statement in
writing: (i) certifying that this Agreement is unmodified and in full force and
effect (or if there have been modifications, that the same, as modified, is in
full force and effect and stating the modifications); (ii) stating whether or
not to the best knowledge of the certifying party (a) there is a continuing
default by the non-certifying party in the performance or observance of any
covenant, agreement or condition contained in this Agreement, or (b) there shall
have occurred any event which, with the giving of notice or passage of time or
both, would become such a default, and, if so, specifying each such default or
occurrence of which the certifying party may have knowledge; and (iii) stating
such other information as the non-certifying party may reasonably request. Such
statement shall be binding upon the certifying party and may be relied upon by
the non-certifying party and/or such third party specified by the non-certifying
party as aforesaid. The obligations set forth in this Section 21.11 shall
survive Termination (that is, each party shall, on request, within the time
period described above, execute and deliver to the non-certifying party and to
any such third party a statement certifying that this Agreement has been
terminated).
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<PAGE>
20.12 Trade Area Restriction
----------------------
Neither Management Company nor any of its Affiliates shall own, build,
franchise, manage or operate any Restricted Inn, under the "Residence Inn by
Marriott" or "Residence Inn" brand name, within the Restricted Area during the
period from the Effective Date through the sixth (6th) anniversary of the
Effective Date.
20.13 Arbitration
-----------
A. In the event of a dispute between Owner and Management Company with
respect to any issue of fact specifically mentioned herein as a matter to be
decided by arbitration, such dispute shall be determined by arbitration as
provided in this Section 20.13.
B. Disputes shall be resolved in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then pertaining. The
decision of the arbitrators shall be binding, final and conclusive on the
parties.
C. Owner and Management Company shall each appoint and pay all fees of a
fit and impartial person as arbitrator who shall have had at least ten (10)
years' recent professional experience in the general subject matter of the
dispute. Notice of such appointment shall be sent in writing by each party to
the other, and the arbitrators so appointed, in the event of their failure to
agree within thirty (30) days after the appointment of the second arbitrator
upon the matter so submitted, shall appoint a
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<PAGE>
third arbitrator. If either Owner or Management Company shall fail to appoint
an arbitrator, as aforesaid, for a period of twenty (20) days after written
notice from the other party to make such appointment, then the arbitrator
appointed by the party having made such appointment shall appoint a second
arbitrator and the two so appointed shall, in the event of their failure to
agree upon any decision within thirty (30) days thereafter, appoint a third
arbitrator. If such arbitrators fail to agree upon a third arbitrator within
forty-five (45) days after the appointment of the second arbitrator, then such
third arbitrator shall be appointed by the American Arbitration Association from
its qualified panel of arbitrators, and shall be a person having at least ten
(10) years' recent professional experience as to the subject matter in question.
The fees of the third arbitrator and the expenses incident to the proceedings
shall be borne equally between Owner and Management Company, unless the
arbitrators decide otherwise. The fees of respective counsel engaged by the
parties, and the fees of expert witnesses and other witnesses called for the
parties, shall be paid by the respective party engaging such counsel or calling
or engaging such witnesses.
D. The decision of the arbitrators shall be rendered within thirty (30)
days after appointment of the third arbitrator. Such decision shall be in
writing and in duplicate, one counterpart thereof to be delivered to Owner and
one to Management Company. A judgment of a court of competent jurisdiction may
be entered
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<PAGE>
upon the award of the arbitrators in accordance with the rules and statutes
applicable thereto then obtaining.
20.14 Entire Agreement
----------------
This Agreement, together with other writings signed by the parties which
are expressly stated to be supplemental hereto and together with any instruments
to be executed and delivered pursuant to this Agreement, constitutes the entire
agreement between the parties, and supersedes all prior written and oral
understandings. This Agreement may be amended only by a writing signed by both
parties hereto.
END OF ARTICLE XX
155
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
Attest: OWNER:
HMH PROPERTIES, INC.
By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend
-------------------- ----------------------------
Attest: MANAGER:
RESIDENCE INN BY MARRIOTT, INC.
By: /s/ Peter J. Swift By: /s/ James Sullivan
------------------- -------------------
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<PAGE>
<TABLE>
<CAPTION>
EXHIBITS ATTACHED TO ORIGINAL AGREEMENT
<S> <C>
Exhibit "A" Location of Inn and Legal Description
Exhibit "A-1" Number of Suites and Brief Description of Facilities; Priority
Basis; Performance Termination Threshold; Loan Priority Basis
(number set forth in (i) of Definition); Revenue Index Threshold
Exhibit "B" Form of Accounting Period Statement
Exhibit "C" [Intentionally Deleted]
Exhibit "D" Map of Restricted Area
Exhibit "D-1" Narrative Description of Restricted Area
Exhibit "E" Proprietary Marks which will remain the property
of Owner after Termination
Exhibit "F" Title Encumbrances; Existing CC&R's (separately describing those
charges thereunder which will be treated as capital expenditures
under Section 8.03); Existing Ground Lease (if applicable);
Existing Mortgages (if any)
</TABLE>
157
<PAGE>
Exhibit 10.14(iv)
FAIRFIELD INN
MANAGEMENT AGREEMENT
This Management Agreement ("Agreement") is executed as of the
25th day of September, 1993 ("Effective Date"), by HMH PROPERTIES, INC.
("Owner"), a Delaware corporation, with a mailing address at 10400 Fernwood
Road, Bethesda, Maryland 20817 and FAIRFIELD FMC CORPORATION ("Management
Company"), a Delaware corporation, with a mailing address at 10400 Fernwood
Road, Bethesda, Maryland 20817.
R E C I T A L S :
A. Owner is the owner of the Hotel (as defined and more fully described in
Section 1.01) which is located as set forth on Exhibit "A" hereto; and
B. Owner desires to have Management Company manage and operate the Hotel,
and Management Company is willing to perform such services for the account of
Owner on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
<PAGE>
ARTICLE I
DEFINITION OF TERMS
-------------------
1.01 Definition of Terms
-------------------
The following terms when used in this Agreement shall have the meanings
indicated:
"Accounting Period" shall mean each of the four (4) week accounting periods
-----------------
which are used in Management Company's accounting system, except that an
Accounting Period may occasionally contain five (5) weeks when necessary to
conform Management Company's accounting system to the calendar.
"Accounting Period Statement" shall have the meaning set forth in Section
---------------------------
5.03.
"Additional Invested Capital" shall mean the cumulative total, as of any
---------------------------
given date during the Term, of the following: (i) any expenditures made by
Owner in response to a Building Estimate, pursuant to Section 8.03, and any
expenditures by Owner pursuant to Section 20.10.C; (ii) any contributions by
Owner to the FF&E Reserve (beyond the funding described in Section 8.02.B and
E); other than those contributions which are reimbursed to Owner under Section
8.02.F; (iii) any payments by Owner with regard to special assessments or impact
fees, pursuant to Section 13.01.B(2) or 13.01.B.(3); and (iv) any costs,
expenses and charges which are described on Exhibit "F" hereto as "Capital
Charges" pursuant to Section 2.05.A. Owner shall give Management Company prompt
notice
-2-
<PAGE>
of any amounts it has provided funding for which constitute "Additional Invested
Capital" together with such evidence of funding as Management Company may
reasonably require.
"Affiliate" shall mean any individual or entity directly or indirectly
---------
through one or more intermediaries, controlling, controlled by or under common
control with a party. The term "control," as used in the immediately preceding
sentence, means, with respect to a corporation, the right to the exercise,
directly or indirectly, of fifty-one percent (51%) or more of the voting rights
attributable to the shares of the controlled corporation, and, with respect to
an entity that is not a corporation, the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of the
controlled entity.
"Agreement" shall have the meaning set forth in the Preamble.
---------
"Annual Operating Projection" shall have the meaning set forth in Section
---------------------------
9.03.
"Annual Operating Statement" shall have the meaning set forth in Section
--------------------------
9.01.
"Available Cash Flow" shall mean an amount, with respect to each Fiscal
-------------------
Year or portion thereof (prorated for any partial Fiscal Years) during the Term
of this Agreement, equal to the excess, if any, of Operating Profit over the sum
of: (i) the applicable Owner's Priority in such Fiscal Year; plus, (ii) the
-3-
<PAGE>
Base Management Fee; plus, (iii) Deferred Contingent Base Management Fees paid
to Manager in such Fiscal Year.
"Base Management Fee" shall mean, for each Fiscal Year (prorated for any
-------------------
partial Fiscal Years) during the Term of this Agreement, an amount equal to two
percent (2%) of Gross Revenues as payment to Management Company for Central
Office Services which are for the general benefit of the Fairfield Inn System.
"Building Estimate" shall have the meaning set forth in Section 8.03.A.
-----------------
"Capitalization Multiple" shall mean the number ten (10).
-----------------------
"Case Goods" shall mean furniture and furnishings used in the Hotel,
----------
including, without limitation: chairs, beds, chests, headboards, desks, lamps,
tables, television sets, mirrors, pictures, wall decorations and similar items.
"CC&R's" shall have the meaning set forth in Section 2.05.
------
"Central Office Services" shall mean certain services performed by
-----------------------
personnel not normally located at the Hotel and include corporate planning and
policy services, corporate financial planning, legislative and governmental
representation, corporate human resources and benefits planning, in-house legal
services and trademark protection relating to Proprietary Marks which are used
generally in the Fairfield Inn System. Any service which is defined as being
included within the term "Chain Services" shall not also be included within
"Central Office Services." The Central Office Services which are provided to
the Hotel shall be generally
-4-
<PAGE>
consistent with those Central Office Services which are provided to other
comparable Fairfield Inn hotels within the Fairfield Inn System.
"Chain Services" shall mean those certain services furnished to the Hotel
--------------
which are furnished generally on a central or regional basis to other hotels in
the Fairfield Inn System. Chain Services shall include: (i) central
operational support for rooms, food and beverage and engineering; central
training services; career development; management personnel relocation; central
safety and loss prevention services; marketing fund contributions; consumer
affairs; to the extent not charged or allocated directly to the Hotel as a
Deduction, the national and regional reservations system service and inventory
and revenue management services; centralized computer payroll and accounting
services; computer system development, support and operating costs; central
monitoring and management support from "line management" personnel such as area
managers; (ii) such additional central or regional services as are or may be,
from time to time, furnished for the benefit of hotels in the Fairfield Inn
System or in substitution for services now performed at individual hotels which
may be more efficiently performed on a group basis; provided, however, that
services not currently included in chain services pursuant to (i) and (ii) above
shall only be added to "Chain Services" if, and to the extent that such
services: (a) are not Central Office Services (it being understood that
Management Company's sole compensation for
-5-
<PAGE>
providing the Central Office Services shall be receipt of the Base Management
Fee); (b) are not services relating to non-routine work (it being understood
that the cost and expense of such non-routine services shall be Deductions as
set forth in paragraph 6 of the definition of Operating Profit); and (c) are
either (x) new services (i.e., not previously performed at or for the Hotel) or
(y) services which theretofore had been performed at the Hotel, but which can be
performed more efficiently and economically on a centralized, regional or other
basis.
[Moved from Section 11.03]
"Communications, Computer and Office Equipment" shall mean: the following
---------------------------------------------
equipment used in the Hotel and all ancillary equipment; (i) telephone; (ii) all
computer equipment and all ancillary equipment used in the Hotel or for the
benefit of the Hotel; (iii) miscellaneous office equipment such as copiers,
postage meters, etc. (iv) television sets; and (v) audio-visual equipment.
"Coverage Ratio" shall mean the number one and three-tenths (1.3).
--------------
"Cure Payment" shall have the meaning set forth in Section 4.03.B.
------------
"Deductions" shall have the meaning set forth in the definition of
----------
Operating Profit.
"Default" shall have the meaning set forth in Section 16.01.
-------
-6-
<PAGE>
"Deferred Contingent Base Management Fees" shall mean an amount equal to
----------------------------------------
(a) the sum of all unpaid Base Management Fees deferred in accordance with
Section 5.02.B(i) less (b) all sums paid to Management Company in accordance
with the provisions of Section 5.02.B(ii).
"Effective Date" shall have the meaning set forth in the Preamble.
--------------
"Employee Claims" shall mean any and all claims (including all fines,
---------------
judgments, penalties, costs, Litigation and/or arbitration expenses, attorneys'
fees and expenses, and costs of settlement with respect to any such claim) by
any employee or employees of Management Company against Owner or Management
Company with respect to the employment at the Hotel of such employee or
employees. "Employee Claims" shall include, without limitation, the following:
(i) claims which are eventually resolved by arbitration, by Litigation or by
settlement; (ii) claims which also involve allegations that any applicable
employment-related contracts affecting the employees at the Hotel have been
breached; and (iii) claims which involve allegations that one or more of the
Employment Laws has been violated; provided, however, that "Employee Claims"
shall not include claims for worker compensation benefits (which shall be
governed by Article XII hereof) or for unemployment benefits.
"Employment Laws" shall mean any federal, state or local law (including the
---------------
common law), statute, ordinance, rule, regulation,
-7-
<PAGE>
order or directive with respect to employment, conditions of employment,
benefits, compensation, or termination of employment that currently exists or
may exist at any time during the Term of this Agreement, including, but not
limited to, Title VII of the Civil Rights Act of 1964, the Age Discrimination in
Employment Act, the Workers Adjustment and Retraining Notification Act, the
Occupational Safety and Health Act, the Immigration Reform and Control Act of
1986, the Polygraph Protection Act of 1988 and the Americans With Disabilities
Act of 1990.
"Environmental Laws" shall mean: any federal, state or local law, rule or
------------------
regulation (both present and future) dealing with the use, generation,
treatment, storage, disposal or abatement of Hazardous Materials, including, but
not limited to, (i) the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601 et seq., as amended; (ii) the regulations
-- ---
promulgated thereunder, from time to time; (iii) all federal, state and local
laws, rules and regulations (now or hereafter in effect) dealing with the use,
generation, treatment, storage, disposal or abatement of Hazardous Materials;
and (iv) the regulations promulgated thereunder, from time to time.
"Event of Default" shall have the meaning set forth in Section 16.02.
----------------
"Existing CC&R's" shall have the meaning set forth in Section 2.05.A.
---------------
-8-
<PAGE>
"Existing Ground Leases" shall mean the ground leases which are listed on
----------------------
Exhibit "F", but for purposes of this Agreement shall not include any amendments
or modifications thereof after the Effective Date.
"Existing Mortgages" shall mean the Mortgages which are listed on Exhibit
------------------
"F", but for purposes of this Agreement shall not include any amendments or
modifications thereof after the Effective Date.
"FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case Goods,
----
signage and equipment at the Hotel (including, without limitation, facsimile
machines, Communications, Computer and Office Equipment, Shuttle Vehicles,
audio-visual equipment, and all computer and other equipment needed for the
reservation system and the property management system, and all other electronic
systems needed for the Hotel from time to time, as well as similar systems based
on other technologies which may be developed in the future.
"FF&E Estimate" shall have the meaning set forth in Section 8.02.C.
-------------
"FF&E Reserve" shall have the meaning set forth in Section 8.02.A.
------------
"Fairfield Inn System" shall mean the hotel system managed by Management
--------------------
Company (or one or more of its Affiliates) which is, as of the Effective Date,
operated under the trade name "Fairfield Inn".
-9-
<PAGE>
"Fairfield Inn System Fee" shall during any given Fiscal Year (or portion
------------------------
thereof), be equal to three percent (3%) of Gross Revenues. It shall mean an
amount paid to Management Company, in each Fiscal Year (prorated for any partial
Fiscal Years) during the Term of this Agreement, as payment to Management
Company for certain services ("System Services") which are for the benefit of
the Fairfield Inn System, are not Central Office Services or Chain Services, and
are performed by personnel not normally located at the Hotel. System Services
shall be limited to divisional executive management, divisional financial
planning, divisional contracting, divisional product planning and development,
divisional human resources planning and development, divisional marketing
planning, and services of Management Company's technical and operational experts
making periodic inspection and consultation visits to the Hotel (but
specifically excluding "line management" personnel such as area managers and
services of Management Company's Architecture and Construction personnel who
provide design, procurement construction or related services).
"Fairfield Inn System Standards" shall mean both the operational standards
------------------------------
(for example, staffing, amenities offered to guests, advertising, etc.) and the
physical standards (for example, the quality, condition and utility of the FF&E,
etc.) generally required of hotels in the Fairfield Inn System such operational
and physical standards may fluctuate from time to time (provided, however, that
the Fairfield Inn System Standards shall in no event
-10-
<PAGE>
be lower than the operational and physical standards, as of the date in
question, of comparable hotels in comparable hotel systems).
"First Notice" shall have the meaning set forth in Section 6.02.
------------
"Fiscal Year" shall mean Management Company's Fiscal Year which now ends at
-----------
midnight on the Friday closest to December 31 in each calendar year; the new
Fiscal Year begins on the Saturday immediately following said Friday. Any
partial Fiscal Year between the Effective Date and the commencement of the first
full Fiscal Year and any partial Fiscal Year between the end of the last full
Fiscal Year and the Termination of this Agreement, shall constitute a separate
Fiscal Year. If Management Company's Fiscal Year is changed in the future,
appropriate adjustment to this Agreement's reporting and accounting procedures
shall be made; provided, however, that no such change or adjustment shall alter
the Term of this Agreement, or in any way reduce the distributions of Operating
Profit or other payments due to Owner hereunder, or otherwise significantly and
adversely affect Owner's rights or obligations under this Agreement.
"Fixed Asset Supplies" shall mean supply items included within "Property
---------------------
and Equipment" under the Uniform System of Accounts, including linen, cleaning
supplies, china, glassware, tableware, uniforms, and similar items.
-11-
<PAGE>
"Force Majeure" shall mean acts of God, acts of war, civil disturbance,
-------------
governmental action (including the revocation or refusal to grant Licenses ,
where such revocation or refusal is not due to the fault of the party whose
performance is to be excused for reasons of Force Majeure), strikes, lockouts,
fire, unavoidable casualties or any other causes beyond the reasonable control
of either party (excluding, however: (i) lack of financing; or (ii) general
economic and/or market factors).
"Foreclosure" shall mean any exercise of the remedies available to a
-----------
Holder, upon a default under the Secured Loan held by such Holder, which results
in a transfer of title to or possession of the Hotel. The term "Foreclosure"
shall include, without limitation, any one or more of the following events, if
they occur in connection with a default under a Secured Loan: (i) a transfer by
judicial foreclosure; (ii) a transfer by deed in lieu of foreclosure; (iii) the
appointment by a court of a receiver to assume possession of the Hotel; (iv) a
transfer of either ownership or control of the Owner, by exercise of a stock
pledge or otherwise; (v) if title to the Hotel is held by a tenant under a
ground lease, an assignment of the tenant's interest in such ground lease; or
(vi) any similar judicial or non-judicial exercise of the remedies held by the
Holder.
"Foreclosure Date" shall mean the date on which title to or possession of
----------------
the Hotel is transferred by means of a Foreclosure.
-12-
<PAGE>
"Future CC&R's" shall have the meaning set forth in Section 2.05.B.
-------------
"GDP Deflator" shall mean the "Gross Domestic Product Implicit Price
------------
Deflator" issued from time to time by the United States Bureau of Economic
Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not
at such time so prepared and published, any comparable index selected by Owner
and reasonably satisfactory to Management Company (a "Substitute Index") then
prepared and published by an agency of the Government of the United States,
appropriately adjusted for changes in the manner in which such index is prepared
and/or year upon which such index is based. Any dispute regarding the selection
of the Substitute Index or the adjustments to be made thereto shall be settled
by arbitration in accordance with Section 20.13. Except as otherwise expressly
stated herein, whenever a number or amount is required to be "adjusted by the
GDP Deflator", or similar terminology, such adjustment shall be equal to the
percentage increase or decrease (except that, for purposes of this Agreement,
the GDP Deflator shall not be decreased below its level as of the Effective
Date) in the GDP Deflator which is issued for the month in which such adjustment
is to be made (or, if the GDP Deflator for such month is not yet publicly
available, the GDP Deflator for the most recent month for which the GDP Deflator
is publicly available) as compared to the GDP Deflator which was issued for the
month in which the Effective Date occurred.
-13-
<PAGE>
"Gross Revenues" shall mean, for each Fiscal Year during the Term of this
--------------
Agreement, all revenues and receipts of every kind derived from operating the
Hotel and parts thereof, including, but not limited to: income (from both cash
and credit transactions), before commissions and discounts for prompt or cash
payments, from rental of rooms, stores, offices, meeting, exhibit or sales space
of every kind; license, lease and concession fees and rentals (not including
gross receipts of licensees, lessees and concessionaires); income from vending
machines; health club membership fees; food and beverage sales; wholesale and
retail sales of merchandise (other than proceeds from the sale of FF&E no longer
necessary to the operation of the Hotel, which shall be deposited in the FF&E
Reserve as set forth in Section 8.02.D hereof); service charges, to the extent
not distributed to the employees at the Hotel as gratuities; and proceeds, if
any, from business interruption or other loss of income insurance; provided,
however, that Gross Revenues shall not include the following: gratuities to
Hotel employees; federal, state or municipal excise, sales, use or similar taxes
collected directly from patrons or guests or included as part of the sales price
of any goods or services; insurance proceeds (other than proceeds from business
interruption or other loss of income insurance); condemnation proceeds (other
than for a temporary taking); any proceeds from any Sale of the Hotel or from
the refinancing of any debt encumbering the Hotel; proceeds from the disposition
of FF&E no longer
-14-
<PAGE>
necessary for the operation of the Hotel; or interest which accrues on amounts
deposited in either the FF&E Reserve or any escrow accounts which are
established in accordance with Section 13.01.C; or Cure Payments.
"Ground Lease Rental" shall mean the annual rental, as of the Effective
-------------------
Date, under the Existing Ground Lease.
"Ground Lessor" shall mean the landlord under the Existing Ground Lease.
-------------
"Hazardous Materials" shall mean and include any substance or material
-------------------
containing one or more of any of the following: "hazardous material", "hazardous
waste", "hazardous substance", "regulated substance", "petroleum", "pollutant",
"contaminant", or "asbestos" as such terms are defined in any applicable
Environmental Law in such concentration(s) or amount(s) as may impose clean-up,
removal, monitoring or other responsibility under the Environmental Laws, as the
same may be amended from time to time, or which may present a significant risk
of harm to guests, invitees or employees of the Hotel.
"Holder" shall mean any holder, from time to time, of any Secured Loan.
------
"Hotel" shall mean the hotel, containing approximately the number of guest
-----
rooms which are set forth on Exhibit "A-1" hereto, which Owner owns at the
location specified in the Recitals; the term "Hotel" shall include the Site, the
improvements built
-15-
<PAGE>
thereon, and all FF&E, Fixed Asset Supplies and Inventories installed therein.
"Hotel Retention" shall have the meaning set forth in Section 12.03 hereof.
---------------
"Impositions" shall mean all real estate and personal property taxes,
-----------
levies, assessments and similar charges (other than those which are specifically
excluded pursuant to Section 13.01.B) including, without limitation, the
following: all water, sewer or similar fees, rates, charges, excises or levies;
license fees; permit fees; inspection fees and other authorization fees and
other governmental charges of any kind or nature whatsoever, whether general or
special, ordinary or extraordinary, foreseen or unforeseen, or hereinafter
levied or assessed of every character (including all interest and penalties
thereon), which at any time during or in respect of the Term of this Agreement
may be assessed, levied, confirmed or imposed on Owner with respect to the Hotel
or otherwise in respect of or be a lien upon the Hotel. Impositions shall not
include any income or franchise taxes payable by Owner or Management Company.
Impositions shall include any taxes, levies, assessments and similar charges
which may be enacted by the applicable governmental authority in lieu of, or in
complete or partial substitution for, Impositions.
"Incentive Management Fee" shall mean, for each Fiscal Year, during the
------------------------
Term of this Agreement the payments which shall be made to Management Company,
as compensation (in addition to the Base
-16-
<PAGE>
Management Fee and Fairfield Inn System Fee) to Management Company for its
services under this Agreement, in the amount of fifty percent (50%) of the
Available Cash Flow in each Fiscal Year (or portion thereof); provided, however,
that the cumulative Incentive Management Fee received by Management Company,
from the Effective Date through any given point in time during the Term of this
Agreement, shall not exceed twenty percent (20%) of the cumulative Operating
Profit from the Effective Date through such point in time; provided further,
however, that in no event shall the aforesaid cumulative limitation require
Management Company to refund to Owner any Incentive Management Fees which were
paid in a previous Fiscal Year and which were within such limitation as of the
time when they were paid.
"Initial Term" shall have the meaning set forth in Section 4.01.
------------
"Intellectual Property" shall mean: (i) all Software; and (ii) all
---------------------
manuals, brochures and directives issued by Management Company to its employees
at the Hotel regarding the procedures and techniques to be used in operating the
Hotel.
"Interest Rate" shall mean an annual rate of interest equal to the Prime
-------------
Rate (as adjusted from time to time) plus three hundred (300) basis points;
provided, however that in no event shall the Interest Rate exceed the maximum
rate which is permitted under applicable Legal Requirements.
-17-
<PAGE>
"Inventories" shall mean "Inventories" as defined in the Uniform System of
-----------
Accounts, such as provisions in storerooms, refrigerators, pantries and
kitchens; beverages in wine cellars and bars; other merchandise intended for
sale; fuel; mechanical supplies; stationery; and other expensed supplies and
similar items.
"Legal Requirements" shall mean any federal, state or local law, code,
------------------
rule, ordinance, regulation or order of any governmental authority or agency
having jurisdiction over the business or operation of the Hotel or the matters
which are the subject of this Agreement, including, without limitation, the
following: (i) any building, zoning or use laws, ordinances, regulations or
orders, and (ii) Environmental Laws.
"License" shall mean any license, permit, decree, act, order, authorization
-------
or other approval or instrument which is necessary in order to operate the Hotel
in accordance with Legal Requirements and pursuant to the Fairfield Inn System
Standards and otherwise in accordance with this Agreement.
"Litigation" shall mean: (i) any cause of action commenced in a federal,
----------
state or local court; and (ii) any claim brought before an administrative agency
or body (for example, without limitation, employment discrimination claims).
"Loan Priority Basis" shall mean the sum total, as of any given point in
-------------------
time during the Term, of (i) the amount shown on Exhibit "A"-1; plus (ii) any
Additional Invested Capital expended
-18-
<PAGE>
by Owner, less the amount of any condemnation award received by Owner and not
applied to restoration of the Hotel pursuant to Section 15.02.B..
"Management Analysis Report" shall mean a report which, if required
--------------------------
pursuant to Section 9.01.B, shall be prepared by Management Company and
delivered to Owner (at the time of the delivery of the Annual Operating
Statement), which shall include a description regarding the preceding Fiscal
Year, of: (i) the Hotel's operating performance, including significant
variations from the Annual Operating Projection; (ii) an analysis of any
significant variation of the actual average daily rate and occupancy from what
was set forth in the Annual Operating Projection; (iii) a review of the
competitive hotel market; (iv) a description of any significant promotional or
other marketing programs in which the Hotel participated, which were not
anticipated as part of the Annual Operating Projection for the preceding Fiscal
Year; (v) a calculation of the Revenue Index, and Operating Profit less Ground
Lease Rental, if any, compared to the Performance Termination Threshold; (vi)
such other supplementary information as shall be reasonably necessary to an
understanding of the financial results of the Hotel; and (vii) a reasonably
detailed report setting forth the components of Chain Services, the amounts
billed for each such component during the Fiscal Year in question and the method
of allocation for each such component, but only if Owner requests such a report
in writing not later than the date
-19-
<PAGE>
which is thirty days (30) prior to the date upon which Management Company must
deliver the Annual Operating Statement to Owner.
"Management Company" shall have the meaning set forth in the Preamble.
------------------
"Management Fees" shall mean the Fairfield Inn System Fee, the Base
---------------
Management Fee, Deferred Contingent Base Management Fees and the Incentive
Management Fee.
"Marriott" shall mean Marriott International, Inc., a Delaware corporation
--------
having an address at 10400 Fernwood Road, Bethesda, Maryland 20817.
"Mortgage" shall mean any security instrument which encumbers real
--------
property, including, without limitation, mortgages, deeds of trust, security
deeds and similar instruments.
"Net Operating Profit" shall mean the greater of: (i) the excess, if any,
--------------------
of Operating Profit over Owner's Priority; or (ii) zero (0).
"Non-Disturbance Agreement" shall mean an agreement, in recordable form in
-------------------------
the jurisdiction in which the Hotel is located, executed and delivered by a
Holder (which agreement shall by its terms be binding upon all Subsequent
Owners), for the benefit of Management Company, pursuant to which, in the event
such Holder or any Subsequent Owner comes into possession of or acquires title
to the Hotel either at or following a Foreclosure, such Holder and all
Subsequent Owners shall (x) recognize Management Company's rights under this
Agreement, and (y) shall not name Management Company as
-20-
<PAGE>
a party in any Foreclosure action or proceeding, and (z) shall not disturb
Management Company in its right to continue to manage the Hotel pursuant to this
Agreement; provided, however, that at such time, (i) this Agreement has not
expired or otherwise been earlier terminated in accordance with its terms; (ii)
there are no outstanding Events of Default by Management Company, and (iii) no
material event has occurred and no material condition exists which, after notice
or the passage of time or both, would entitle Owner to terminate this Agreement.
"Operating Accounts" shall have the meaning set forth in Section 9.02.
------------------
"Operating Loss" shall mean a negative Operating Profit.
--------------
"Operating Profit" shall mean, in each Fiscal Year during the Term of this
----------------
Agreement, the excess of Gross Revenues over the following deductions
("Deductions") incurred by Management Company or its Affiliates (or, in the case
of any Owner Deductions, by Owner) in operating the Hotel:
1. The cost of sales including, without limitation, salaries, wages,
employee benefits, Employee Claims (except to the extent specifically set forth
to the contrary in Section 14.01.C or 14.01.D), payroll taxes and other costs
related to Hotel employees (the foregoing costs shall not include salaries and
other employee costs of executive personnel of Manager who do not work at the
Hotel on a regular basis except that the foregoing costs shall include the
allocable portion of the salary and other employee
-21-
<PAGE>
costs of area or regional personnel the cost of whom are not included within the
definitions of Chain Services or System Services assigned to a "cluster" of
hotels which includes the Hotel; provided, however, that such allocable portion
of salary and employee costs shall be a Deduction only to the extent that they
relate directly to the Hotel);
2. Departmental expenses; administrative and general expenses; the cost
of Hotel advertising, marketing and business promotion; all utility costs
including but not limited to the cost of heat, light, power and water; and the
cost of routine repairs, maintenance and minor alterations which are treated as
Deductions under Section 8.01;
3. The cost of Inventories and Fixed Asset Supplies consumed in the
operation of the Hotel;
4. A reasonable reserve for uncollectible accounts receivable as
determined by Management Company;
5. All reasonable costs and fees of independent professionals or other
third parties who are retained by Management Company to perform services
required or permitted hereunder; provided that Management Company will notify
Owner at least thirty (30) days in advance of any proposed expenditure under
this paragraph 5 which is in excess of Twenty-five Thousand Dollars
($25,000.00), subject to adjustment by the GDP Deflator on each anniversary of
the Effective Date, and which was not specifically identified in the Annual
Operating Projection, and Management
-22-
<PAGE>
Company shall consider in good faith any comments which Owner may have with
respect to such proposed expenditure; and provided, further, that if such
expenditure involves immediately-needed repair work to the Hotel or if immediate
action is otherwise required, the above-described requirement regarding thirty
(30) days' prior notice shall be modified to require whatever notice period is
reasonable under the circumstances (including notification after the fact, if
necessary);
6. The reasonable cost and expense of technical consultants and
operational experts who are employees of Management Company or one of its
Affiliates, and who perform specialized services in connection with non-routine
Hotel work; provided, however, that the costs and expenses so incurred shall
only be Deductions to the extent such costs and expenses are reasonable and
competitively priced, as compared to similar work done by outside consultants or
experts; and provided, further, that Management Company will notify Owner at
least thirty (30) days in advance of any proposed expenditure under this
paragraph 6 which is in excess of Twenty-five Thousand Dollars ($25,000),
subject to adjustment by the GDP Deflator on each anniversary of the Effective
Date, and which was not specifically identified in the Annual Operating
Projection, and Management Company shall consider in good faith any comments
which Owner may have with respect to such proposed expenditure; and provided,
further, that if immediate action is otherwise in the best interests of the
Hotel required, the above-
-23-
<PAGE>
described requirement regarding thirty (30) days' prior notice shall be modified
to require whatever notice period is reasonable under the circumstances
(including notification after the fact, if necessary);
7. The Fairfield Inn System Fee;
8. Subject to Section 11.03.B, the Hotel's pro rata share of costs and
expenses incurred by Management Company (or its Affiliate) in providing Chain
Services;
9. The Hotel's pro rata share of costs and expenses incurred in
connection with sales, advertising, marketing and/or promotional programs
developed for or within the Fairfield Inn System, such as (without limitation)
the INNsiders Club, where such costs and expenses are not deducted as either
departmental expenses under paragraph 2 above or as Chain Services under
paragraph 8 above;
10. Insurance costs and expenses as provided in Section 12.04.B;
11. Taxes, if any, payable by or assessed against Management Company
related to this Agreement or to Management Company's operation of the Hotel
(exclusive of Management Company's income taxes or franchise taxes) and all
Impositions assessed against the Hotel;
12. Amounts which are required to be transferred into the FF&E Reserve
in accordance with the provisions of Section 8.02;
13. Lease payments pursuant to leases of Shuttle
-24-
<PAGE>
Vehicles and of Communications, Computer and Office Equipment (to the extent
Management Company has not elected to make such payments from the FF&E Reserve);
14. All sums charged to the Hotel for room reservations obtained for
the Hotel through the reservation system used by Management Company, but in no
event in excess of the amount charged, on a per reservation basis for similarly
computed activity to other Hotels in the Fairfield Inn System using such
reservation system.
15. The reimbursement to Owner of the amount of any Owner Deductions;
16. The payment to Management Company of the cost of preparing the
Management Analysis Report pursuant to Section 9.01.B; and
17. Such other costs and expenses incurred by Management Company or its
Affiliates (not including the costs and expenses of providing the Central Office
Services) as are specifically provided for elsewhere in this Agreement or are
otherwise reasonably necessary for the proper and efficient operation of the
Hotel (including, without limitation, the costs and expenses of all functions
described in Section 2.03, to the extent such costs and expenses are not already
treated as Deductions elsewhere in this definition of Operating Profit, unless,
and to the extent that, any such costs and expenses are specifically stated not
to be Deductions under any provision of this Agreement).
-25-
<PAGE>
The term "Deductions" shall not include (i) debt service payments pursuant
to any Secured Loan, nor (ii) rental payments pursuant to any ground lease of
the Site; both of the foregoing shall be paid by Owner from its own funds, and
not from Gross Revenues nor from the FF&E Reserve. In no event shall the costs
or expenses of providing the Central Office Services be treated as Deductions,
or otherwise be reimbursed out of Gross Revenues; it being the intent of the
parties that all such costs and expenses are to be paid by Management Company
(or its Affiliates) from its own funds.
"Owner" shall have the meaning set forth in the Preamble. Subject to
-----
compliance with Articles XVIII and XIX of this Agreement, the term "Owner" shall
include all successors and assigns of the entity identified as the "Owner" in
the Preamble.
"Owner Deductions" shall mean amounts paid by Owner with respect to: (i)
----------------
premiums for the insurance policies described in Section 12.05; and (ii)
reasonable costs of any negotiations or Litigation with respect to any contest
of Impositions, as described in Section 13.01.A; provided, however, that to the
extent Owner spends in excess of Five Thousand Dollars ($5,000.00) with respect
to any contest of Impositions and has not received Management Company's consent
as provided in Section 13.01.A, then any amount in excess of such Five Thousand
Dollars ($5,000.00) or such greater amount as may be approved by Management
Company, shall not be considered an Owner Deduction. Except as specifically set
forth in
-26-
<PAGE>
Section 8.02.F.2, the amount of any Owner Deductions paid by Owner shall be
reimbursed to Owner (as a Deduction) in the Fiscal Year in which they were paid.
Owner shall give Management Company prompt notice of any amounts it has paid
which constitute "Owner Deductions" together with such evidence of payments as
Management Company may reasonably require.
"Owner's Distribution" shall mean, with respect to each Fiscal Year or
--------------------
portion thereof during the Term of this Agreement, funds distributed to Owner
in accordance with the provisions of Section 5.02 hereof which shall equal
Operating Profit less any Base Management Fee, Deferred Contingent Base
Management Fees and Incentive Management Fees paid to Management Company.
"Owner's Priority" shall mean, with respect to each Fiscal Year (prorated
----------------
for any partial Fiscal Years) during the Term of this Agreement, a dollar amount
equal to ten percent (10%) of the Priority Basis for that Fiscal Year.
If the Hotel has an Existing Ground Lease, the annual rental payments for such
- ------------------------------------------------------------------------------
Fiscal Year (prorated for any partial Fiscal Year) shall be added to the Owner's
- --------------------------------------------------------------------------------
Priority.
- --------
"Performance Termination Threshold" shall mean, with respect to each full
---------------------------------
Fiscal Year during the Term of this Agreement, the dollar amount set forth on
Exhibit "A-1", plus eight percent (8%) of any Additional Invested Capital
expended by Owner pursuant to clause (ii) of the definition of the Priority
Basis; provided, however, that the aforesaid dollar amount shall be adjusted, as
of
-27-
<PAGE>
the tenth (10th) anniversary of the Effective Date, in an amount equal to
seventy-five percent (75%) of the percentage change in the GDP Deflator between
the Effective Date and the tenth (10th) anniversary of the Effective Date;
provided that, in no event will the Performance Termination Threshold be lower
than it is as of the Effective Date and provided further, that in calculating
the aforesaid change in the GDP Deflator during such period of time, both: (i)
the two (2) years having the highest annual rates of change in the GDP Deflator
during such period; and (ii) the two (2) years having the lowest annual rates of
change in the GDP Deflator during such period, shall be ignored, and such
percentage change in the GDP Deflator between the Effective Date and the tenth
(10th) anniversary of the Effective Date shall be recalculated, for purposes of
this Agreement, using as the rate of change in the GDP Deflator for each of such
four (4) excluded years (i.e., those years described in clauses (i) and (ii),
above) the average annual rate of change in the GDP Deflator during the
non-excluded years; and provided further that, to the extent that certain
portions of the Performance Termination Threshold, as of immediately prior to
such tenth (10th) anniversary adjustment, reflect expenditures which qualify as
Additional Invested Capital, the aforesaid GDP Deflator adjustment shall be
calculated with respect to such portions by using, as the base, not the GDP
Deflator as of the Effective Date, but rather the GDP Deflator as of either the
date
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<PAGE>
of such expenditure or (if construction is involved) the date on which the items
in question were substantially completed.
"Post-Foreclosure Decision Date" shall have the meaning set forth in
------------------------------
Section 6.06.
"Prime Rate" shall mean the "prime rate" as published in the "Money Rates"
----------
section of The Wall Street Journal; however, if such rate is, at any time during
-----------------------
the Term, no longer so published, the term "Prime Rate" shall mean the average
of the prime interest rates which are announced, from time to time, by the three
(3) largest banks (by assets) headquartered in the United States which publish a
"prime rate."
"Priority Basis" shall mean the sum total, as of any given point in time
--------------
during the Term, of: (i) the dollar amount shown on Exhibit "A-1"; plus (ii)
any Additional Invested Capital expended by Owner; provided that each
expenditure of Additional Invested Capital shall be added to the Priority Basis
at such date or dates as the expenditure occurred, taking into consideration at
what point (or points) during such Fiscal Year such expenditure occurred; less
(iii) the amount of any condemnation award received by Owner and not applied to
restoration of the Hotel pursuant to Section 15.02.B.
"Proprietary Marks" shall mean all trademarks, trade names, symbols, logos,
-----------------
slogans, designs, insignia, emblems, devices, service marks and distinctive
designs of buildings and signs, or combinations thereof, which are used to
identify hotels in the
-29-
<PAGE>
Fairfield Inn System. The names "Marriott", "Fairfield Inn" and "INNsiders
Club", and any of the foregoing used in conjunction with other words or names,
are examples, without limitation of Proprietary Marks. The term "Proprietary
Marks" shall include all present and future Proprietary Marks, whether they are
now or hereafter owned by Management Company or one of its Affiliates, and
whether or not they are registered under the laws of the United States or any
other country. The term "Proprietary Marks" shall also include all trade names,
trademarks, symbols, logos, designs, etc. which are used in connection with the
operation of the Hotel during the Term (such as, without limitation, the names
of the restaurants and lounges). Notwithstanding the foregoing, those trade
names, trademarks, symbols, logos, designs, etc., which are specifically set
forth on Exhibit "E" hereto shall be deemed to be "Proprietary Marks" only for
so long as this Agreement is in effect, and such Proprietary Marks shall revert
to the exclusive control of Owner as of the date of Termination.
"Proprietary Signage" shall mean any signage used in connection with the
-------------------
Hotel (including both interior and exterior signage, and including billboards
and other signage not located on the Site) which contains one or more
Proprietary Marks; any signage which contains the word "Marriott" or "Fairfield
Inn" shall automatically be deemed to be Proprietary Signage.
"Prospectus" shall have the meaning set forth in Section 20.05.
----------
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<PAGE>
"Qualified Lender" shall mean any Holder, from time to time, of any
----------------
Qualified Loan with respect to which Management Company has received a written
notice (pursuant to Section 20.09 of this Agreement) stating: (i) the name and
address of such Holder; and (ii) that such Holder is a "Qualified Lender"
pursuant to the terms of this Agreement.
"Qualified Loan" shall mean any Secured Loan in which the initial principal
--------------
amount, as of the date such Secured Loan is incurred, when added to the current
principal balance of all existing Secured Loans as of that date, is less than or
equal to the greater of the following:
(i) Seventy percent (70%) of the Loan Priority Basis; or
(ii) the result obtained by (a) dividing the Operating Profit for the
thirteen (13) most recent full Accounting Periods by the Coverage
Ratio; then, (b) multiplying the result of clause (a) by the
Capitalization Multiple; or
(iii) the existing balance of any Secured Loans encumbering the Hotel
immediately prior to the date of the incurrence of such Qualified
Loan, plus commercially reasonable Transaction Costs associated with
such refinancing, up to an amount equal to four percent (4%) of the
principal amount of such Qualified Loan.
In addition, regardless of whether or not the above test set forth in clauses
(i), (ii) and (iii) is satisfied, the existing (as of the Effective Date)
balance of any Secured Loan which is secured by any Existing Mortgage shall be
deemed to be a "Qualified Loan."
"Qualified Loan Acceleration" shall mean the acceleration of the
---------------------------
indebtedness incurred pursuant to any Qualified Loan, as a
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<PAGE>
result of a default under the terms and conditions of such Qualified Loan.
"Renewal Terms" shall have the meaning set forth in Section 4.01.
-------------
"Restricted Area" shall mean that area which is shown on the map attached
---------------
hereto as Exhibit "D", as described in the narrative which is set forth in
Exhibit "D-1".
"Restricted Hotel" shall mean any hotel whose size, facilities and market
----------------
positioning are such that, if such hotel had been operated by Management Company
or one of its Affiliates as of the Effective Date it would have been operated as
a member of the Fairfield Inn System (that is, as a limited service hotel, as
opposed to full service hotel or one of the other limited service brands also
operated by Affiliates of Management Company i.e. Residence Inn or Courtyard by
Marriott. The term "Restricted Hotel" shall not include any one or more of the
following: (i) any existing (as of the Effective Date) member of the Fairfield
Inn System which is within the Restricted Area; (ii) any Courtyard by Marriott
(or other similar moderate-price lodging product) or any Residence Inn by
Marriott (or other similar extended-stay lodging product); (iii) any full
service, suite or resort hotel; (iv) any hotel or hotels which are members of a
chain of hotels (provided that such chain has a minimum of four (4) or more
hotels in operation), all or substantially all (but in no event less than four
(4) hotels) of which is acquired by, or merged with, or
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franchised by or joined through marketing agreement with, Management Company or
one of its Affiliates (or the operation of which is transferred to Management
Company or one of its Affiliates); (v) any future lodging product developed by
Management Company or one of its Affiliates which is not a lodging product which
would have been included within the Fairfield Inn System, as such system existed
as of the Effective Date; or (vi) any existing non-Marriott hotel within the
Restricted Area which is specifically designated on Exhibit D-1 as not being a
Restricted Hotel.
"Revenue Data Publication" shall mean Smith's STAR Report, a monthly
------------------------
publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee,
or an alternative source, reasonably satisfactory to both parties, of data
regarding the Revenue Per Room of hotels in the general trade area of the Hotel.
The "competitive set" for the Hotel shall be determined (with periodic
adjustments) by Management Company, subject to Owner's approval (such approval
not to be unreasonably withheld). If such Smith's STAR Report is discontinued
in the future, or ceases (in the reasonable opinion of either Owner or
Management Company) to be a satisfactory source of data regarding the Revenue
Per Room of various hotels in the general trade area of the Hotel, Management
Company shall select an alternative source, subject to Owner's approval (such
approval not to be unreasonably withheld). If the parties fail to agree on
either such competitive set or such alternative source, as the case may be,
within a reasonable period
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of time, the matter shall be resolved by arbitration pursuant to Section 20.13.
"Revenue Index" shall mean that fraction which is equal to (a) the Revenue
-------------
Per Room for the Hotel, divided by (b) the average Revenue Per Room for the
hotels in the Hotel's competitive set (including the Hotel), as set forth in the
Revenue Data Publication.
"Revenue Index Threshold" shall mean the number set forth on Exhibit "A-1"
-----------------------
hereto. However, if the entry of a new hotel into the Hotel's competitive set
(or the removal of a hotel from such competitive set) causes significant
variations in the Revenue Index which do not reflect the Hotel's true position
in the relevant market, appropriate adjustments shall be made to the Revenue
Index Threshold by mutual consent of Owner and Management Company (neither such
consent to be unreasonably withheld).
"Revenue Per Room" shall mean, (i) the term "revenue per room" as defined
----------------
by the Revenue Data Publication; or (ii) if the Revenue Data Publication is no
longer being used (as more particularly set forth in the definition of "Revenue
Data Publication"), the aggregate gross room revenues of the hotel in question
for a given period of time divided by the total room nights for such period. If
clause (ii) of the preceding sentence is being used, a "room" shall be a hotel
guest room which is keyed as a single unit, and shall include rooms which are
temporarily unavailable due to: (i) maintenance or (ii) ongoing renovation work.
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"Sale/Leaseback Transaction" shall have the meaning set forth in Section
--------------------------
6.10.
"Sale of the Hotel" shall mean any sale, assignment, transfer or other
-----------------
disposition, for value or otherwise, voluntary or involuntary, of Owner's title
to the Hotel or the Site (either fee or leasehold title, as the case may be),
but shall not include a collateral assignment intended to provide security for a
loan. For purposes of this Agreement, a "Sale of the Hotel" shall also include a
lease (or sublease) of the entire Hotel or Site. The phrase "Sale of the
Hotel" shall also include any sale, transfer, or other disposition, for value or
otherwise, in a single transaction or a series of related transactions, of the
controlling interest in Owner. If Owner is a corporation, the phrase
"controlling interest" shall mean the right to exercise, directly or indirectly,
fifty percent (50%) or more of the voting rights attributable to the shares of
Owner (through ownership of such shares or by contract). If Owner is not a
corporation, the phrase "controlling interest" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of Owner. Notwithstanding the foregoing, the term "Sale
of the Hotel" shall not include any sale, assignment, transfer or other
disposition of the Hotel or the Site by Owner to an Affiliate of Owner.
"Second Notice" shall have the meaning set forth in Section 6.02.
-------------
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"Secured Loan" shall mean and include: (i) any indebtedness secured by a
------------
Mortgage encumbering the Hotel or all or any part of Owner's interest therein;
and (ii) all amendments, modifications, supplements and extensions of any such
Mortgage.
"Settlement Threshold Amount" shall mean the greater of (i) One Hundred
---------------------------
Thousand Dollars ($100,000) (as adjusted by the GDP Deflator); or (ii) a dollar
amount (to be re-determined whenever reasonably necessary) equal to the highest
amount paid in a representative sampling of Employee Claims, which have been
settled within the preceding twelve (12) months where each of such settlements
can be reasonably characterized as being (i) within the normal course of
business at the Hotel, and (ii) within the range of similar settlements at other
hotels comparable to the Hotel. Any dispute between the parties as to the
appropriate amount under clause (ii) of the preceding sentence shall be
submitted to arbitration under Section 20.13.
"Shuttle Vehicles" shall mean any car, van, bus or similar motor vehicle
----------------
used primarily for the purpose of transporting Hotel guests.
"Site" shall mean the parcel or parcels of land described in Exhibit "A"
----
attached hereto.
"Soft Goods" shall mean all fabric, textile and flexible plastic products
----------
(not including items which are classified as "Fixed Asset Supplies" under the
Uniform System of Accounts)which are used in furnishing the Hotel, including,
without limitation:
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carpeting, drapes, bedspreads, wall and floor coverings, mats, shower curtains
and similar items.
"Software" shall mean all computer software and accompanying documentation
--------
(including all future upgrades, enhancements, additions, substitutions and
modifications thereof), other than computer software which is commercially
available, which are used by Management Company in connection with the property
management system, the reservation system and all future electronic systems
developed by Management Company for use in the Hotel.
"Subsequent Owner" shall mean any individual or entity which acquires title
----------------
to or possession of the Hotel at or through a Foreclosure.
"Term" shall mean the Initial Term plus all Renewal Terms.
----
"Termination" shall mean the expiration or sooner cessation of this
-----------
Agreement.
"Transaction Costs" shall mean, with respect to the incurring of any
-----------------
Secured Loan, all normal transaction costs (to the extent actually incurred)
including, without limitation, the following: state and local transfer taxes;
escrow fees; recording costs; Mortgage recording taxes; costs of any survey
required by the Holder; reasonable fees of the Holder's outside attorneys and
accountants; appraisal fees; title insurance premiums; financing costs
(including "points"); reasonable attorneys' fees of Owner in connection with
such Secured Loan; environmental inspection, testing and reporting fees to the
extent required by the Holder;
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and brokerage commissions (provided that no such brokerage commissions shall be
recognized as "Transaction Costs" hereunder if they are made to a person or
entity affiliated with Owner, to the extent (if any) that such payments exceed
the normal customary amounts).
"Uniform System of Accounts" shall mean the Uniform System of Accounts for
--------------------------
Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of
New York City, Inc.
"Working Capital" shall mean assets which are used in the day-to-day
---------------
operation of the Hotel's business, including, without limitation, amounts kept
in petty cash funds, amounts deposited in operating bank accounts, receivables,
prepaid expenses and funds expended to purchase Inventories, less accounts
payable and accrued current liabilities.
END OF ARTICLE I
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ARTICLE II
APPOINTMENT OF MANAGEMENT COMPANY
---------------------------------
2.01 Appointment
-----------
Owner hereby appoints and employs Management Company as Owner's exclusive
agent to supervise, direct and control the management and operation of the Hotel
for the Term provided in Article IV. Management Company accepts said
appointment and agrees to manage the Hotel during the Term of this Agreement in
accordance with the terms and conditions hereinafter set forth. The performance
of all activities by Management Company hereunder shall be for the account of
Owner.
2.02 Delegation of Authority
-----------------------
Except as otherwise specifically set forth in this Agreement, Hotel
operations shall be under the exclusive supervision and control of Management
Company which, except as otherwise specifically provided in this Agreement,
shall be responsible for the proper and efficient operation of the Hotel.
Management Company shall have discretion and control, free from interference,
interruption or disturbance, but in all respects subject to the provisions of
this Agreement, in all matters relating to management and operation of the
Hotel, including, without limitation, the following: charges for rooms and
commercial space; credit policies; food and beverage prices and services;
employment
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policies; granting of leases, parking services, Licenses and concessions for
shops and agencies within the Hotel (provided that the term of any such lease,
License or concession shall not exceed the Term of this Agreement; and provided
further that Owner's consent shall be required prior to the execution by
Management Company of any such lease, License or concession which (i) has a
term of more than five (5) years; or (ii) involves more than one thousand
(1,000) square feet of space within the Hotel); receipt, holding and
disbursement of funds; maintenance of bank accounts; procurement of Inventories,
supplies and services; participation in marketing, advertising plans, promotion
and publicity; and, generally, all activities necessary for operation of the
Hotel.
2.03 Operational Standards
---------------------
In accordance with the Fairfield Inn System Standards and the other terms
of this Agreement, Management Company shall, in connection with the Hotel,
perform each of the following functions (provided that in all cases, except as
otherwise specifically set forth in this Agreement, the costs and expenses of
performing such functions shall be Deductions):
A. Obtain and keep in full force and effect, either in its own name on
behalf of Owner or in Owner's name, as may be required by the Legal
Requirements, any and all Licenses necessary for the operation of the Hotel,
to the extent the same is within the control of Management Company (or, if same
is not within the
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control of Management Company, Management Company shall use all due diligence
and reasonable efforts to obtain and keep same in full force and effect).
B. Recruit, employ, supervise, direct and (when appropriate) discharge the
employees at the Hotel.
C. Establish and revise, as necessary, administrative policies and
procedures, including policies and procedures for the control of revenue and
expenditures, for the purchasing of supplies and services, for the control of
credit, and for the scheduling of maintenance, and verify that the foregoing
procedures are operating in a sound manner.
D. Plan, execute, and supervise repairs and maintenance at the Hotel.
E. Procure (as agent for Owner) all Fixed Asset Supplies and Inventories.
F. Maintain the Operating Accounts.
G. Prepare and deliver Accounting Period Statements, Annual Operating
Statements, Annual Operating Projections, Building Estimates, FF&E Estimates,
and such other budgets and reports as are required by this Agreement.
H. Establish prices, rates and charges for services provided in the Hotel,
including room rates.
I. As agent for Owner, negotiate and enter into leases, concessions and
Licenses for shops and other facilities within the Hotel.
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J. Administer the leases, concessions and Licenses for shops and other
facilities within the Hotel (whether entered into pursuant to subsection I,
above, or otherwise).
K. Provide the Central Office Services and the Chain Services.
L. Provide, or cause to be provided, risk management services relating to
the types of insurance required to be obtained or provided by Management Company
under this Agreement, provided that the costs and expenses of providing such
services are to be paid as described in Section 12.04.B.
M. Reasonably cooperate with Owner concerning (i) disputes with any Holder
regarding the Hotel, (ii) contests of Impositions and Legal Requirements, and
(iii) adjustments of insurance claims and condemnation awards involving the
Hotel.
N. Reasonably cooperate (provided that Management Company shall not,
except as otherwise specifically set forth in Section 6.01, be obligated to
enter into any amendments of this Agreement) with Owner in any attempt(s) by
Owner to effectuate a Sale of the Hotel (provided that nothing herein shall
affect the provisions of Section 20.05), or to obtain any Secured Loan. If
given reasonable notice, such cooperation shall include, without limitation:
(i) answering any reasonable questions by prospective purchasers and Holders;
(ii) preparing lists and schedules of leases, concessions, FF&E, Fixed Asset
Supplies, Inventories, and similar items (but specifically excluding customer
lists); and (iii) making such
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certifications and representations to Owner, to such purchasers and to such
Holders, regarding the Hotel and the operation thereof, as Owner may reasonably
request (taking into account the extent of Management Company's control and
responsibility provided for hereunder). Owner shall promptly reimburse
Management Company, from its own funds and not as a Deduction, for the
reasonable costs and expenses incurred by Management Company in connection with
any actions necessary to comply with the requirements of this Section 2.03.N,
provided that such actions are not otherwise required under other provisions of
this Agreement.
O. Arrange for and supervise public relations and advertising, and prepare
annual marketing plans.
P. Endeavor to manage the timing of expenditures to replenish Inventories,
Fixed Asset Supplies, payments on accounts payable and collections of accounts
receivable, so as to avoid or minimize any cash deficits with respect to Hotel
operations, which deficits would otherwise require additional funding of Working
Capital by Owner.
Q. Comply with all provisions in the Existing Ground Lease and in any
Existing Mortgages which are by their terms applicable to the operation of the
Hotel; provided, however, that all practices and procedures used by Management
Company in the operation of the Hotel as of the Effective Date shall be deemed
to be in compliance with the Existing Ground Lease and all Existing Mortgages;
and provided further, that if either the Ground Lessor
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or any Holder under an Existing Mortgage shall, from time to time, notify
Management Company that it has determined that certain practices and procedures
which are used by Management Company in the operation of the Hotel are not in
compliance with the provisions of the Existing Ground Lease or such Existing
Mortgage (as the case may be), Management Company shall promptly alter such
practices and procedures to ensure such compliance; and provided further, that
if such compliance would require work by Management Company which is beyond the
normal course of Hotel operations, or would impose additional financial burdens
on the Hotel which are beyond the normal course of Hotel operations, Owner (from
its own funds, not as a Deduction) shall compensate Management Company for such
work and such additional burdens.
2.04 Limitations on Authority
------------------------
A. Notwithstanding anything in Section 2.02 or elsewhere in this
Agreement to the contrary (unless otherwise stated in this Section 2.04), and in
addition to the various other provisions of this Agreement which prohibit
Management Company from taking certain actions or which allow certain actions
only if Owner's consent thereto has been obtained, Management Company shall not,
without the prior written approval of Owner, which approval Owner may withhold
in its sole discretion, perform any of the following
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actions in connection with the Hotel and on behalf of or burdening Owner:
1. Acquiring any land or interest therein;
2. Acquiring any capital assets or interest therein except (i) items
in the approved Building Estimate, and (ii) FF& E, Fixed Asset Supplies and
Inventories (to the extent the same constitute capital assets) in the ordinary
course of business as expressly provided for in this Agreement;
3. Financing, refinancing or mortgaging of any portion of the Hotel
or the revenue due to Owner therefrom;
4. Selling (other than dispositions of FF&E, Fixed Asset Supplies
and Inventories in the ordinary course of business as expressly provided for in
this Agreement), leasing (other than as expressly provided for in this
Agreement, including without limitation, Section 2.02 of this Agreement), or
other transferring of, or the pledging or placing of any lien or encumbrance on,
any part of the Hotel;
5. In the event of a total or partial condemnation, consenting to
any award or participating in any condemnation proceeding, except as expressly
provided for in this Agreement;
6. Entering into, modifying or terminating any lease, concession or
License, except to the extent permitted under Section 2.02;
7. Adjusting any claim or settling any Litigation which (a) is not
covered by any of the insurance policies described in
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Article XII and is not an Employee Claim, and which would result in a Deduction
or payment in excess of Five Hundred Thousand Dollars ($500,000) in any Fiscal
Year, as adjusted by the GDP Deflator, or (b) would impose on Owner any material
liability or obligation other than the payment of money, or would require Owner
to make any material admission; or
8. Adjusting any claim, under applicable property insurance
policies, regarding injury or damage to the Hotel or its contents, where the
estimated cost of restoration is in excess of One Million Dollars ($1,000,000),
as adjusted by the GDP Deflator.
2.05 Covenants, Conditions or Restrictions
-------------------------------------
A. As of the Effective Date, there are existing covenants, conditions,
restrictions and/or agreements, including reciprocal easements or cost-sharing
arrangements (all of the foregoing types of encumbrances on the Hotel, or
agreements relating to the Hotel, whether existing as of the Effective Date or
not, shall be collectively referred to as "CC&R's"; those CC&R's which are in
existence as of the Effective Date shall be referred to in this Agreement as
"Existing CC&R's"). Management Company hereby gives its consent to all Existing
CC&R's. Except as otherwise specifically set forth to the contrary in Exhibit
"F" hereto, all costs, expenses and charges which are imposed on the Hotel under
the Existing CC&R's shall be paid from Gross Revenues as Deductions. Those
certain costs, expenses and charges which are
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described on Exhibit "F" hereto as "capital charges" shall be paid by Owner,
from its own funds, and all such payments shall be treated for purposes of this
Agreement as Additional Invested Capital expended by Owner.
B. CC&R's which are entered into, or become encumbrances on the Hotel
and/or the Site, after the Effective Date shall be referred to in this Agreement
as "Future CC&R's". Owner agrees that it will give Management Company, for
Management Company's prior approval, written notice of its intention to execute
any Future CC&R's, such notice to be reasonably in advance of the execution
thereof. Owner covenants that, during the Term of this Agreement, there will
not be (unless Management Company has given its prior written consent thereto)
any Future CC&R's affecting the Site or the Hotel: (i) which purport to impose
any material financial obligations on the Hotel; (ii) which would prohibit or
limit Management Company from operating the Hotel, including cocktail lounges,
restaurants and other facilities customarily a part of or related to a
first-class limited service hotel, in accordance with the Fairfield Inn System
Standards; or (iii) which would allow Hotel facilities (for example, parking
spaces) to be used by persons other than guests, invitees or employees of the
Hotel.
C. All financial obligations imposed on Owner or on Management Company or
on the Hotel pursuant to any Future CC&R's shall be paid by Owner from its own
funds, and not from Gross
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Revenues or from the FF&E Reserve, unless Management Company has given its prior
written consent to such Future CC&R's. Management Company agrees that it will
not unreasonably withhold its consent to any such Future CC&R's; provided,
however, that Management Company shall be entitled to withhold its consent in
its discretion if a proposed Future CC&R would have a material impact on the
operation of the Hotel, as described in clauses (i), (ii) or (iii) of Section
2.05.B. Upon receipt of such consent from Management Company, such sums shall
be Deductions in computing Operating Profit.
D. Owner shall not waive any protections which benefit the Hotel pursuant
to existing restrictive covenants without the prior written consent of
Management Company which consent shall not be unreasonably withheld, conditioned
or delayed.
2.06 Licenses and Permits
--------------------
Owner agrees that, upon request by Management Company, it will sign
promptly and without charge applications for Licenses.
END OF ARTICLE II
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ARTICLE III
OWNERSHIP OF THE HOTEL
----------------------
3.01 Ownership of the Hotel
----------------------
A. Each party acknowledges that the status of title to the Site and to
the Hotel is as described on Exhibit "F" hereto; neither party will hold the
other party responsible for any defects in said status of title, and each party
hereby releases the other party from all claims stemming from any such defects.
B. Owner hereby covenants that, throughout the Term of this Agreement, it
will not change the status of title to the Site from that which is described on
Exhibit "F" hereto, except that Owner shall have the right either (i) to
effectuate a Sale of the Hotel in accordance with Article XIX, or (ii) to
encumber the Site and the Hotel with the following:
1. Mortgages which are given to secure any one or more Qualified
Loans;
2. Liens for Impositions or other public charges not yet due or which
are being contested in good faith; and
3. Easements or other encumbrances (not including those described in
subsection 1 or 2 above) which do not adversely affect the operation of the
Hotel by Management Company and which are not prohibited pursuant to Section
2.05.B of this Agreement.
C. Owner shall indemnify, defend and hold Management Company and its
Affiliates harmless from claims by entities which have
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loaned money to Owner that Management Company (or any of such Affiliates) owes
any such lender all or any portion of such indebtedness.
D. Management Company shall indemnify, defend and hold Owner and its
Affiliates harmless from claims by entities which have loaned money to
Management Company that Owner (or any of such Affiliates) owes any such lender
all or any portion of such indebtedness.
END OF ARTICLE III
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ARTICLE IV
TERM
----
4.01 Term
----
A. The initial term ("Initial Term") of this Agreement shall commence with
the Effective Date and, unless sooner terminated as herein provided, shall
continue until the expiration of Fiscal Year 2013. The Term shall thereafter be
automatically renewed for each of three (3) successive periods of ten (10) full
Fiscal Years each ("Renewal Terms"), unless either: (i) Management Company, at
its option, notifies Owner, in accordance with Section 20.09, at any time within
the period of eighteen (18) months prior to the expiration of the Initial Term
or the then current Renewal Term, as the case may be, of its intention not to
renew; or (ii) Management Company has committed an Event of Default, and has
been notified by Owner of such Event of Default, under Article XVI of this
Agreement, as of the date of any such renewal.
B. If Management Company so notifies Owner of its intention not to renew
pursuant to Section 4.01.A, Management Company shall continue to manage the
Hotel pursuant to this Agreement until the termination date set forth in such
notice, provided that such termination date shall be: (i) no less than twelve
(12) months after the date of such notice; and (ii) in no event earlier than
the expiration date of the Initial Term or the then current Renewal Term, as the
case may be. Such termination date may be after the
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expiration of the Initial Term or the then current Renewal Term, as the case may
be, provided that the requirements of the preceding sentence are satisfied.
However, if Management Company has so notified Owner of its intention not to
renew, Owner may, at its option, by written notice to Management Company at
least ninety (90) days prior to the date on which Owner desires Termination to
occur, reduce the period of time prior to Termination to any shorter period of
time which Owner desires, provided that such shorter period of time shall be at
least the greater of: (a) ninety (90) days, (beginning as of the date of such
notice from Owner), or (b) the minimum period of time which Management Company
reasonably decides is prudent, given the requirements of the applicable
Employment Laws regarding employee discharges. In no event shall the fact that
Management Company may, pursuant to the preceding sentence, be managing the
Hotel after the expiration of the Initial Term or the then current Renewal Term,
as the case may be, be construed as an election by Management Company to renew
the Term, if Management Company has elected (in accordance with this Section
4.01) in writing not to so renew.
C. If Owner has the right, under the provisions of the Existing Ground
Lease, to elect to renew or extend the term of the Existing Ground Lease, Owner
shall so notify Management Company at least one hundred eighty (180) days (but
no more than one (1) year) prior to the expiration of the period within which
Owner is obligated to notify the Ground Lessor of its election to renew or
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extend the term of the Existing Ground Lease. Such notice from Owner shall
contain all of the relevant facts about the impending election to renew or
extend, including the length of the period of renewal or extension. Unless
Management Company notifies Owner, within a period of ninety (90) days after
receipt of the foregoing notice from Owner, that Management Company disapproves
the renewal or extension of the term of the Existing Ground Lease, Owner will,
by proper notice to the Ground Lessor, within the applicable time period under
the Existing Ground Lease, elect to renew or extend the term of the Existing
Ground Lease.
D. If, after proper notice from Owner in accordance with Section 4.01.C,
Management Company fails to disapprove the renewal or extension of the term of
the Existing Ground Lease, the Term of this Agreement shall be deemed to be
automatically extended to the later of: (i) the expiration of the term of the
Existing Ground Lease, as renewed or extended in accordance with Section 4.01.C;
or (ii) the date on which the Term of this Agreement would otherwise have
expired absent this sentence. If, in order to comply with the preceding
sentence, it is necessary for Management Company to waive its option not to
renew with respect to one or more Renewal Terms, such waiver shall be deemed to
have been given; however, Management Company shall retain the right not to renew
(as more particularly described in Section 4.01 A) as to any portion of such
Renewal Term(s) which would occur after the expiration of the term of the
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Existing Ground Lease, as renewed or extended in accordance with Section 4.01.C.
E. If, after proper notice from Owner in accordance with Section 4.01.C,
Management Company disapproves the renewal or extension of the term of the
Existing Ground Lease, the Term of this Agreement shall be deemed to be
automatically reduced to the earlier of: (i) the expiration of the term of the
Existing Ground Lease; or (ii) the date on which the Term of this Agreement
would otherwise have expired absent this sentence.
4.02 Actions to be Taken Upon Termination
------------------------------------
Upon a Termination of this Agreement, the following shall be applicable:
A. Management Company shall, within sixty (60) days after Termination of
this Agreement, prepare and deliver to Owner a final accounting statement with
respect to the Hotel, as more particularly described in Section 9.01 hereof,
along with a statement of any sums due from Owner to Management Company pursuant
hereto, dated as of the date of Termination. Within thirty (30) days after the
receipt by Owner of such final accounting statement, the parties will make
whatever cash adjustments are necessary pursuant to such final statement. The
cost of preparing such final accounting statement shall be a Deduction, unless
the Termination occurs as a result of an Event of Default by either party, in
which case the defaulting party shall pay such cost. Management Company
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and Owner acknowledge that there may be certain adjustments for which the
necessary information will not be available at the time of such final
accounting, and the parties agree to readjust such amounts and make the
necessary cash adjustments when such information becomes available; provided,
however, that (unless there are ongoing disputes of which each party has
received notice) all accounts shall be deemed final as of one hundred eighty
(180) days after such Termination.
B. As of the date of the final accounting referred to in subsection A
above, Management Company shall release and transfer to Owner any of Owner's
funds which are held or controlled by Management Company with respect to the
Hotel, with the exception of funds to be held in escrow pursuant to Section
12.04, and Section 14.01.F. During the period between the date of Termination
and the date of such final accounting, Management Company shall pay (or reserve
against) all Deductions which accrued (but were not paid) prior to the date of
Termination, using for such purpose any Gross Revenues prior to the date of
Termination.
C. Management Company shall make available to Owner such books and
records respecting the Hotel (including those from prior years, subject to
Management Company's reasonable records retention policies) as will be needed by
Owner to prepare the accounting statements, in accordance with the Uniform
System of Accounts, for the Hotel for the year in which the Termination occurs
and for any subsequent year. Such books and records shall not include: (i)
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employee records which must remain confidential either under Legal Requirements
or under reasonable system-wide corporate policies of Management Company; (ii)
any Intellectual Property; or (iii) customer lists.
D. Management Company shall (to the extent permitted by Legal
Requirements) assign to Owner or any other manager employed by Owner to operate
and manage the Hotel, all Licenses for the Hotel which have been issued in
Management Company's name; provided that if Management Company has expended any
of its own funds in acquiring such Licenses or in transferring any such Licenses
to Owner, Owner shall reimburse Management Company therefor if it has not done
so already.
E. All Proprietary Signage shall be removed by Management Company from
the Hotel and from the Site (and from any locations other than the Site). The
cost of such removal shall be a Deduction, unless the Termination occurs either:
(i) as a result of an Event of Default by either party, in which case the
defaulting party shall pay the cost of such removal from its own funds, and not
as a Deduction; or (ii) as a result of Management Company's election not to
renew the Term, as of the expiration of either the Initial Term or any Renewal
Term (as the case may be), in which case Management Company shall pay the cost
of such removal from its own funds, and not as a Deduction.
F. Various other actions shall be taken, as described in this Agreement,
including, but not limited to, the actions
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described in Sections 7.01, 10.02, 10.03, 10.04, 12.04.B, and 14.01.F.
G. Management Company shall peacefully vacate and surrender the Hotel to
Owner.
The provisions of this Section 4.02 shall survive any Termination.
4.03 Performance Termination
-----------------------
A. Subject to the provisions of Section 4.03.B below, Owner shall have
the option to terminate this Agreement if:
1. With respect to any two (2) consecutive full Fiscal Years (not
including any Fiscal Year prior to Fiscal Year 1996), Operating Profit less the
amount of Ground Lease Rental, if applicable, for each of such two (2) Fiscal
Years is less than the Performance Termination Threshold; and
2. The Revenue Index of the Hotel during each of such two (2)
consecutive Fiscal Years is less than the Revenue Index Threshold; and
3. The fact that the Hotel is not meeting the tests set forth in
Section 4.03.A(1) and (2) is not the result of either (x) Force Majeure, or (y)
any major renovation of the Hotel. Such option to terminate shall be exercised
by serving written notice thereof on Management Company no later than sixty (60)
days after the receipt by Owner of the annual accounting under Section 9.01
hereof for the second (2nd) of the two (2) Fiscal Years
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referred to in Section 4.03.A(1). If Management Company does not elect to avoid
such Termination pursuant to Section 4.03.B below, this Agreement shall
terminate as of the end of the fourth (4th) full Accounting Period following the
date on which Management Company receives Owner's written notice of its intent
to terminate this Agreement; provided that such period of time shall be extended
as required by applicable Legal Requirements pertaining to the termination of
the employment of the employees at the Hotel. Owner's failure to exercise its
right to terminate this Agreement pursuant to Section 4.03.A with respect to any
given Fiscal Year shall not be deemed an estoppel or waiver of Owner's right to
terminate this Agreement with respect to subsequent Fiscal Years to which this
Section 4.03.A may apply.
B. Upon receipt of Owner's written notice of Termination under Section
4.03.A, Management Company shall have the option, to be exercised within sixty
(60) days after receipt of said notice, to avoid such Termination by paying
Owner an amount (the "Cure Payment") equal to one hundred five percent (105%) of
the amount by which Operating Profit less Ground Lease Rental, if any, for
either of the two (2) Fiscal Years in question (i.e., the two (2) Fiscal Years
referred to in Section 4.03.A(1)) was less than the Performance Termination
Threshold. Any such Cure Payment shall be accounted for as a fee to Owner in
connection with the avoidance of such Termination. In the event Management
Company makes a Cure Payment pursuant to this Section 4.03.B, the Fiscal Year
with
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respect to which such Cure Payment was made shall thereafter not be treated, for
purposes of subsequent elections by Owner pursuant to Section 4.03.A, as a
Fiscal Year in which the circumstances described in Section 4.03.A(1) have
occurred. If Management Company exercises such option to make such Cure
Payment, then the foregoing Owner's election to terminate this Agreement under
Section 4.03.A shall be cancelled and of no force or effect with respect to the
two (2) Fiscal Years in question and this Agreement shall not terminate. Such
cancellation, however, shall not affect the right of Owner, as to each
subsequent Fiscal Year to which Section 4.03.A applies, to again elect to
terminate this Agreement pursuant to the provisions of Section 4.03.A (which
subsequent election shall again be subject to Management Company's rights under
this Section 4.03.B). If Management Company does not exercise its option to
make the Cure Payment, then this Agreement shall be terminated as of the date
set forth in Section 4.03.A. Any Cure Payment which is paid by Management
Company pursuant to this Section 4.03.B shall not be recoverable by Management
Company. Any Cure Payment which is paid by Management Company pursuant to this
Section 4.03.B shall only operate to cancel Owner's election to terminate this
Agreement under Section 4.03.A, and shall not operate to cure any outstanding
Defaults by Management Company under Article XVI.
END OF ARTICLE IV
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ARTICLE V
COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS
-------------------------------------------------
5.01 Management Fees
---------------
A. In consideration of the services it provides pursuant to this
Agreement, Management Company shall retain the Management Fees. Owner's
Priority, the Base Management Fee, Deferred Contingent Base Management Fees, the
Fairfield Inn System Fee and the Incentive Management Fee shall be appropriately
prorated for any Partial Fiscal Year.
B. Notwithstanding the provisions of Article IX of this Agreement
permitting the consolidation of reports and co-mingling of certain funds with
other hotels owned by Owner, the Base Management Fee, Deferred Contingent Base
Management Fees, Fairfield Inn System Fee and Incentive Management Fee shall be
calculated based on the revenues generated by the Hotel and not on a
consolidated basis with any other hotels which may be owned by Owner.
5.02 Distribution of Operating Profit In each Fiscal Year, Operating
--------------------------------
Profit shall be distributed to Owner and Management Company in accordance with
the following priorities:
A. Owner shall first receive an amount equal to the lesser of: (i)
Owner's Priority; or (ii) Operating Profit.
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B. Management Company shall next receive (i) the Base Management Fee,
provided, however, that if, in any Fiscal Year, the Base Management Fee exceeds
Net Operating Profit, Management Company's right to receive the Base Management
Fee shall be deferred to the extent of such excess, and such deferred sums shall
become Deferred Contingent Base Management Fees; (ii) the Deferred Contingent
Base Management Fees; to the extent that Net Operating Profit is otherwise
sufficient for such purposes; and (iii) an amount equal to the Incentive
Management Fee.
C. Owner shall receive all Operating Profit remaining after the
distributions made pursuant to the preceding subparagraphs of this Section 5.02.
5.03 Accounting and Interim Payments
-------------------------------
A. On or before the twentieth (20th) day after the close of each
Accounting Period, Management Company shall deliver to Owner a reasonably
detailed accounting statement (the "Accounting Period Statement") in
substantially the form set forth in Exhibit "B" hereto. Upon Owner's written
request therefor, Management Company shall forward copies of any such Accounting
Period Statement to any Holders or Ground Lessors, at the addresses specified by
Owner. Such Accounting Period Statement shall set forth the results of the
operations of the Hotel for the preceding Accounting Period and for the Fiscal
Year-to-date, all in accordance with generally accepted accounting principles
applied on a consistent basis. Each
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Accounting Period Statement shall be accompanied by a statement, by either the
controller, assistant controller of the Hotel or other authorized financial
representative of Management Company, that, to the best of his or her knowledge
and belief, and subject to routine year-end audit and adjustment, such
Accounting Period Statement is true and correct in all material respects. Each
Accounting Period Statement shall include: (i) average rate and occupancy,
Gross Revenues, Operating Profit, Owner's Priority, the Management Fees, and the
interim Owner's Distribution; and (ii) comparisons with the categories for the
prior Fiscal Year. With each such Accounting Period Statement, Management
Company shall transfer any interim Owner's Distribution due to Owner, and shall
retain any interim Management Fees due to Management Company. Calculations and
payments of the Management Fees and the Owner's Distribution with respect to
each Accounting Period within a Fiscal Year shall be accounted for cumulatively.
B. Within seventy-five (75) days after the close of each Fiscal Year,
Management Company shall submit an Annual Operating Statement, as more fully
described in Section 9.01, for such Fiscal Year to Owner, which Annual Operating
Statement shall be controlling over the interim Accounting Period Statements.
Any adjustments or payments required by any such Annual Operating Statement
shall be made promptly by the parties. Operating Losses shall not be carried
forward or backward to subsequent or prior Fiscal Years.
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5.04 Accounting for Period Prior to Effective Date
---------------------------------------------
A. It shall be a general principle in the accounting for the Hotel that
all liabilities incurred and/or income generated prior to the Effective Date, or
properly allocated to the period prior to the Effective Date under generally
accepted accounting principles, shall be included in the Accounting Period
Statements and the Annual Operating Statements for the Hotel pursuant to this
Agreement for the Fiscal Year in which such liabilities are paid or such income
is received, provided, however, that the foregoing shall not be reflected in the
computation of Operating Profit for purposes of Section 4.03.
B. As of the Effective Date, the cash on hand at the Hotel shall be
deposited in one of the Operating Accounts set up by Management Company pursuant
to Section 9.02, and shall be treated as part of the Working Capital described
in Section 7.01.
END OF ARTICLE V
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ARTICLE VI
FINANCING OF THE HOTEL
----------------------
6.01 Amendments of Management Agreement
----------------------------------
A. If requested by any Qualified Lender or prospective Qualified Lender
(in which event such amendments shall take effect as of the funding of such
Qualified Loan), Management Company agrees to execute and deliver any amendment
of this Agreement which is reasonably required by such Qualified Lender or
prospective Qualified Lender, provided that Management Company shall be under no
obligation to amend this Agreement if the result of such amendment would be:
(i) to reduce, defer or delay the amount of any payment to be made to Management
Company hereunder; (ii) to materially increase Management Company's obligations
under this Agreement; (iii) to change the Term of this Agreement; (iv) to cause
the Hotel to be operated other than pursuant to the Fairfield Inn System
Standards; (v) to amend either Section 8.02 or Section 14.01; or (vi) to
otherwise materially affect Management Company's rights under this Agreement.
Any such amendment shall take effect as of the funding of such Qualified Loan.
B. In addition to the provisions of Section 6.01.A, if a Qualified Lender
or prospective Qualified Lender requests that Management Company enter into an
amendment of this Agreement, and if such amendment would impose additional
duties (for example, an increase in the reporting requirements or in the
record-keeping
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requirements, or adding the obligation to prepare parallel accounting statements
using a different fiscal year) on Management Company or would otherwise
adversely affect Management Company's rights under this Agreement, but not to
the degree described in clauses (i) through (vi) of Section 6.01.A, Management
Company hereby agrees that it will execute and deliver such requested amendment
of this Agreement, provided that Owner compensates Management Company for the
additional burden imposed by such amendment out of Owner's funds and not as a
Deduction. It is understood that the word "burden", as used in the preceding
sentence, shall encompass not only additional work to be performed by Management
Company, but also any adverse effect on the Incentive Management Fee which
would be caused by requiring increased services by third parties. Any dispute
as to whether Management Company is entitled to any compensation pursuant to
this Section 6.01.B, or as to the amount of such compensation, shall be resolved
by arbitration pursuant to Section 20.13.
C. Proposed amendments to this Agreement which are requested by any
Qualified Lender or prospective Qualified Lender, and which would affect the
insurance provisions set forth in Article XII, shall be governed exclusively by
Article XII.
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6.02 Notice and Opportunity to Cure
------------------------------
A. In the event of: (i) a Default by Owner in the performance or
observance of any of the terms and conditions of this Agreement; or (ii) any
other occurrence which entitles Management Company to terminate this Agreement,
and in the event that Management Company gives written notice thereof to Owner
pursuant to Article XVI of this Agreement, Management Company shall also give a
duplicate copy (herein referred to as the "First Notice") of such notice to each
Qualified Lender, at the address previously provided to Management Company. Any
such notice will be sent in the manner described in Section 20.09 hereof. In
addition, in the event that such Default is not cured within the applicable cure
period under Article XVI of this Agreement, and Management Company intends to
exercise its remedy of terminating this Agreement, Management Company shall send
a second notice (the "Second Notice"), to each Qualified Lender, at the same
address and in the same manner applicable to the First Notice stating Management
Company's intention to terminate this Agreement. Management Company shall
forbear from taking any action to terminate this Agreement for a period of
thirty (30) days after the service of the First Notice, and for an additional
period of thirty (30) days after the service of the Second Notice (if such
Second Notice is required, as set forth above).
B. In the event of a Default by Owner under the provisions of this
Agreement, Management Company agrees to accept performance by any Qualified
Lender with the same force and effect as if same were
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performed by Owner, in accordance with the provisions and within the cure
periods prescribed in this Agreement (except that each Qualified Lender shall
have such additional cure periods, not available to Owner, as are set forth in
this Section 6.02).
C. No notice given by Management Company to Owner shall be effective as a
notice under Article XVI of this Agreement unless the applicable duplicate
notice to each Qualified Lender which is required under Section 6.02.A (either
the First Notice or the Second Notice, as the case may be) has been given. It
is understood that any failure by Management Company to give such a duplicate
notice (either the First Notice or the Second Notice, as the case may be) to any
Qualified Lender shall not itself be a Default by Management Company under this
Agreement, but rather shall operate only to void the effectiveness of any such
notice by Management Company to Owner under Article XVI of this Agreement.
D. Except as specifically limited by this Section 6.02, nothing herein
shall preclude Management Company from exercising any of its rights or remedies
against Owner with respect to any Default by Owner under this Agreement.
6.03 Assignment of Management Agreement
----------------------------------
Owner shall have the right to collaterally assign to any Qualified Lender,
as additional security for the indebtedness evidenced by a Qualified Loan, all
of Owner's right, title and interest in and to this Agreement, including the
right to
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distributions payable to Owner pursuant to Article V thereof. If, pursuant to
any such assignment (or subsequent loan documentation entered into between Owner
and a Qualified Lender with a similar purpose), and provided that Management
Company has previously received a copy of such assignment and such subsequent
documentation, Management Company may receive (from time to time) a notice or
notices from such Qualified Lender directing Management Company to pay to such
Qualified Lender subsequent distributions under Article V of this Agreement
which would otherwise be payable to Owner, Management Company shall comply with
any such notice. Management Company shall continue to make payments in
compliance with any such notice from such Qualified Lender until Management
Company receives written instructions to the contrary from such Qualified
Lender. Owner hereby gives its consent to any such payments by Management
Company to such Qualified Lender which are in compliance with any such notice.
The foregoing consent by Owner shall be deemed to be irrevocable until the
entire Qualified Loan has been discharged, as evidenced either by the
recordation of a satisfaction or release executed by such Qualified Lender, or
by the delivery of a written statement to that effect from such Qualified Lender
to Management Company. Management Company shall comply with the direction set
forth in any such notice without any necessity to investigate why such Qualified
Lender sent such notice, or to confirm whether or not Owner is in fact in
default under the terms of such Qualified Loan. If Management Company
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receives such notices from more than one Qualified Lender, Management Company
shall (at its option) either (i) comply with the provisions of the notice sent
by the Qualified Lender whose Qualified Loan has the senior lien priority, or
(ii) institute Litigation for a declaratory judgment to determine to whom
payments under this Agreement shall be made (in which case, the costs and
expenses of such Litigation, including attorneys' fees, shall be Deductions).
6.04 Subordination of Management Agreement
-------------------------------------
A. This Agreement, and Management Company's right to continue to manage
and operate the Hotel pursuant to this Agreement, are and shall be subject and
subordinate to the lien of any Qualified Loan, (i.e., upon a Foreclosure of any
such Qualified Loan, such Qualified Lender, at its option, unless it has
otherwise agreed to the contrary in a Non-Disturbance Agreement, shall have the
right to terminate this Agreement). Notwithstanding the foregoing, during the
Term of this Agreement, all debt service (including increased or accelerated
payments after a default) payable with respect to any Qualified Loan shall be
paid exclusively from Owner's Distribution.
B. Section 6.04.A is intended to be, and is, fully effective and binding,
as between Management Company and any such Qualified Lender; however, Management
Company agrees to execute such confirmatory documentation (in recordable form in
the jurisdiction
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in which the Hotel is located) as such Qualified Lender shall reasonably
request.
C. Notwithstanding the possible termination of this Agreement which is
set forth in the foregoing provisions of this Section 6.04, it is understood
that, until such time as this Agreement is validly terminated either (i)
pursuant to the applicable provision of this Agreement, or (ii) pursuant to a
court order in connection with the Foreclosure of a Qualified Loan (assuming
that such termination does not breach any binding Non-Disturbance Agreement),
the Holder of each Qualified Loan will honor and recognize the right of
Management Company to operate the Hotel in accordance with this Agreement
(including the right of Management Company to collect all Gross Revenues and
make expenditures in accordance with this Agreement).
6.05 Non-Disturbance Agreement
-------------------------
A. Owner agrees that, in connection with the obtaining by Owner of any
Secured Loan or Secured Loans, from time to time, Owner will use good faith
reasonable efforts to obtain a Non-Disturbance Agreement from each Holder or
Holders. The phrase "good faith reasonable efforts" shall be determined by
reference to the following: (i) normal loan underwriting procedures and
practices (including those practices relating to non-disturbance agreements)
which are generally being implemented by entities which are making loans similar
to such Secured Loan, as of that point in
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time; and (ii) the concessions which Management Company is, as of that point in
time, reasonably prepared to make in order to satisfy the objectives of lenders
in connection with the lender-manager relationship after a Foreclosure. In no
event, however, shall the failure of Owner to obtain such a Non-Disturbance
Agreement affect or modify any of the responsibilities of Management Company
towards Qualified Lenders which are contained elsewhere in this Article VI.
B. Notwithstanding Section 6.05.A, Owner agrees that, prior to obtaining
any Qualified Loan, it will obtain from each prospective Holder or Holders
thereof a Non Disturbance Agreement pursuant to which Management Company's
rights under this Agreement will not be disturbed as a result of a loan default
stemming from non-monetary factors, which (i) relate to Owner, and (ii) are not
Defaults by Management Company under Article XVI of this Agreement .
6.06 Attornment
----------
A. Management Company agrees that, subject to the provisions of Section
6.06.B, upon a Foreclosure of any Qualified Loan, provided that this Agreement
has not expired or otherwise been earlier terminated in accordance with its
terms, Management Company shall attorn to any Subsequent Owner and shall remain
bound by all of the terms, covenants and conditions of this Agreement for the
balance of the remaining Term (including any Renewal Terms) with the same force
and effect as if such Subsequent Owner were the
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"Owner" under this Agreement; provided, however, that Management Company shall
be under no such obligation to so attorn, and, to the contrary, shall thereupon
have the right to terminate this Agreement on thirty (30) days' prior written
notice to both Owner and such Subsequent Owner: (i) if such Subsequent Owner
would not qualify as a permitted transferee under Section 19.01.A of this
Agreement; or (ii) unless such Subsequent Owner, within twenty (20) days after
the Foreclosure Date (or, in the event such Subsequent Owner acquires title to
the Hotel after the Foreclosure Date, within twenty (20) days after the date of
such acquisition of title to the Hotel), assumes all of the obligations of the
"Owner" under this Agreement which arise from and after the Foreclosure Date (or
such later date of acquisition of title to the Hotel), pursuant to a written
assumption agreement which shall be delivered to Management Company. Upon the
written request of any Qualified Lender, Management Company shall periodically
execute and deliver a statement, in a form reasonably satisfactory to such
Qualified Lender, reaffirming Management Company's obligation to attorn as set
forth in this Section 6.06.A.
B. It is understood by the parties that, in view of the fact that a
Qualified Lender will have the right to terminate this Agreement on a
Foreclosure under the provisions of Section 6.04, Management Company has an
interest in being informed, within a reasonable period of time after a Qualified
Loan Acceleration, of whether or not such Qualified Lender intends to exercise
such right
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of termination. Accordingly, if, by no later than that date (the
"Post-Foreclosure Decision Date") which is ninety (90) days after the date of
any Qualified Loan Acceleration, Management Company has not received a
Non-Disturbance Agreement executed by the Holder of such Qualified Loan,
Management Company shall, as of the Post-Foreclosure Decision Date and
thereafter, no longer be under any obligation to attorn (pursuant to the
provisions of Section 6.06.A) with respect to any Foreclosure of that Qualified
Loan, and Management Company shall have the option to terminate this Agreement,
by written notice to both Owner and the Holder of each existing Qualified Loan,
at any time within the sixty (60) day period immediately following the
Post-Foreclosure Decision Date.
6.07 No Modification or Termination of Agreement
-------------------------------------------
If the documents evidencing and securing a Qualified Loan require the
consent of the Qualified Lender to any amendment or modification of this
Agreement which materially affects such Qualified Lender, no such amendment or
modification of this Agreement shall be binding or effective unless such
Qualified Lender shall have consented in writing thereto.
6.08 Owner's Right to Finance the Hotel
----------------------------------
Owner shall have the right, from time to time, without Management Company's
prior consent or approval, to obtain Qualified
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Loans, and to encumber the Hotel with Mortgages securing such Qualified Loans.
Owner shall not, without the prior consent of Management Company, have the right
to obtain Secured Loans which are not Qualified Loans.
6.09 Cross Collateralization
-----------------------
A. In connection with obtaining Qualified Loans, Owner shall have
the right to cross collateralize the Hotel with other hotels which it owns in
the Fairfield Inn System, provided that:
1. the hotels to be the subject of the Qualified Loans are owned
by Owner or an Affiliate of Owner;
2. the Qualified Loans are secured only by hotels in the
Fairfield Inn System which are managed by Management Company or its Affiliates
and are not cross collateralized with any property other than hotels managed by
Management Company or its Affiliates in the Fairfield Inn System;
3. the basic terms and conditions of the Qualified Loans for the
Hotel and each other hotel securing such loan are intended to be part of an
integrated transaction; and
4. the closing of the Qualified Loans shall take place within
six (6) months of each other.
B. Any Mortgage secured by the Hotel shall contain a provision
requiring Holder to provide Management Company prior written notice of any
default under such Mortgage. Further, upon receipt of any notice of default by
such Holder, Owner shall
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forward a copy of such notice to Management Company within three (3) days
thereafter, in accordance with the notice provisions set forth in Section 20.09.
6.10 Sale/Leaseback Transactions
---------------------------
Any single transaction or related series of transactions in which (i)
Owner's interest in the Hotel is sold or transferred by the then Owner
("Seller") to a buyer ("Buyer"), and (ii) the Buyer (as "Landlord") leases the
Hotel to the Seller (as "tenant"), is hereby defined as a "Sale/Leaseback
Transaction". With respect to each Sale/Leaseback Transaction during the Term
of this Agreement, the following provisions will apply: (a) the sale or
transfer of the Hotel will be considered a Sale of the Hotel; however, the
Seller (as tenant under the aforesaid lease), not the Buyer, shall thereafter be
treated as the "Owner" for purposes of this Agreement; (b) the purchase price
will not be a Secured Loan, but any mortgage financing placed (either at the
time of the transaction or later) on the Buyer's interest in the Hotel will be
treated as a Secured Loan, and the proceeds of each such Secured Loan will be
aggregated with all outstanding Secured Loans which encumber either the Buyer's
interest in the Hotel or the Seller's leasehold interest in the Hotel, for
purposes of determining whether a given Secured Loan qualifies as a Qualified
Loan; (c) payments pursuant to such lease shall not be treated as Deductions,
except for Impositions and similar items which would have been
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treated as Deductions in the absence of such Sale/Leaseback Transaction; and (d)
all subsequent sales, transfers or assignments of either Buyer's interest in the
Hotel or Seller's interest in the Hotel will be treated as Sales of the Hotel.
Owner will not enter into any Sale/Leaseback Transaction unless Management
Company and the proposed Buyer have previously executed a mutually satisfactory
attornment agreement pursuant to which, as of the date of the termination of
Seller's leasehold interest, the provisions of this Agreement will (unless there
has been an Event of Default or other event entitling either party to terminate
this Agreement) be binding both on Management Company and on Buyer (as the
successor "Owner"); such attornment agreement will also contain an immediately
effective provision which will incorporate the terms of Section 6.08 of this
Agreement, binding both on Management Company and on Buyer.
END OF ARTICLE VI
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ARTICLE VII
WORKING CAPITAL AND FIXED ASSET SUPPLIES
----------------------------------------
7.01 Working Capital
---------------
A. Owner shall, from time to time during the Term of this Agreement,
provide Management Company, within thirty (30) days after Owner's receipt of
written request therefor by Management Company, with the funds necessary to
maintain Working Capital at levels determined by Management Company to be
reasonably necessary to operate the Hotel in accordance with the Fairfield Inn
System Standards. Any such request by Management Company shall be accompanied
by a detailed explanation of the reasons for the request. If Owner fails to
respond to any such request within thirty (30) days after Owner's receipt
thereof, Management Company shall be entitled, at its option, without affecting
other remedies which may be available pursuant to Article XVI, to lend Owner the
necessary additional Working Capital from Management Company's own funds, which
loan will bear interest at the Interest Rate (compounded annually), and will be
secured by a security interest (subordinate to any Qualified Loan) encumbering
all Working Capital previously or thereafter provided by either Owner or
Management Company, and will be repaid in accordance with such terms and
conditions as Management Company shall at that time reasonably determine.
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B. Management Company will manage the Working capital of the Hotel
prudently and in accordance with the Fairfield Inn System Standards. Management
Company shall review and analyze the Working Capital needs of the Hotel on an
annual basis. If Management Company reasonably determines that there is excess
Working Capital, such excess shall be returned to Owner.
C. Working Capital provided by Owner pursuant to this Section 7.01 shall
remain the property of Owner throughout the Term of this Agreement. Upon
Termination, Owner shall retain any of its unused Working Capital, except for
Inventories purchased by Management Company pursuant to Section 10.02.
D. If Owner owns other hotels in the Fairfield Inn System which are
operated by Management Company, Management Company, at its option, may co-mingle
the Working Capital for the Hotel with the Working Capital account for Owner's
other hotel(s) in a single bank account.
7.02 Fixed Asset Supplies
--------------------
As of the Effective Date, Owner shall provide the Hotel with the Fixed
Asset Supplies which are necessary to operate the Hotel in accordance with the
Fairfield Inn System Standards. Owner shall, from time to time thereafter
during the Term of this Agreement, provide Management Company, within thirty
(30) days after Owner's receipt of written request therefor by Management
Company, with any additional funds necessary to maintain Fixed
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Asset Supplies at levels determined by Management Company to be necessary to
operate the Hotel in accordance with the Fairfield Inn System Standards. Fixed
Asset Supplies shall remain the property of Owner throughout the Term of this
Agreement, except for Fixed Asset Supplies purchased by Management Company
pursuant to Section 10.02.
END OF ARTICLE VII
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ARTICLE VIII
REPAIRS, MAINTENANCE AND REPLACEMENTS
-------------------------------------
8.01 Routine Repairs and Maintenance
-------------------------------
Management Company shall maintain the Hotel in good repair and condition,
to a standard comparable with competitive hotels and in conformity with
applicable Legal Requirements and the Fairfield Inn System Standards, and shall
make or cause to be made such routine maintenance, repairs and minor
alterations, the cost of which can be expensed under generally accepted
accounting principles, as it, from time to time, deems reasonably necessary for
such purposes. The cost of such maintenance, repairs and alterations shall be
paid from Gross Revenues and shall be treated as a Deduction in determining
Operating Profit.
8.02 FF&E Reserve
------------
A. Management Company shall establish a reserve account (the "FF&E
Reserve") in a bank designated by Management Company (and approved by Owner,
such approval not to be unreasonably withheld) to cover the cost of:
1. Replacements and renewals to the Hotel's FF&E ;
2. Certain routine repairs and maintenance to the Hotel building
which are normally capitalized under generally accepted accounting principles
such as exterior and interior repainting, resurfacing building walls, floors,
roofs and parking areas, and
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replacing folding walls and the like (but which are not major repairs,
alterations, improvements, renewals or replacements to the Hotel's buildings'
structure, roof, or exterior facade, or to its mechanical, electrical, heating,
ventilating, air conditioning, plumbing or vertical transportation systems, the
cost of which shall be governed exclusively by Sections 8.03.C and 8.03.D); and
3. At Management Company's option, lease payments for
Shuttle Vehicles and Communications, Computer and Office Equipment used in
connection with the operation of the Hotel.
Management Company agrees that it will, from time to time, execute such
reasonable documentation as may be requested by any Qualified Lender to assist
such Qualified Lender in establishing or perfecting its security interest in the
funds which are in the FF&E Reserve; provided, however, that no such
documentation shall contain any amendment or modification of any of the
provisions of this Agreement, including this Section 8.02.
B. During the period of time from the Effective Date through the
Termination of this Agreement, subject to the provisions of Sections 8.02.E and
8.02.F, Management Company shall transfer (as of the end of each Accounting
Period) into the FF&E Reserve an amount equal to five percent (5%) of Gross
Revenues for that Accounting Period. All such amounts transferred into the FF&E
Reserve after the Effective Date shall be paid from Gross Revenues and shall
constitute Deductions in determining Operating Profit.
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C. Each year, at the same time as Management Company submits the Annual
Operating Projection described in Section 9.03, Management Company shall prepare
an estimate (the "FF&E Estimate") of the expenditures necessary during the
ensuing Fiscal Year, for (i) replacements and renewals to the Hotel's FF&E, (ii)
repairs to the Hotel building of the nature described in Section 8.02.A.2, and
(iii) if elected by Management Company, lease payments for Shuttle Vehicles, and
Communications, Computer and Office Equipment used in connection with the
operation of the Hotel, and shall submit such FF&E Estimate to Owner for its
review. All expenditures from the FF&E Reserve will be (as to both the amount
of each such expenditure and the timing thereof) both reasonable and necessary,
given the objective that the Hotel will be maintained and operated to a standard
comparable to competitive hotels and in accordance with the Fairfield Inn
System Standards. Notwithstanding the foregoing, Management Company shall not be
required to enumerate on the FF&E Estimate any individual project which will
cost less than Ten Thousand Dollars ($10,000.00) as adjusted by the GDP
Deflator on each anniversary of the Effective Date.
D. Management Company shall from time to time make such (i) replacements
and renewals to the Hotel's FF&E, and (ii) repairs to the Hotel building of the
nature described in Section 8.02.A.2, as it deems necessary, and (iii) lease
payments as described in Section 8.02.A.3 as it deems necessary provided that
Management
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Company shall not expend more than the balance in the FF&E Reserve without the
prior approval of Owner. Management Company will endeavor to follow the
applicable FF&E Estimate, but shall be entitled to depart therefrom, in its
reasonable discretion, provided that: (a) such departures from the applicable
FF&E Estimate result from circumstances which could not reasonably have been
foreseen at the time of the submission of such FF&E Estimate; (b) such
departures from the applicable FF&E Estimate are in the best interest of the
Hotel; and (c) if the deviations from the FF&E Estimate are greater than Ten
Thousand Dollars ($10,000.00), as adjusted by the GDP Deflator on each
anniversary of the Effective Date, Management Company has submitted to Owner a
revised FF&E Estimate setting forth and explaining such departures. At the end
of each Fiscal Year, any amounts remaining in the FF&E Reserve shall be retained
in the FF&E Reserve, and shall be carried forward to the next Fiscal Year. Upon
a Sale of the Hotel, funds in the FF&E Reserve will not be affected (or, if
withdrawn, will be replaced as set forth in Section 19.01.D), and all
dispositions of such funds (both before and after such Sale of the Hotel) will
continue to be made exclusively pursuant to the provisions of this Agreement.
Proceeds from the sale of FF&E no longer necessary to the operation of the Hotel
shall be deposited in the FF&E Reserve, as shall any interest which accrues on
amounts placed in the FF&E Reserve. Neither (i) proceeds from the disposition
of FF&E, nor (ii) interest which accrues on amounts held in the FF&E Reserve,
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shall either (x) result in any reduction in the required contributions to the
FF&E Reserve set forth in subsection B above, or (y) be included in Gross
Revenues. Shuttle Vehicles and Communications, Computer and Office Equipment
are the only items of FF&E which Management Company is authorized to lease
(rather than purchase). At Management Company's option, lease payments with
respect to Shuttle Vehicles and Communications, Computer and Office Equipment
shall be paid from the FF&E Reserve. If Management Company proposes that other
items of FF&E (other than Shuttle Vehicles and Communications, Computer and
Office Equipment) should be leased rather than purchased, Management Company
shall submit such proposal to Owner for Owner's approval (not to be unreasonably
withheld; provided, however that in connection with the foregoing, it is
understood that the failure of a Qualified Lender to approve such leasing
proposal shall justify Owner in withholding its approval thereof, regardless of
whether withholding such approval would otherwise be deemed to be unreasonable.
E. The percentage contribution for the FF&E Reserve which is described in
Section 8.02.B is an estimate. As the Hotel ages, this percentage may not be
sufficient to keep the FF&E Reserve at the levels necessary to make the
replacements and renewals to the Hotel's FF&E, or to make the repairs to the
Hotel building of the nature described in Section 8.02.A.2, which are required
to maintain the Hotel in accordance with the Fairfield Inn System Standards and
comparable with competitive hotels. If (i) any FF&E
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Estimate prepared in good faith by Management Company exceeds the available
funds in the FF&E Reserve or would cause a shortfall to occur in future years,
and (ii) Management Company has prepared and delivered to Owner a financial plan
describing the shortages in the available funding in the FF&E Reserve for the
Fiscal Years in question, Management Company will have the right, during the
time periods described in such financial plan, to increase the percentage of
Gross Revenues set forth in Section 8.02.B to a higher percentage, provided that
in no event will such percentage exceed six percent (6%) of Gross Revenues per
Fiscal Year.
F. If any FF&E Estimate which is prepared in accordance with clauses (i)
and (ii) of Section 8.02.E would require funding in excess of six percent (6%)
of Gross Revenues per Fiscal Year, Owner may either:
1. Agree to increase the percentages of Gross Revenues set forth in
Section 8.02.B to provide the additional funds required, or
2. Make a lump-sum contribution to the FF&E Reserve in the necessary
amount (in which case, such lump-sum contribution shall be an Owner Deduction
and shall be reimbursed to Owner in equal annual payments over the useful life
of the FF&E which is purchased, and such reimbursements shall be Deductions).
If Owner elects not to agree to either option 1 or option 2 above within
thirty (30) days after the submission of such FF&E Estimate (or, if Owner has
elected option 2, and has not funded the
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required amount within sixty (60) days after expiration of the aforesaid thirty
(30) day period), Management Company shall be entitled, at its option, to
terminate this Agreement by written notice to Owner, (with a copy to each
Qualified Lender) which notice shall be delivered no later than ninety (90) days
after the expiration of the sixty (60) day period described in the preceding
sentence. The effective date of such Termination shall be the date set forth in
such notice, provided that in no event shall the effective date of such
Termination be less than one hundred eighty (180) days, and no more than three
hundred sixty five (365) days after the date of such notice. Such failure to
fund by Owner shall not be deemed a Default by Owner under Article XVI, and
Management Company shall not be entitled to any remedies with respect to such
failure other than such termination of this Agreement and as set forth in
Section 8.03.E.
G. If Owner owns any other hotel(s) in the Fairfield Inn System which is
(are) operated by Management Company, Management Company shall co-mingle the
FF&E Reserve for the Hotel with the FF&E reserve account for Owner's other
hotel(s) in a single bank account unless such co-mingling is prohibited by any
Qualified Lender.
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8.03 Building Alterations, Improvements, Renewals, and Replacements
--------------------------------------------------------------
A. Management Company shall prepare an annual estimate (the "Building
Estimate") of the expenditures necessary for major
repairs, alterations, improvements, renewals and replacements (which repairs,
alterations, improvements, renewals and replacements are not among those
referred to in Section 8.02.A.2) to the structure or exterior facade of the
Hotel, or to the mechanical, electrical, heating, ventilating, air conditioning,
plumbing, or vertical transportation elements of the Hotel building. Management
Company shall submit each such Building Estimate to Owner for its approval at
the same time the Annual Operating Projection is submitted, and Management
Company shall not make any expenditures for such purposes without the prior
written consent of Owner. Owner shall not unreasonably withhold its consent
with respect to such changes, repairs, alterations, improvements, renewals or
replacements to the Hotel as are required by reason of any Legal Requirement, or
required under Management Company's current life-safety standards (provided
that, in order for any such life-safety standards to be "required" within the
meaning of this Section 8.03.A, such standards must be both required and in the
process of being implemented at a majority of the hotels within the Fairfield
Inn System operated by Management Company, which are comparable to the Hotel),
or otherwise required for the continued safety of guests or prevention of
material damage
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to property, including the removal of Hazardous Materials in compliance with all
Environmental Laws pursuant to Section 20.10).
B. In the event of the receipt by Management Company of a governmental
order or other circumstances described in Section 8.03.A above, Management
Company shall give Owner notice thereof within five (5) business days thereafter
or sooner if circumstances reasonably warrant; Management Company shall then be
authorized (but not obligated) to take appropriate remedial action without
receiving Owner's prior consent as follows: (i) in an emergency threatening the
Hotel, its guests, invitees or employees; or (ii) if the continuation of the
given condition could (in Management Company's reasonable judgment) potentially
subject Management Company and/or Owner to either criminal or more than de
--
minimis civil liability, and Owner has either failed to remedy the situation or
- -------
has failed to take appropriate legal action to stay the effectiveness of any
applicable Legal Requirement. Management Company shall cooperate with Owner in
the pursuit of any such action and shall have the right to participate therein.
Owner shall reimburse Management Company for any costs incurred by Management
Company in connection with any such remedial action within thirty (30) days
after Owner's receipt of notice from Management Company of the amount of such
costs.
C. The cost of all changes, repairs, alterations, improvements, renewals
or replacements referred to in Section 8.03.A or 8.03.B (including the expenses
incurred by either Owner
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or Management Company in connection with any civil or criminal proceeding
described above) shall be borne solely by Owner, and shall not be paid from
Gross Revenues or from the FF&E Reserve. Any failure of Owner to either (i)
approve and provide funding for any proposed expenditures pursuant to the last
sentence of Section 8.03.A, within seventy-five (75) days after Management
Company's request therefor, or (ii) in the case of any Legal Requirement which
is described in Section 8.03.B, to either comply therewith or to stay the
effectiveness of such Legal Requirement during the period of any contesting
thereof, shall be a Default by Owner. In such event, Management Company shall
be entitled (without affecting its other remedies under Article XVI) to
terminate this Agreement upon ninety (90) days' written notice to Owner; (with a
copy to each Qualified Lender); provided, however, that Management Company shall
have the right to stipulate such shorter period of time as may be appropriate,
given the time periods which are mandated by Legal Requirements, as described in
Section 8.03.A, or given Management Company's good faith concerns about its own
civil and/or criminal liability.
D. Management Company shall have the right, from time to time, to set
forth in any Building Estimate (in addition to the expenditures described in
Section 8.03.A), such changes, alterations or improvements to the Hotel as are
required, in Management Company's reasonable judgment, to keep the Hotel in a
competitive, efficient and economical operating condition, in
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accordance with the Fairfield Inn System Standards (which Management Company
shall substantiate by demonstrating a reasonable return on the proposed
investment to be made by Owner). The cost of all changes, alterations or
improvements referred to in this Section 8.03.D shall be paid, to the extent
reasonably possible (given the requirement, set forth in Section 8.02, that the
balance in the FF&E Reserve be maintained at a level sufficient to maintain the
Hotel in accordance with the Fairfield Inn System Standards) from the FF&E
Reserve, and Owner shall pay such costs from its own funds only to the extent
there are not adequate funds for such purpose in the FF&E Reserve. Any failure
of Owner to approve and provide funding for the Owner's portion of any proposed
expenditures pursuant to Section 8.03 D, as described in the preceding sentence,
or provide funding for items in Section 8.03.A (other than those items included
in the last sentence of Section 8.03.A) within sixty (60) days after Management
Company's request therefor, shall not be a Default by Owner but shall entitle
Management Company to terminate this Agreement and receive payment of the fee
set forth in Section 8.03.E. Such Termination shall be evidenced by a written
notice to Owner, (with a copy to each Qualified Lender) which notice shall be
delivered to Owner no later than ninety (90) days after the expiration of the
sixty (60) day period described in the preceding sentence. The effective date
of such Termination shall be the date stated by Management Company in such
notice, provided that such effective date shall be no less
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than one hundred eighty (180) days, and no more than three hundred sixty (360)
days, after the date of such notice. It is understood that "alterations" and
"improvements" which either (a) increase or decrease the number of guest rooms
in the Hotel, or (b) involve changing the architectural footprint of the Hotel
or involve other significant changes in the structural design of the Hotel, in
any case by more than a de minimis amount, are beyond the scope of this Article
-- -------
VIII, and would require an amendment of this Agreement prior to implementation
by either party.
E. Notwithstanding anything to the contrary in Section 8.02.F and 8.03.D,
if Owner owns five (5) or fewer hotels in the Fairfield Inn System which are
managed by Management Company, and Management Company elects to terminate the
Management Agreement due to: (i) Owner's failure to elect either option 1 or 2
in Section 8.02.F; (ii) Owner's failure to fund the required amount in Section
8.02.F, having elected option 2, or (iii) Owner's failure to fund pursuant to
Section 8.03.D, as applicable, then upon Management Company's election to
terminate the Management Agreement, which pursuant to both Sections 8.02.F and
8.03.D must (a) be made within ninety (90) days following the expiration of the
time period in which Owner must provide such additional funds, and (b) set forth
an effective date of such Termination which is no less than one hundred eighty
(180) days and no more than three hundred sixty five (365) days after the date
of such notice, then, Owner agrees to pay to Management Company a fee equal to
three (3) times the Base
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Management Fee for the prior Fiscal Year (regardless of whether said Base
Management Fee was actually paid to Management Company); provided, however, that
if, within ten (10) days from receipt of Management Company's notice to
terminate, Owner provides the funds required pursuant to Section 8.02.F or
8.03.D, as applicable, then upon receipt of such funds by Management Company,
Management Company's notice to terminate shall be deemed null and void and this
Agreement shall continue in full force and effect. Said fee shall be paid to
Management Company upon the termination date set forth in the written notice
from Management Company to Owner terminating this Agreement. This fee shall be
compensation for lost revenue and expenses and not as a penalty. If Owner
fails to pay such fee within the time period set forth herein, then Management
Company shall have the right (without affecting Management Company's other right
under this Agreement) to withhold the amount of such fee from Owner's
Distribution.
8.04 Liens
-----
Management Company and Owner shall use their best efforts to prevent any
liens from being filed against the Hotel which arise from any maintenance,
repairs, alterations, improvements, renewals or replacements in or to the Hotel.
They shall cooperate fully in obtaining the release of any such liens, and the
cost thereof, if the lien was not occasioned by the fault of either party, shall
be treated the same as the cost of the matter to which it relates. If
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the lien arises as a result of the fault of either party, then the party at
fault shall bear the full cost (including, without limitation, all legal fees,
court costs, bonding fees and underlying debt) of obtaining the lien release.
8.05 Ownership of Replacements, Etc.
-------------------------------
All repairs, alterations, improvements, renewals or replacements of the
Hotel which are made pursuant to Article VIII or otherwise shall be the property
of Owner. Subject to the provisions of Section 8.02, the funds in the FF&E
Reserve shall be the property of Owner.
END OF ARTICLE VIII
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ARTICLE IX
BOOKKEEPING AND BANK ACCOUNTS
-----------------------------
9.01 Books and Records
-----------------
A. Books of control and account shall, in all material respects, be kept
on the accrual basis and in accordance with the Uniform System of Accounts, with
the exceptions provided in this Agreement. Owner may at reasonable intervals
during Management Company's normal business hours examine such records. Within
seventy-five (75) days following the close of each Fiscal Year, Management
Company shall furnish Owner a statement (the "Annual Operating Statement")
substantially in the form of Exhibit G hereto for such Fiscal Year and a
certificate of Management Company's chief accounting officer (or its controller
or any vice-president), certifying that to the best of his or her knowledge and
belief such year-end Annual Operating Statement is true and correct. Owner
shall have sixty (60) days after receipt to examine or review (at Owner's sole
expense, and not as a Deduction) said Annual Operating Statement. If Owner
raises no objections within said sixty (60) day period, the Annual Operating
Statement shall be deemed to have been accepted by Owner as true and correct,
and Owner shall have no further right to question its accuracy. If Owner does
raise such an objection, by notice to Management Company, Owner shall arrange
for an audit to be commenced within sixty (60) days after the date of such
objection, and shall diligently cause such audit to be
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completed within a reasonable period of time. Owner shall pay all costs and
expenses of such audit at its sole expense (and not as a Deduction); however, if
such audit establishes that Management Company has understated the Operating
Profit for that Fiscal Year by five percent (5%) or more, the reasonable costs
and expenses of such audit shall be paid as a Deduction (provided, however, that
the amount of such costs and expenses so paid as a Deduction, as opposed to
being paid as Owner's sole expense, shall in no event exceed the dollar amount
of such understatement of Operating Profit).
B. Upon written request by Owner, but in no event more frequently
than annually, Management Company shall, prepare and deliver to Owner the
Management Analysis Report. In addition, Management Company shall, in
connection with an impending Sale of the Hotel or commitment by a Qualified
Lender to make a Qualified Loan, within thirty (30) days after written request
therefor from Owner, prepare and deliver to Owner an updated Management Analysis
Report describing significant changes since the effective date of the most
recent Management Analysis Report; provided, however that Management Company
shall not be required to prepare such updated Management Analysis Report if a
report has been delivered within the previous one hundred twenty (120) days.
The cost and expense of preparing the Management Analysis Report shall be paid
as a Deduction.
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9.02 Hotel Accounts, Expenditures
----------------------------
A. All funds derived from operation of the Hotel shall be deposited by
Management Company in Hotel bank accounts (the "Operating Accounts") in a bank
or banks designated by Management Company and approved by Owner, which approval
shall not be unreasonably withheld. Withdrawals from said accounts shall be
made only by representatives of Management Company whose signatures have been
authorized. Reasonable petty cash funds shall be maintained at the Hotel.
B. All payments made by Management Company hereunder shall be made from
authorized bank accounts, petty cash funds, or from Working Capital provided by
Owner pursuant to Section 7.01. Management Company shall not be required to make
any advance or payment to or for the account of Owner except out of such funds,
and Management Company shall not be obligated to incur any liability or
obligation for Owner's account without assurances that necessary funds for the
discharge thereof will be provided by Owner. Debts and liabilities incurred by
Management Company as a result of its operation and management of the Hotel
pursuant to the terms hereof, whether asserted before or after the Termination
of this Agreement, will be paid by Owner to the extent funds are not available
to Management Company for that purpose from Gross Revenues.
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9.03 Annual Operating Projection
---------------------------
A. Management Company shall submit to Owner for its review, at least
thirty (30) days prior to the beginning of each full Fiscal Year after the
Effective Date, a preliminary draft of the projection of the estimated financial
results of the operation of the Hotel during the next Fiscal Year substantially
in the form of Exhibit H (the "Annual Operating Projection"). Such Annual
Operating Projection shall project the estimated Gross Revenues and Operating
Profit for the forthcoming Fiscal Year for the Hotel. In preparing the Annual
Operating Projection for each Fiscal Year, Management Company's goal will be the
maximization of the long-term Operating Profit of the Hotel, in keeping with
Fairfield Inn System Standards and the general standards of the hotel industry
for similar properties. At Owner's request, Management Company agrees to take
reasonable steps to ensure that qualified personnel from Management Company's
staff are available to explain the preliminary draft of the Annual Operating
Projection including any material items which are expected to be significantly
different amounts from the amounts actually experienced (or projected) for the
same items in the preceding Fiscal Year. A meeting (or meetings) for such
purpose shall be held, at Owner's request, within a reasonable period of time
after the submission to Owner of the preliminary draft of the Annual Operating
Projection. Management Company will at all times give good faith consideration
to Owner's suggestions regarding any Annual Operating Projection. Management
Company
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shall thereafter submit to Owner, twenty (20) days after the beginning of such
Fiscal Year, the final Annual Operating Projection.
B. Management Company shall use reasonable efforts to adhere to the Annual
Operating Projection. It is understood, however, that the Annual Operating
Projection is an estimate only and that unforeseen circumstances such as, but
not limited to, the costs of labor, materials, services and supplies, casualty,
operation of law, or economic and market conditions may make adherence to the
Annual Operating Projection impracticable, and Management Company shall be
entitled to depart therefrom for such reasons.
9.04 Operating Losses; Credit
------------------------
A. To the extent there is an Operating Loss, additional funds in the
amount of any such Operating Loss shall be provided by Owner within thirty (30)
days after Management Company has given written notice thereof to Owner;
provided, however, that if Owner has already received a request from Management
Company for additional Working Capital pursuant to Section 7.01.A, and if such
request under Section 7.01.A reflects fundamentally the same cash shortage which
resulted in a request under this Section 9.04.A, Owner and Management Company
shall mutually discuss the extent to which the requests under Section 7.01.A and
Section 9.04.A may overlap, and such requests shall be modified accordingly.
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B. In no event shall either party borrow money in the name of or pledge
the credit of the other.
9.05 Consolidated Reports
---------------------
With respect to Management Company's reports, books and records
required to be kept and provided to Owner pursuant to Sections 9.01.A, 9.01.B
and 9.03.A hereof provided that Owner is also the owner of other hotels in the
Fairfield Inn System and that said Hotels are managed by Management Company,
Management Company shall have the right, at Management Company's option, to
prepare said reports on a consolidated basis rather than by individual hotel;
provided, however that if Owner reasonably determines that it requires
individual reports for each individual hotel and requests individual reports
from Management Company, in writing, together with Owner's reasons for
requesting individual reports, Management Company shall comply with such
request.
END OF ARTICLE IX
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ARTICLE X
PROPRIETARY MARKS; INTELLECTUAL PROPERTY
----------------------------------------
10.01 Proprietary Marks
-----------------
A. During the Term of this Agreement, the Hotel shall be known as a
"Fairfield Inn", "Fairfield Inn by Marriott" or "Marriott Fairfield Inn" with
such additional identification as may be agreed to by Owner and Management
Company to provide local identification. If the name of the "Fairfield Inn"
system is changed, Management Company shall have the right to change the name of
the Hotel to conform thereto.
B. The names "Marriott", "Fairfield Inn", "Fairfield Inn by Marriott" and
"Marriott Fairfield Inn" whether used alone or in connection with another word
or words, and all other Proprietary Marks shall in all events remain the
exclusive property of Management Company and its Affiliates. Owner shall have
no right to use the Marriott or Fairfield Inn name or any other Proprietary
Marks; provided, however, that Owner shall have the right, during the Term of
this Agreement, to have Proprietary Signage installed (in strict conformance
with the specifications provided by Management Company prior to the Effective
Date, or subsequent specifications provided by Management Company from time to
time during the Term) in the Hotel and on the Site.
C. Except as provided in Section 10.02, upon Termination, any use of or
right to use the Marriott or Fairfield Inn name or any other Proprietary Marks
by Owner shall immediately cease. As of
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the date of Termination, Management Company shall remove all Proprietary Signage
from the Hotel and from the Site (and from any locations other than the Site).
The cost of such removal shall be paid as set forth in Section 4.02.E.
D. Notwithstanding the foregoing, those trademarks, trade names, symbols,
logos and designs which are specifically listed on Exhibit "E" shall be deemed
"Proprietary Marks" only during the Term of this Agreement; upon a Termination,
the exclusive control of such Proprietary Marks shall revert to Owner.
10.02 Purchase of Inventories and Fixed Asset Supplies
------------------------------------------------
Upon Termination, Management Company shall have the option, to be exercised
no later than thirty (30) days prior to Termination, to elect to purchase, at
their then book value, any items of the Hotel's Inventories and Fixed Asset
Supplies as may be marked with the Fairfield Inn name or any other Proprietary
Marks. In the event Management Company does not exercise such option, Owner
agrees that it will use any such items not so purchased exclusively in
connection with the Hotel until they are consumed.
10.03 Computer Software and Equipment
-------------------------------
A. All Software is and shall remain the exclusive property of Management
Company or one of its Affiliates (or the licensor of such Software, as the case
may be), and Owner shall have no right to use, or to copy, any Software.
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B. Upon Termination, Management Company shall have the right to remove
from the Hotel, without compensation to Owner, all Software. Furthermore, upon
Termination, Management Company shall be entitled to remove from the Hotel any
computer equipment which is utilized as part of a centralized reservation or
property management system or is otherwise considered proprietary by Management
Company. If any of such removed computer equipment is owned by Owner,
Management Company shall reimburse Owner for all previous expenditures made by
Owner for the purchase of such equipment, subject to a reasonable allowance for
depreciation.
10.04 Intellectual Property
---------------------
All Intellectual Property shall at all times be proprietary to Management
Company or its Affiliates, and shall be the exclusive property of Management
Company or its Affiliates. During the Term of this Agreement, Management
Company shall be entitled to take all reasonable steps to ensure that the
Intellectual Property remains confidential and is not disclosed to anyone other
than Management Company's employees at the Hotel. Upon Termination, all
Intellectual Property shall be removed from the Hotel by Management Company,
without compensation to Owner.
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10.05 Breach of Covenant
------------------
Management Company and/or its Affiliates shall be entitled, in case of any
breach of the covenants of Article X by Owner or others claiming through it, to
injunctive relief and to any other right or remedy available at law. Article X
shall survive Termination.
END OF ARTICLE X
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ARTICLE XI
POSSESSION AND USE OF HOTEL
---------------------------
11.01 Quiet Enjoyment
---------------
Owner covenants that, so long as: (i) an Event of Default by Management
Company has not occurred under Article XVI of this Agreement; and (ii) Owner
does not have the right to terminate this Agreement under any other Section of
this Agreement, Management Company shall quietly hold, occupy and enjoy the
Hotel throughout the Term hereof free from hindrance or ejection by Owner or
other party claiming under, through or by right of Owner (except as may be
otherwise set forth in Section 6.04). Owner agrees to pay and discharge any
payments and charges and, at its expense, to prosecute all appropriate actions,
judicial or otherwise, necessary to assure such free and quiet occupation.
Nothing set forth in the preceding sentence, however, shall be deemed to create
a recourse obligation by Owner to pay any payment or charge pursuant to a
contract which is non-recourse to Owner.
11.02 Use
---
A. Management Company shall use the Hotel solely for the operation of a
hotel pursuant to the Fairfield Inn System Standards, and for all activities in
connection therewith which are customary and usual to such an operation.
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B. Management Company shall comply with and abide by all applicable Legal
Requirements pertaining to the operation of the Hotel, provided that: (i) all
costs and expenses (other than those which are specifically described in clauses
(ii) or (iii) of this Section 11.02.B) of such compliance shall be paid from
Gross Revenues as Deductions in the computation of Operating Profit; (ii) all
costs and expenses of compliance with Environmental Laws shall be paid as set
forth in Section 20.10; (iii) all costs and expenses of compliance with the
Legal Requirements which are described in Section 8.03.A shall be paid as set
forth in Section 8.03; and (iv) Management Company shall have the right, but not
the obligation, in its reasonable discretion, to contest or oppose, by
appropriate proceedings, any such Legal Requirements (provided that the consent
of Owner, not to be unreasonably withheld, shall be obtained prior to initiating
any such proceedings which directly involve Owner's ownership interest in the
Hotel in a material manner. The reasonable expenses of any such contest shall
be paid from Gross Revenues as Deductions.
11.03 Chain Services
--------------
A. Management Company shall, beginning with the Effective Date and
thereafter during the Term of this Agreement, cause Chain Services to be
furnished to the Hotel.
B. Costs and expenses incurred in the providing of Chain Services shall be
allocated on a fair and equitable basis among all
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Fairfield Inn hotels owned, leased or managed by Management Company in the
United States which benefit from these services. Such allocation shall be made
without regard to any "caps" or other limitations on the amount which Management
Company or its Affiliates may charge to a given hotel, pursuant to agreements
which Management Company (or its Affiliates) may have with the owner of such
hotel. Any excess of that portion of such costs and expenses which is fairly
allocated to a given hotel over the "cap" which may be in effect with regard to
that hotel shall be paid by Management Company from its own funds. Management
Company shall make no profit from Chain Services. Upon Owner's written request,
an explanation of the current Chain Services will be given to Owner, and the
basis for the allocation of the charge for each Chain Service will be explained
to Owner, in reasonable detail, at the time of the submission of the Annual
Operating Statement (as more particularly set forth in Section 9.01). In no
event will the total charge for all of the Chain Services which are described in
the definition of Chain Services in Section 1.01 (exclusive of reservation
system services), for any given Fiscal Year, exceed four and one half percent (4
1/2%) of Gross Revenues for such Fiscal Year. The parties hereby stipulate that
the limitation set forth in the preceding sentence is intended to apply only to
the services which are currently listed (as of the Effective Date) in the
definition of Chain Services in Section 1.01; accordingly, if there are types of
expenditures which were originally treated as
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Deductions (other than pursuant to paragraph 8 of the definition of "Operating
Profit" in Section 1.01), but which are later determined to be more properly
treated as Chain Services, such expenditures shall be treated as Deductions
pursuant to said paragraph 8 of the definition of "Operating Profit" without
regard to the aforesaid limitation.
11.04 Owner's Right to Inspect
------------------------
Owner or its agents shall have access to the Hotel at any and all
reasonable times for the purpose of inspection or showing the Hotel to
prospective purchasers, tenants or Holders.
11.05 Indemnity
---------
A. Management Company shall indemnify and hold harmless Owner (and any
officer, director, employee, advisor, partner or shareholder of Owner) in
respect of, and, at Owner's request, shall defend any action, cause of action,
suit, debt, cost, expense (including, without limitation, reasonable attorneys'
fees), claim or demand whatsoever brought or asserted by any third person
whomsoever, at law or in equity, arising by reason of: (i) liabilities stemming
from general corporate matters of Management Company or its Affiliates, to the
extent the same are not directly and primarily related to the Hotel; (ii)
infringement and other claims relating to the Proprietary Marks; (iii) if
Management Company intentionally or negligently fails to maintain insurance
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coverage that it is required to maintain pursuant to this Agreement, the excess
of the amount of any liability or loss that would have been covered over the
amount of any applicable deductible; and (iv) the bad faith or willful
misconduct of Management Company or its Affiliates, or any of their employees,
servants or agents or other persons for whom they are responsible, resulting in
a claim for bodily injury, death or property damage occurring on, in or in
conjunction with the business of the Hotel, to the extent that such claim
exceeds the insurance proceeds (including Hotel Retentions) which are available
to pay such claim.
B. If any claim, action or proceeding is made or brought against Owner,
against which claim, action or proceeding Management Company shall be obligated
to indemnify pursuant to the terms of this Agreement, then, upon demand by
Owner, Management Company, at its sole cost and expense, shall resist or defend
such claim, action or proceeding (in Owner's name, if necessary), using such
attorneys as Owner shall approve, which approval shall not be unreasonably
withheld. If, in the Owner's reasonable opinion, (i) there exists a conflict of
interest which would make it inadvisable to be represented by counsel for
Management Company, or (ii) there are legal defenses available to Management
Company that are different from or inconsistent with those available to the
Owner, or (iii) there are claims at issue which are not covered by Management
Company's insurance, the Owner shall be entitled to
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retain its own attorneys, and Management Company shall pay the reasonable fees
and disbursements of such attorneys.
C. Matters with respect to which Management Company has specifically
agreed to indemnify Owner under other provisions of this Agreement (for example,
Section 14.01 regarding "Employee Claims", and Section 20.11 regarding
environmental matters) are to be treated exclusively under such other provisions
and not under this Section 11.05.
END OF ARTICLE XI
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ARTICLE XII
INSURANCE
---------
12.01 Interim Insurance
-----------------
[Intentionally omitted]
12.02 Property and Operational Insurance
----------------------------------
Management Company shall, commencing with the Effective Date and thereafter
during the Term of this Agreement, procure and maintain, either with insurance
companies of recognized responsibility or by legally qualifying itself as a self
insurer, a minimum of the following insurance:
A. Property insurance on the Hotel building(s) and contents against loss
or damage by fire, lightning and all other risks covered by the usual extended
coverage endorsement, all in an amount not less than one hundred percent (100%)
of the replacement cost thereof (excluding the cost of foundations and
excavations);
B. Boiler and machinery insurance against loss or damage from explosion of
boilers or pressure vessels to the extent applicable to the Hotel;
C. Business interruption insurance covering loss of profits and necessary
continuing expenses for interruptions caused by any occurrence covered by the
insurance referred to in Section 12.02.A and B, which shall be of a type and in
such amounts (but such coverage shall in no event be for less than one (1) year)
as are
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generally established by Management Company at similar hotels it owns, leases or
manages under the Fairfield Inn name in the United States;
D. General liability insurance against claims for bodily injury, death or
property damage occurring on, in, or in conjunction with the business of the
Hotel, and automobile liability insurance on vehicles operated in conjunction
with the Hotel, with a combined single limit for each occurrence of not less
than One Hundred Million Dollars ($100,000,000); representatives of Management
Company and Owner shall meet, at Owner's request, at intervals of approximately
once every five (5) years, to review the adequacy of such limit;
E. Workers' compensation and employer's liability insurance as may be
required under applicable laws covering all of Management Company's employees at
the Hotel;
F. Fidelity bonds, with reasonable limits to be determined by Management
Company, covering its employees in job classifications normally bonded in other
similar hotels it leases or manages under the Fairfield Inn name in the United
States or as otherwise required by law, and comprehensive crime insurance to the
extent Management Company and Owner mutually agree it is necessary for the
Hotel; and
G. Such other insurance in amounts as Management Company and Owner, in
their reasonable judgment, mutually deem advisable for
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protection against claims, liabilities and losses arising out of or connected
with the operation of the Hotel.
12.03 General Insurance Provisions
----------------------------
A. All insurance described in Section 12.02 may be obtained by Management
Company by endorsement or equivalent means under its blanket insurance policies,
provided that such blanket policies substantially fulfill the requirements
specified herein. Upon the request of either Owner or any Qualified Lender,
representatives of the requesting party shall be entitled to examine, at
Management Company's corporate headquarters, all insurance policies maintained
by Management Company regarding the Hotel.
B. Management Company may self insure or otherwise retain such risks or
portions thereof as it does with respect to other similar hotels it owns, leases
or manages under the Marriott name in the United States.
C. All policies of insurance required under Section 12.02 shall be carried
in the name of Management Company. The policies required under Sections
12.02.A, B, C and D shall include the Owner as an additional insured. Upon
notice by the Owner, Management Company shall also have the policies required
under Sections 12.02 A, B, C and D include any Qualified Lender as an additional
insured. Any property losses thereunder shall be payable to the respective
parties as their interests may appear. Any Mortgage on the Hotel shall contain
provisions to the effect that proceeds of
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the insurance policies required to be carried under Section 12.02.A and B shall,
with respect to any casualty involving less than twenty-five percent (25%) of
the replacement cost of the Hotel, be available for repair and restoration of
the Hotel.
D. Management Company shall deliver to the Owner certificates of insurance
with respect to all policies so procured and, in the case of insurance policies
about to expire, shall deliver certificates with respect to the renewal thereof.
E. All certificates of insurance provided for under Article XII shall, to
the extent obtainable, state that the insurance shall not be cancelled or
materially changed without at least thirty (30) days' prior written notice to
Owner.
F. The term "Hotel Retention" shall mean the amount of any loss or reserve
under Management Company's blanket insurance or self-insurance programs which is
allocated to the Hotel, not to exceed the higher of (a) the maximum per
occurrence limit established for similar hotels participating in such programs,
or (b) the insurance policy deductible on any loss which may fall within high
hazard classifications as mandated by the insurer (e.g., earthquake, flood,
windstorm on coastal properties, etc.). If the Hotel is not a participant under
Management Company's blanket insurance or self-insurance programs, "Hotel
Retention" shall mean the amount of any loss or reserve allocated to the Hotel,
not to exceed the insurance policy deductible.
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12.04 Cost and Expense
----------------
A. [Intentionally omitted]
B. Insurance premiums and any other costs or expenses with respect to the
insurance or self-insurance required under Section 12.02, including any Hotel
Retention, shall be paid from Gross Revenues as Deductions. To the extent that
such costs or expenses include reimbursement by Management Company of its own
costs or expenses, or those of one of its Affiliates, such costs or expenses
shall be generally competitive (as calculated over the Term of this Agreement)
with costs and expenses of non-affiliated entities providing similar services.
Such premiums and costs shall be allocated on an equitable basis to the hotels
participating under Management Company's blanket insurance or self-insurance
programs. Any reserves, losses, costs or expenses which are uninsured shall be
treated as a cost of insurance and shall be Deductions. Upon Termination, an
escrow fund in an amount reasonably acceptable to Management Company shall be
established from Gross Revenues (or, if Gross Revenues are not sufficient, with
funds provided by Owner) to cover the amount of any Hotel Retention and all
other costs which will eventually have to be paid by either Owner or Management
Company with respect to pending or contingent claims, including those which
arise after Termination for causes arising during the Term of this Agreement.
Upon the final disposition of all such pending or contingent claims, any
unexpended funds remaining in such escrow shall be paid to Owner.
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12.05 Owner's Option to Obtain Certain Insurance
------------------------------------------
Owner may, at its option, by written notice to Management Company which
shall be delivered no later than ninety (90) days prior to the natural
expiration of the insurance policies which Management Company has obtained
pursuant to Section 12.02.A, B and C, procure and maintain the insurance
specified in Section 12.02.A, B and C (in which case Management Company shall
allow such policies obtained by it under Section 12.02.A, B, and C to expire),
subject to the following terms and conditions:
A. All such policies of insurance shall be carried in the name of Owner,
with Management Company as an additional insured. Any property losses thereunder
shall be payable to the respective parties as their interests may appear. The
documentation with respect to each Secured Loan shall contain provisions to the
effect that proceeds of the insurance policies required to be carried under
Section 12.01.A and B shall be available for repair and restoration of the
Hotel, to the extent required pursuant to Section 12.03.C. However, any Holder
of such Secured Loan shall be entitled to impose reasonable conditions on the
disbursement of insurance proceeds for the repair and/or restoration of the
Hotel, including a demonstration by Owner and/or Management Company that the
amount of such proceeds (together with other funds Owner agrees to make
available) is sufficient for such purpose.
B. Owner shall deliver to Management Company certificates of insurance
with respect to all policies so procured and, in the case
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of insurance policies about to expire, shall deliver certificates with respect
to the renewal thereof.
C. All such certificates of insurance shall, to the extent obtainable,
state that the insurance shall not be canceled or materially changed without at
least thirty (30) days' prior written notice to the certificate holder.
D. Premiums for such insurance coverage shall be treated as Deductions,
provided that if the cost of such insurance procured by Owner exceeds the cost
of Management Company's comparable coverage by more than ten percent (10%), all
such excess costs shall be the sole responsibility of Owner and shall not be a
Deduction.
E. Should Owner exercise its option to procure the insurance described in
this Section 12.05, Owner hereby waives its rights of recovery from Management
Company or any of its Affiliates (and their respective directors, officers,
shareholders, agents and employees) for loss or damage to the Hotel, and any
resultant interruption of business.
F. Should Owner exercise its right to obtain the insurance described in
this Section 12.05, Owner acknowledges that Management Company is under no
obligation to thereafter include the Hotel in its blanket insurance program
(with respect to the coverage described in Section 12.02.A, B and C) for the
balance of the Term of this Agreement. However, upon a Sale of the Hotel, a
successor Owner shall have the right, notwithstanding the fact that the previous
Owner may have obtained insurance in accordance with this
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Section 12.05, to have the Hotel included in Management Company's blanket
insurance program (provided that the Hotel, as of that point in time, satisfies
the applicable criteria for admission to such program, as established by the
program's insurance carriers) by making a written request to Management Company
for such inclusion not later than thirty (30) days after the date on which such
party becomes the Owner.
G. All insurance procured by Owner hereunder shall be obtained from
reputable insurance companies reasonably acceptable to Management Company.
END OF ARTICLE XII
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ARTICLE XIII
TAXES
-----
13.01 Real Estate and Personal Property Taxes
---------------------------------------
A. Except as specifically set forth in subsection B below, all Impositions
which accrue during the Term of this Agreement (or are properly allocable to
such Term under generally accepted accounting principles) shall be paid by
Management Company from Gross Revenues, as a Deduction, before any fine,
penalty, or interest is added thereto or lien placed upon the Hotel or the
Agreement, unless payment thereof is stayed; provided, however, that Management
Company shall not be responsible for any fine, penalty or interest resulting
through no fault of Management Company or caused by Owner. Owner shall within
five (5) business days after the receipt of any invoice, bill, assessment,
notice or other correspondence relating to any Imposition, furnish Management
Company with a copy thereof. Management Company shall, within the earlier of
thirty (30) days of payment or fifteen (15) business days following written
demand by Owner, furnish Owner with copies of official tax bills and assessments
which Management Company has received, and evidence of payment or contest
thereof. Either Owner or Management Company (in which case each party agrees to
sign the required applications and otherwise cooperate with the other party in
expediting the matter) may initiate proceedings to contest any Imposition, and
all reasonable costs of any negotiations or
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proceedings with respect to any such contest shall either (i) be paid from Gross
Revenues and be a Deduction in determining Operating Profit; or (ii) be
considered an Owner Deduction; provided, however that in the event either Owner
or Management Company spends in excess of Five Thousand Dollars ($5,000.00) with
respect to such contest, such party shall provide written notice to the other
party and the other party shall approve or disapprove of such expenditure within
ten (10) days following receipt of such notice. Failure of such party to
approve or disapprove such expenditure shall be deemed approval. In the event
that either party's expenditures in excess of Five Thousand Dollars ($5,000.00)
are not approved by the other party such party may nevertheless proceed to spend
whatever funds are necessary with respect to such contest; provided, however,
that any amounts in excess of Five Thousand Dollars ($5,000.00) (or such higher
amount as may have been approved by the other party) shall be at the sole cost
of Owner or Management Company, as the case may be, and shall not be considered
an Owner Deduction by Owner nor be considered a Deduction from Operating Profit
by either Owner or Management Company.
B. The word "Impositions", as used in this Agreement, shall not include
the following, all of which shall be paid solely by Owner, not from Gross
Revenues nor from the FF&E Reserve:
1. Any franchise, corporate, estate, inheritance, succession, capital
levy or transfer tax imposed on Owner, or any
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income tax imposed on any income of Owner (including distributions to Owner
pursuant to Article V hereof);
2. Special assessments (regardless of when due or whether they are
paid as a lump sum or in installments over time) imposed because of facilities
which are constructed by or on behalf of the assessing jurisdiction (for
example, roads, sidewalks, sewers, culverts, etc.) which directly benefit the
Hotel (regardless of whether or not they also benefit other buildings), which
assessments shall not be treated as Deductions, but rather shall be added to the
Additional Invested Capital as of each payment by Owner with respect thereto;
provided, however, that any installments (after the Effective Date) of any
assessments which were levied or imposed prior to the Effective Date shall be
Deductions;
3. "Impact Fees" (regardless of when due or whether they are paid as
a lump sum or in installments over time) which are required of Owner as a
condition to the issuance of site plan approval, zoning variances or building
permits, which impact fees shall not be treated as Deductions, but rather shall
be added to the Additional Invested Capital as of each payment by Owner with
respect thereto; provided, however, that any installments (after the Effective
Date) of any impact fees which were levied or imposed prior to the Effective
Date shall be Deductions; and
4. "Tax-increment financing" or similar financing whereby the
municipality or other taxing authority has assisted in
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financing the construction of the Hotel by temporarily reducing or abating
normal Impositions in return for substantially higher levels of Impositions at
later dates.
C. Owner shall have the right to require Management Company to establish
an escrow account (with either any Qualified Lender or another entity reasonably
acceptable to both Owner and Management Company) from which Impositions will be
paid. Payments into such escrow account will be Deductions. Any interest which
accrues on amounts deposited in such escrow account shall be added to the
balance in such escrow account and used to pay Impositions.
END OF ARTICLE XIII
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ARTICLE XIV
HOTEL EMPLOYEES
---------------
14.01 Employees
---------
A. All personnel employed at the Hotel shall be the employees of
Management Company. Management Company shall have absolute discretion to hire,
promote, supervise, direct, train and discharge all employees at the Hotel, to
fix their compensation and, generally, establish and maintain all policies
relating to employment.
B. Management Company shall decide which, if any, of the Hotel's employees
shall reside at the Hotel (provided that,Owner's prior approval shall be
obtained if more than one (1) such employee and their immediate families reside
at the Hotel), and shall be permitted to provide free accommodations and
amenities to its employees and representatives living at or visiting the Hotel
in connection with its management or operation. No person shall otherwise be
given gratuitous accommodations or services without prior joint approval of
Owner and Management Company except in accordance with usual practices of the
hotel and travel industry.
C. Any proposed settlement of any Employee Claim where the amount proposed
to be offered to the employee by Management Company is in excess of the
Settlement Threshold Amount shall be jointly approved by Management Company and
Owner. Any dispute between Owner and Management Company as to whether
Management Company's
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settlement recommendation is reasonable, where such proposed settlement is in
excess of the Settlement Threshold Amount, shall be resolved by arbitration
under Section 20.13 hereof; provided that Management Company shall have the
right to settle any Employee Claim (prior to the arbitration on the
reasonableness of the settlement, as described in this sentence) based on
Management Company's recommendation, which shall be Management Company's
reasonable estimate, in good faith, by using: (i) funds from Gross Revenues (as
a Deduction) up to the amount of Owner's settlement recommendation, which shall
be Owner's reasonable estimate, in good faith and (ii) Management Company's own
funds to the extent Management Company's recommendation exceeds the amount
described in subparagraph (i) above. Following the settlement of such Employee
Claim, the parties will arbitrate under Section 20.13 the issue of whether
Management Company's settlement recommendation was reasonable under the
circumstances. If the arbitrators decide that Management Company's
recommendation was reasonable, Management Company shall be entitled to reimburse
itself from Gross Revenues (as a Deduction) in the amount of the funds advanced
under subparagraph (ii) above, together with accrued interest thereon at the
Prime Rate. If the arbitrators decide that Management Company's settlement
recommendation was not reasonable, then Management Company shall not be entitled
to any reimbursement of the amounts advanced by it under subparagraph (ii)
above, nor to accrued interest thereon.
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D. Management Company shall pay from its own funds, and not from Gross
Revenues, any Employee Claim where the basis of such Employee Claim is conduct
by Management Company which: (i) is a substantial violation of the standards of
responsible labor relations as generally practiced by prudent owners or
operators of similar hotel properties in the general geographic area of the
Hotel; and (ii) is not the isolated act of individual employees, but rather is a
direct result of corporate policies of Management Company which either encourage
or fail to discourage such conduct. In addition, Management Company shall
indemnify, defend and hold harmless Owner from and against any fines or
judgments arising out of such conduct, and all Litigation expenses (including
reasonable attorneys' fees and expenses) incurred in connection therewith. Any
dispute between Owner and Management Company as to whether or not certain
conduct by Management Company is not in accordance with the aforesaid standards
shall be resolved by arbitration under Section 20.13 hereof. The arbitration
proceedings described in the preceding sentence shall be conducted independently
of any arbitration proceedings with respect to such Employee Claim pursuant to
the applicable employee-related contract and/or pursuant to Section 14.01.C of
this Agreement.
E. With respect to all Litigation or arbitration involving Employee Claims
in which both Management Company and Owner are involved as actual or potential
defendants, Management Company shall have exclusive and complete responsibility
(subject to the
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rights of Owner to approve certain settlements, as set forth in Section 14.01.C)
for the resolution of such Employee Claims. In the event that any Employee
Claim is made against Owner, but not against Management Company, Owner shall
give notice to Management Company of the Employee Claim in a timely manner so as
to avoid any prejudice to the defense of the Employee Claim, provided that
Management Company shall in all events be so notified within twenty (20) days
after the date such Employee Claim is made against Owner. Management Company
will thereafter assume exclusive and complete responsibility for the resolution
of such Employee Claim.
F. At Termination, other than by reason of an Event of Default of
Management Company hereunder, an escrow fund shall be established from Gross
Revenues (or, if Gross Revenues are not sufficient, with funds provided by
Owner) to reimburse Management Company for all costs and expenses incurred by
Management Company which arise out of either the transfer or the termination of
employment of Management Company's employees at the Hotel, such as reasonable
transfer costs, severance pay, unemployment compensation and other employee
liability costs.
END OF ARTICLE XIV
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ARTICLE XV
DAMAGE, CONDEMNATION AND FORCE MAJEURE
--------------------------------------
15.01 Damage and Repair
-----------------
A. If, during the Term hereof, the Hotel is damaged or destroyed by fire,
casualty or other cause, Owner shall, with all reasonable diligence, to the
extent that proceeds from the insurance described in Section 12.02 are available
(subject to the provisions of any Mortgage encumbering the Hotel, but with the
limitations described in Section 12.03.C) for such purpose, repair or replace
the damaged or destroyed portion of the Hotel to the same condition as existed
previously.
B. In the event damage or destruction to the Hotel from any cause
materially and adversely affects the operation of the Hotel and Owner fails to
timely (subject to Force Majeure, and subject to unreasonable delays caused by
Management Company, including unreasonable delays in adjusting the insurance
claim with the carriers which participate in Management Company's blanket
insurance program) commence and complete the repairing, rebuilding or
replacement of the same so that the Hotel shall be substantially the same as it
was prior to such damage or destruction, such action shall be deemed an Event of
Default by Owner pursuant to Section 16.01.E and Management Company may, at its
option, elect to terminate this Agreement upon one hundred twenty (120) days'
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written notice, in addition to its other remedies under Section 16.03.
15.02 Condemnation
------------
A. In the event all or substantially all of the Hotel shall be taken in
any eminent domain, condemnation, compulsory acquisition, or similar proceeding
by any competent authority for any public or quasi-public use or purpose, or in
the event a portion of the Hotel shall be so taken, but the result is that it is
unreasonable to continue to operate the Hotel, this Agreement shall terminate.
B. In the event a portion of the Hotel shall be taken by the events
described in Section 15.02.A, or the entire Hotel is affected but on a temporary
basis, and the result is not to make it unreasonable to continue to operate the
Hotel, this Agreement shall not terminate. However, so much of any award for
any such partial taking or condemnation as shall be necessary to render the
Hotel equivalent to its condition prior to such event shall be used for such
purpose; the balance of such award, if any, shall be fairly and equitably
apportioned between Owner and Management Company in accordance with their
respective interests. The amount of any award received by Owner and not
applied to restoration of the Hotel pursuant to Section 15.02.B shall be
deducted from the Priority Basis and the Loan Priority Basis at such time as the
award is received by Owner. In addition, the Performance Termination
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Threshold shall be reduced by an amount equal to eight percent (8%) of such
total amount (if any) of any award received by Owner pursuant to this Section
15.02.B which is not used to restore the Hotel.
C. In the event of any proceeding described in Section 15.02.A or
15.02.B, Owner and Management Company shall each have the right to initiate such
proceedings as they deem advisable to recover any damages to which they may be
entitled; provided, however, that Management Company shall be entitled to retain
the award or compensation it may obtain through proceedings which are conducted
separately from those of Owner only if such award or compensation does not
reduce the award or compensation otherwise available to Owner. (For this
purpose, any award or compensation received by any Holder shall be deemed to be
an award or compensation received by Owner).
15.03 Force Majeure
-------------
A. The withdrawal or revocation of any License which is material to the
operation of the Hotel in accordance with the Fairfield Inn System Standards,
where such withdrawal or revocation: (i) is not due to the fault of either
Management Company or Owner; and (ii) is not otherwise within the reasonable
control of either Management Company or Owner, shall not be an Event of Default
under Article XVI of this Agreement. Management Company and Owner shall each,
in good faith, use all commercially
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reasonable efforts (including the diligent pursuit of all available appeals),
during the period of one hundred twenty (120) days after the date of such
withdrawal or revocation, to have such License reinstated. If, notwithstanding
such efforts, such License is not reinstated prior to the expiration of the
aforesaid period of one hundred twenty (120) days, either Owner or Management
Company shall have the right, at its option, to terminate this Agreement upon no
less than sixty (60) days' notice to the other party; provided, however, that
the terminating party must deliver such notice of Termination to the other party
by no later than ninety (90) days after the expiration of such one hundred
twenty (120) day period; and provided further, that no such Termination shall be
effective if, prior to the effective date of such Termination, such License is
reinstated or such withdrawal or revocation of such License is stayed.
B. If an order, judgment or directive by a court or administrative body
is issued, in connection with any legal or Litigation involving Owner, which
restricts or prevents Management Company, in a material adverse manner, from
operating the Hotel in accordance with the Fairfield Inn System Standards, and
which, in Management Company's reasonable opinion, will have a significant
adverse effect upon operations of the Hotel, Management Company shall be
entitled, at its option, to terminate this Agreement upon sixty (60) days'
written notice; provided, however, that upon making such election, Management
Company shall deliver such notice
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of Termination to Owner by no later than ninety (90) days after the issuance of
such order, judgment or directive (or, if such order, judgment or directive is
appealed, within ninety (90) days after the final disposition of such appeal).
END OF ARTICLE XV
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ARTICLE XVI
DEFAULTS
--------
16.01 Definition of "Default"
-----------------------
Any one or more of the following shall constitute a "Default," to the
extent permitted by applicable law:
A. The filing of a voluntary petition in bankruptcy or insolvency or a
petition for reorganization under any bankruptcy law by either party, or the
admission by either party that it is unable to pay its debts as they become due;
B. The consent to an involuntary petition in bankruptcy or the failure to
vacate, within ninety (90) days from the date of entry thereof, any order
approving an involuntary petition by either party;
C. The entering of an order, judgment or decree by any court of competent
jurisdiction, on the application of a creditor, adjudicating either party as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets, and such order, judgment or decree's continuing unstayed
and in effect for any period of ninety (90) days;
D. The failure of either party to make any payment required to be made in
accordance with the terms of this Agreement, as of the due date which is
specified in this Agreement;
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E. The failure of either party to perform, keep or fulfill any of the
other covenants, undertakings, obligations or conditions set forth in this
Agreement.
16.02 Definition of "Event of Default"
--------------------------------
A. Upon the occurrence of any Default by either party hereto (hereinafter
referred to as the "defaulting party") under Section 16.01.A, B or C, such
Default shall immediately and automatically, without the necessity of any notice
to the defaulting party, constitute an "Event of Default" under this Agreement.
B. Upon the occurrence of any Default by defaulting party under Section
16.01.D, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within ten (10)
days after written notice from the non-defaulting party specifying such Default
and demanding such cure.
C. Upon the occurrence of any Default by either party hereto under Section
16.01.E, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within thirty (30)
days after written notice from the non-defaulting party and demanding such cure,
or, if the Default is such that it cannot reasonably be cured within said thirty
(30) day period of time, if the defaulting party fails to commence the cure of
such Default within said thirty (30) day period of time or thereafter fails to
diligently pursue such efforts to completion.
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16.03 Remedies Upon an Event of Default
---------------------------------
A. Upon the occurrence of an Event of Default under the provisions of
Section 16.02, the non-defaulting party shall have the right to pursue any one
or more of the following courses of action: (i) in the event of a material
breach by the defaulting party of its obligations under this Agreement, to
terminate this Agreement by written notice to the defaulting party, which
termination shall be effective as of the effective date which is set forth in
said notice, provided that said effective date shall be at least thirty (30)
days after the date of said notice; and provided further that, if the defaulting
party is the employer of all or a substantial portion of the employees at the
Hotel, the foregoing period of thirty (30) days shall be extended to
seventy-five (75) days (or such longer period of time as may be necessary under
applicable Legal Requirements pertaining to termination of employment); (ii) to
institute forthwith any and all proceedings permitted by law or equity,
including, without limitation, actions for specific performance and/or damages;
and (iii) to avail itself of any one or more of the other remedies described in
this Section 16.03.
B. Upon the occurrence of a Default by either party under the provisions
of Section 16.01.D, the amount owed to the non-defaulting party shall accrue
interest, at the Interest Rate, from and after the date on which such payment
was originally due to the non-defaulting party.
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C. The rights granted hereunder are intended to be cumulative, and shall
not be in substitution for, but shall be in addition to, any and all rights and
remedies available to the non-defaulting party (including, without limitation,
injunctive relief and damages; provided that the satisfaction of damage awards
against Owner shall be limited by the provisions of Section 16.04) by reason of
applicable provisions of law or equity.
16.04 Owner's Estate
--------------
Notwithstanding any other provisions of this Agreement, in the event of any
Event of Default by Owner pursuant to the terms of this Agreement, Management
Company shall look only to Owner's estate and interest in the Site and the Hotel
(which shall, for this purpose, include (i) amounts deposited in the Operating
Accounts and the FF&E Reserve, and (ii) accounts receivable) for the
satisfaction of a money judgment against Owner resulting from such Event of
Default, and no other property or assets of Owner, or of its partners, officers,
directors, shareholders or principals, shall be subject to levy, execution or
other enforcement procedure for the satisfaction of such judgment. Management
Company's right to look to Owner's estate and interest in the Site and the Hotel
for satisfaction of such a money judgment against Owner shall survive
Termination and shall not be affected by any one or more Sales of the Hotel.
Nothing contained in this Section 16.04 shall be deemed to affect or diminish
Management Company's remedies under
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this Article XVI other than money damages against Owner (including, without
limitation, Termination of this Agreement).
END OF ARTICLE XVI
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ARTICLE XVII
WAIVER AND PARTIAL INVALIDITY
-----------------------------
17.01 Waiver
------
The failure of either party to insist upon a strict performance of any of
the terms or provisions of this Agreement, or to exercise any option, right or
remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
17.02 Partial Invalidity
------------------
If any portion of this Agreement shall be declared invalid by order, decree
or judgment of a court, this Agreement shall be construed as if such portion had
not been inserted herein except when such construction would operate as an undue
hardship on Management Company or Owner, or constitute a substantial deviation
from the general intent and purpose of said parties as reflected in this
Agreement.
END OF ARTICLE XVII
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ARTICLE XVIII
ASSIGNMENT
----------
18.01 Assignment
----------
A. Management Company shall not assign or transfer its management
responsibilities under this Agreement without the prior written consent of
Owner; provided, however, that Management Company shall have the right, without
such consent, to (1) assign its interest in this Agreement to any of its
Affiliates, and any such Affiliate shall be deemed to be the Management Company
for the purposes of this Agreement, and (2) sublease shops or grant Licenses or
concessions at the Hotel so long as the terms of any such subleases, Licenses or
concessions; are consistent with the provisions of Section 2.02 and provided
further that Owner's consent shall be required prior to the execution by
Management Company of any such lease, license or concession which (a) has a term
of more than five (5) years, or (b) involves more than one thousand (1,000)
square feet of space within the Hotel. In the event of such an assignment by
Management Company of its interest in this Agreement to an Affiliate, the
Management Company which is named in the Preamble to this Agreement: (i) shall
automatically be deemed to guarantee the performance of such Affiliate under
this Agreement; (ii) shall, at the request of Owner, execute a guaranty, in form
and substance reasonably satisfactory to both parties, of
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the performance of such Affiliate under this Agreement (provided that the
failure of Owner to obtain an executed guaranty pursuant to this clause (ii)
shall not affect the validity or enforceability of the guaranty which is
automatically created pursuant to clause (i); and provided further, that, when
Owner does so receive an executed guaranty pursuant to this clause (ii), such
executed guaranty shall be deemed to have superseded the guaranty described in
clause (i) above); and (iii) shall make available to such Affiliate, in
connection with the performance by such Affiliate under this Agreement,
Management Company's skill, personnel, facilities and resources.
B. Owner shall not assign or transfer its interest in this Agreement other
than (i) in connection with a Sale of the Hotel which complies with the
provisions of Article XIX hereof, or (ii) as set forth in Section 18.01.C.
C. Nothing contained herein shall prevent: (i) the collateral assignment
of this Agreement by Owner as security for any Mortgage which complies with the
provisions of Section 3.01; or (ii) the transfer of this Agreement in connection
with a merger or consolidation or a sale of all or substantially all of the
assets of either party, provided that (x) if such transfer is by Owner, the
provisions of Article XIX hereof shall be complied with, and (y) if such
transfer is by Management Company, such transfer is being done as a part of a
merger, consolidation, etc., of all or
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substantially all of the business which consists of managing the Fairfield Inn
System.
D. In the event either party consents to an assignment of this Agreement
by the other, no further assignment shall be made without the express consent in
writing of such party, unless such assignment may otherwise be made without such
consent pursuant to the terms of this Agreement.
E. An assignment (either voluntarily or by operation of law) by Owner of
its interest in this Agreement (in compliance with Article XVIII) shall not
relieve Owner from its obligations under this Agreement which accrued prior to
the date of such assignment, but shall relieve Owner of such obligations
accruing after such date, if the assignment complies with Section 18.01.B and if
Management Company has received an assumption agreement executed by the assignee
(in form and substance reasonably satisfactory to Management Company). An
assignment (either voluntarily or by operation of law) by Management Company of
its interest in this Agreement shall not relieve Management Company from its
obligations under this Agreement, unless Owner so agrees in writing.
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F. Subject to the provisions of this Article XVIII, the terms and
conditions of this Agreement shall inure to the benefit
of, and be binding upon, the respective successors, heirs, legal
representatives, or assigns of each of the parties hereto.
END OF ARTICLE XVIII
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ARTICLE XIX
SALE OF THE HOTEL
-----------------
19.01 Sale of the Hotel
-----------------
A. Owner shall not enter into any Sale of the Hotel to any individual or
entity which: (i) does not have sufficient financial resources and liquidity to
fulfill Owner's obligations under this Agreement; (ii) is in control of or
controlled by persons who have been convicted of felonies involving moral
turpitude in any state or federal court; or (iii) is engaged in the business of
operating or franchising (as distinguished from owning) a branded hotel chain
having fifteen hundred (1,500) or more guest rooms in competition with
Management Company. An individual or entity shall not be deemed to be in the
business of operating hotels in competition with Management Company solely by
virtue of (x) the ownership of such hotels, either directly or indirectly
through subsidiaries, affiliates and partnerships, or (y) holding a Mortgage or
Mortgages secured by one or more hotels. Notwithstanding the foregoing, if
Owner or an Affiliate of Owner is a corporation whose shares are listed on a
public stock exchange, and if a Sale of the Hotel occurs as a result of
purchases of such shares, through such public stock exchange, in sufficient
quantities to cause a transfer of the "controlling interest" in Owner (as
described in the definition of "Sale of the Hotel"), and if such Sale of the
Hotel is not in compliance with the provisions of this Section 19.01.A,
Management
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Company shall have the right, at its option, to terminate this Agreement by
written notice to Owner (as more particularly described in Section 19.01.B), but
such non-compliance with this Section 19.01.A shall not be an Event of Default
nor shall it subject Owner to claims for damages by Management Company pursuant
to Article XVI.
B. If Owner receives a bona fide written offer to enter into a Sale of the
Hotel, Owner shall give written notice thereof to Management Company, stating
the name of the prospective purchaser or tenant, as the case may be. Such
notice shall include appropriate information relating to such prospective
purchaser or tenant demonstrating compliance with the provisions of Section
19.01.A together with such additional information as Management Company may
reasonably request. If Management Company decides that a Sale of the Hotel to
such prospective purchaser or tenant would violate the provisions of Section
19.01.A, Management Company shall so notify Owner by no later than thirty (30)
days after receipt of such notice from Owner; provided, however, that any
decision by Management Company regarding any such prospective purchaser or
tenant shall not be binding if the information furnished by Owner pursuant to
the preceding sentence is inaccurate. Concurrently with the finalization of
such Sale of the Hotel, the purchaser or tenant, as the case may be, shall, by
appropriate instrument reasonably satisfactory to Management Company, assume all
of Owner's obligations hereunder. An executed copy of such assumption
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agreement shall be delivered to Management Company. If the proposed Sale of the
Hotel would violate the provisions of Section 19.01.A, Owner will not enter into
any agreement relating to such Sale of the Hotel. However, if Owner does enter
into such an agreement, Management Company shall have the right to terminate
this Agreement by written notice to Owner, which notice will set an effective
date for such Termination not earlier than thirty (30) days, nor more than one
hundred twenty (120) days, following the date of the giving of such notice.
Management Company shall have the right to change such effective date of
Termination to coincide with the date of the finalization of the proposed Sale
of the Hotel. At Management Company's election, said notice of Termination
shall not be effective if such Sale of the Hotel is not finalized. If such
Termination by Management Company results from a Default by Owner under Section
19.01.A, such Termination shall not relieve Owner (except as otherwise set forth
to the contrary in the last sentence of Section 19.01.A) of liability to
Management Company for such Default.
C. In connection with the possibility of a Sale of the Hotel achieved by
means of a transfer of the controlling interest in Owner, Owner, upon written
request of Management Company, shall (unless Owner is a publicly-traded
corporation which is registered under Section 12 or Section 15 of the Securities
Act of 1934) furnish Management Company with a list of the names and addresses
of the owners of the capital stock, (but only those owners which
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hold an ownership interest of thirty percent (30%) or more), or the partnership
interests, (both (i) general partner and (ii) any limited partner holding an
ownership interest of thirty percent (30%) or more, or other ownership interests
in Owner. In addition, Owner shall notify Management Company of any transaction
or series of transactions in which Owner reduces its ownership interest in the
Hotel below fifty percent (50%) or in which the former controlling interest in
Owner is reduced below fifty percent (50%). Management Company agrees to use
diligent efforts to keep all such lists confidential.
D. It is understood that no Sale of the Hotel (which is otherwise in
compliance with the provisions of this Article XIX) shall reduce or otherwise
affect: (i) the current level of Working Capital; (ii) the current amount
deposited in the FF&E Reserve; or (iii) any of the Operating Accounts maintained
by Management Company pursuant to this Agreement. If, in connection with any
Sale of the Hotel, the selling Owner intends to withdraw, for its own use, any
of the cash deposits described in the preceding sentence, the selling Owner must
obtain the contractual obligation of the buying Owner to replenish those
deposits (in the identical amounts) simultaneously with such withdrawal. The
selling Owner is hereby contractually obligated to Management Company to ensure
that such replenishment in fact occurs. The obligations described in this
Section 19.01.D shall survive such Sale of the Hotel and shall survive
Termination.
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E. Management Company shall have the right to terminate this Agreement, on
thirty (30) days' written notice, if title to or possession of the Hotel is
transferred by judicial or administrative process (including, without
limitation, a Foreclosure, or a sale pursuant to an order of a bankruptcy court,
or a sale by a court-appointed receiver) to an individual or entity which would
not qualify as a permitted transferee under clause (i), (ii) or (iii) of Section
19.01.A, regardless of whether or not such transfer is the voluntary action of
the transferring Owner, or whether (under applicable law) the Owner is in fact
the transferor; provided, however, that Management Company shall not have the
right to so terminate this Agreement based on the assertion that a Qualified
Lender fails to so qualify as a permitted transferee under said clauses (i),
(ii) or (iii) of Section 19.01.A.
END OF ARTICLE XIX
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ARTICLE XX
MISCELLANEOUS
-------------
20.01 Right to Make Agreement
-----------------------
A. Each party warrants, with respect to itself, that neither the execution
of this Agreement nor the finalization of the transactions contemplated hereby
shall: (i) violate any provision of law or any judgment, writ, injunction,
order or decree of any court or governmental authority having jurisdiction over
it; (ii) result in or constitute a breach or default under any indenture,
contract, other commitment or restriction to which it is a party or by which it
is bound; to the extent that the remedies for such breach or default would have
a material adverse effect on such party's ability to perform under this
Agreement, or (iii) require any consent, vote or approval which has not been
taken, or at the time of the transaction involved shall not have been given or
taken. Each party covenants that it has and will continue to have throughout
the Term of this Agreement and any extensions thereof, the full right to enter
into this Agreement and perform its obligations hereunder.
B. Each party agrees that it will, as of the Effective Date, provide the
other party with: (i) certified copies of the applicable resolutions of its
board of directors (if it is a corporation), or written authorization by all
general partners (if it is a partnership) or other appropriate documentation
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establishing its authority to execute this Agreement; and (ii) such opinions of
counsel as the other party shall reasonably request regarding the matters
described in this Section 20.01.
20.02 Consents
--------
Wherever in this Agreement the consent or approval of Owner or Management
Company is required, such consent or approval shall (except to the extent that
such consent or approval is specifically designated as being "within the
discretion" of a party, or words to that effect, in the applicable provision)
not be unreasonably withheld, shall be in writing and shall be executed by a
duly authorized officer or agent of the party granting such consent or approval.
If either Owner or Management Company fails to respond within thirty (30) days
to a request by the other party for a consent or approval, such consent or
approval shall be deemed to have been given.
20.03 Agency
------
The relationship of Owner and Management Company shall be that of principal
and agent, and nothing contained in this Agreement shall be construed to create
a partnership or joint venture between them or their successors in interest.
Management Company's agency established by this Agreement is coupled with an
interest and may not be terminated by Owner until the expiration of the Term of
this Agreement, except as provided in Section 4.03 and in Articles XV or
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<PAGE>
XVI. Notwithstanding the agency relationship created by this Agreement, except
to the extent specifically set forth to the contrary in Section 20.12, nothing
contained herein shall prohibit, limit or restrict Management Company or any of
its Affiliates from developing, owning, operating, leasing, managing or
franchising hotels in the market area where the Hotel is located.
The agency coupled with an interest herein was created by a complex,
single, integrated transaction between Marriott Corporation (the parent
corporation of Owner and Management Company as of the Effective Date) and its
subsidiaries whereby Marriott Corporation and its subsidiaries developed,
constructed, own and manage the Hotel. This agency is further intended to
provide security for the covenants, promises and guarantees herein. The agency
was purchased for valuable consideration, and is not terminable except as
specifically allowed by the express provisions of this agreement. The parties
intend for this agency to be coupled with an interest, waive any right to claim
it is terminable at will, and further agree to be equitably estopped from
asserting that the agency is not coupled with an interest.
20.04 Confidentiality
---------------
The parties hereto agree that the matters set forth in this Agreement are
strictly confidential and each party will make every effort to ensure that such
matters are not disclosed to any outside person or entities (including the
press) without the written
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consent of the other party; provided, however, that such consent will not be
required with respect to: (i) legally required filings and other disclosures
mandated by Legal Requirements; and (ii) in the case of Owner, disclosure to any
Qualified Lender or prospective Qualified Lender, or to prospective purchasers
of the Hotel (subject to the provisions of Section 20.05, if applicable).
20.05 Equity Offerings
----------------
No reference to Management Company or to any of its Affiliates will be made
in any prospectus, private placement memorandum, offering circular or offering
documentation related thereto (herein collectively referred to as the
"Prospectus"), issued by Owner or one of its Affiliates, which is designed to
interest potential investors in the Hotel, unless Management Company has
previously received a copy of all such references. However, regardless of
whether Management Company does or does not so receive a copy of all such
references, neither Management Company nor any of its Affiliates will be deemed
a sponsor of the offering described in the Prospectus, nor will it have any
responsibility for the Prospectus, and the Prospectus will so state. Unless
Management Company agrees in advance, the Prospectus will not include: (i) any
Proprietary Marks; or (ii) except as required by applicable securities laws, the
text of this Agreement. Owner shall be entitled, however, to include in the
Prospectus an accurate summary of this Agreement; if there are no Legal
Requirements pursuant to
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which such information must be disclosed, appropriate measures shall be taken to
ensure entities or individuals receiving such Prospectus shall acknowledge the
confidentiality of such information. Owner shall indemnify, defend and hold
Management Company and its Affiliates (and their respective directors, officers,
shareholders, employees and agents) harmless from and against all loss, costs,
liability and damage (including attorneys' fees and expenses, and the cost of
Litigation) arising out of any Prospectus or the offering described therein.
20.06 Applicable Law
--------------
This Agreement shall be construed under and shall be governed by the laws
of the state where the Hotel is located.
20.07 Recordation
-----------
The terms and provisions of this Agreement shall run with the land
designated as the Site, and with Owner's interest therein, and shall be binding
upon all successors to such interest. At the request of either party, the
parties shall execute an appropriate memorandum of this Agreement in recordable
form and cause the same to be recorded in the jurisdiction where the Hotel is
located. Any cost of such recordation shall be borne by Management Company.
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20.08 Headings
--------
Headings of Articles and Sections are inserted only for convenience and are
in no way to be construed as a limitation on the scope of the particular
Articles or Sections to which they refer.
20.09 Notices
-------
Notices, statements and other communications to be given under the terms of
this Agreement shall be in writing, and shall be either (i) delivered by hand
against receipt, or (ii) sent by certified or registered mail, postage prepaid,
return receipt requested or (iii) sent by either a nationally utilized overnight
delivery service or by facsimile machine (provided that, in either case, a
confirmatory copy is thereafter sent by certified or registered mail):
To Owner:
--------
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department
with a copy to:
---------------
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Asset Management Department 72-1AD-02
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To Management Company:
---------------------
Fairfield FMC Corporation
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department
with a copy to:
---------------
Fairfield FMC Corporation
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Fairfield Inn
Vice President - Finance
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice which is properly mailed, as described
above, shall be deemed to have been served as of three (3) business days after
said posting.
20.10 Environmental Matters
---------------------
A. Management Company shall indemnify, defend and hold Owner and its
Affiliates (and their respective directors, officers, shareholders, employees
and agents) harmless from and against all loss, cost, liability and damage
(including, without limitation, engineers' and attorneys' fees and expenses, and
the cost of Litigation) arising from the placing, discharge, leakage, use or
storage of Hazardous Materials, in violation of applicable Environmental Laws,
on the Site or in the Hotel by Management Company's employees, representatives
or agents during the Term of
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this Agreement. Regardless of whether or not a given Hazardous Material is
permitted on the Site under applicable Environmental Law, Management Company
shall only bring on the Site such Hazardous Materials as are needed in the
normal course of business of the Hotel.
B. In the event of the discovery of Hazardous Materials on any portion of
the Site or in the Hotel during the Term of this Agreement, Owner shall (except
to the extent such removal is Management Company's responsibility pursuant to
Section 20.10.A) promptly remove (if required by applicable Environmental Law)
such Hazardous Materials, together with all contaminated soil and containers,
and shall otherwise remedy the problem in accordance with all Environmental
Laws. Owner shall (except to the extent that the removal of such Hazardous
Materials is Management Company's responsibility pursuant to Section 20.10.A)
indemnify, defend and hold Management Company and its Affiliates (and their
respective directors, officers, shareholders, employees and agents) harmless
from and against all loss, cost, liability and damage (including, without
limitation, engineers' and attorneys' fees and expenses, and the cost of
Litigation) arising from the presence of Hazardous Materials on the Site or in
the Hotel.
C. All costs and expenses of the removal of Hazardous Materials from the
Site or the Hotel pursuant to Section 20.10.B, and of the aforesaid compliance
with all Environmental Laws, and any amounts paid to Management Company pursuant
to the indemnity
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set forth in the last sentence of Section 20.10.B, shall be paid by Owner from
its own funds, not as a Deduction nor from the FF&E Reserve, and shall be
treated as an expenditure by Owner pursuant to Section 8.03.
20.11 Estoppel Certificates
---------------------
Each party to this Agreement shall at any time and from time to time, upon
not less than thirty (30) days' prior notice from the other party, execute,
acknowledge and deliver to such other party, or to any third party specified by
such other party, a statement in writing: (i) certifying that this Agreement is
unmodified and in full force and effect (or if there have been modifications,
that the same, as modified, is in full force and effect and stating the
modifications); (ii) stating whether or not to the best knowledge of the
certifying party (a) there is a continuing default by the non-certifying party
in the performance or observance of any covenant, agreement or condition
contained in this Agreement, or (b) there shall have occurred any event which,
with the giving of notice or passage of time or both, would become such a
default, and, if so, specifying each such default or occurrence of which the
certifying party may have knowledge; and (iii) stating such other information as
the non-certifying party may reasonably request. Such statement shall be binding
upon the certifying party and may be relied upon by the non-certifying party
and/or such third party specified by the non-certifying party as aforesaid. The
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obligations set forth in this Section 21.11 shall survive Termination (that is,
each party shall, on request, within the time period described above, execute
and deliver to the non-certifying party and to any such third party a statement
certifying that this Agreement has been terminated).
20.12 Trade Area Restriction Neither Management Company nor any of its
----------------------
Affiliates shall own, build, franchise, manage or operate any Restricted Hotel,
under the Fairfield Inn brand name, within the Restricted Area during the period
from the Effective Date through the sixth (6th) anniversary of the Effective
Date.
20.13 Arbitration
-----------
A. In the event of a dispute between Owner and Management Company with
respect to any issue of fact specifically mentioned
herein as a matter to be decided by arbitration, such dispute shall be
determined by arbitration as provided in this Section 20.13.
B. Disputes shall be resolved in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then pertaining. The
decision of the arbitrators shall be binding, final and conclusive on the
parties.
C. Owner and Management Company shall each appoint and pay all fees of a
fit and impartial person as arbitrator who shall have had at least ten (10)
years' recent professional experience in the general subject matter of the
dispute. Notice of such appointment
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shall be sent in writing by each party to the other, and the arbitrators so
appointed, in the event of their failure to agree within thirty (30) days after
the appointment of the second arbitrator upon the matter so submitted, shall
appoint a third arbitrator. If either Owner or Management Company shall fail to
appoint an arbitrator, as aforesaid, for a period of twenty (20) days after
written notice from the other party to make such appointment, then the
arbitrator appointed by the party having made such appointment shall appoint a
second arbitrator and the two so appointed shall, in the event of their failure
to agree upon any decision within thirty (30) days thereafter, appoint a third
arbitrator. If such arbitrators fail to agree upon a third arbitrator within
forty-five (45) days after the appointment of the second arbitrator, then such
third arbitrator shall be appointed by the American Arbitration Association from
its qualified panel of arbitrators, and shall be a person having at least ten
(10) years' recent professional experience as to the subject matter in question.
The fees of the third arbitrator and the expenses incident to the proceedings
shall be borne equally between Owner and Management Company, unless the
arbitrators decide otherwise. The fees of respective counsel engaged by the
parties, and the fees of expert witnesses and other witnesses called for the
parties, shall be paid by the respective party engaging such counsel or calling
or engaging such witnesses.
D. The decision of the arbitrators shall be rendered within thirty (30)
days after appointment of the third arbitrator. Such decision
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shall be in writing and in duplicate, one counterpart thereof to be delivered to
Owner and one to Management Company. A judgment of a court of competent
jurisdiction may be entered upon the award of the arbitrators in accordance with
the rules and statutes applicable thereto then obtaining.
20.14 Entire Agreement
----------------
This Agreement, together with other writings signed by the parties which
are expressly stated to be supplemental hereto and together with any instruments
to be executed and delivered pursuant to this Agreement, constitutes the entire
agreement between the parties, and supersedes all prior written and oral
understandings. This Agreement may be amended only by a writing signed by both
parties hereto.
END OF ARTICLE XX
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
Attest: OWNER:
HMH PROPERTIES, INC.
By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend
-------------------- ----------------------------
Attest: MANAGEMENT COMPANY:
FAIRFIELD FMC CORPORATION
By: /s/ Peter J. Swift By: /s/ James Sullivan
------------------- -------------------
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EXHIBITS ATTACHED TO ORIGINAL AGREEMENT
Exhibit "A" Location of Hotel; and Legal Description
Exhibit "A-1" Number of Suites and Brief Description of Facilities;
Priority Basis; Performance Termination Threshold; Loan Priority
Basis (number set forth in (i) of Definition); Revenue Index
Threshold
Exhibit "B" Form of Accounting Period Statement
Exhibit "C" [Intentionally Deleted]
Exhibit "D" Map of Restricted Area
Exhibit "D-1" Narrative Description of Restricted Area
Exhibit "E" Proprietary Marks which will remain the property of Owner after
Termination
Exhibit "F" Title Encumbrances; Existing CC&R's (separately describing those
charges thereunder which will be treated as capital expenditures
under Section 8.03); Existing Ground Lease (if applicable);
Existing Mortgages (if any)
Exhibit "G" Form of Annual Operating Statement
Exhibit "H" Form of Annual Operating Projection
<PAGE>
Exhibit 10.15(i)
HMH COURTYARD PROPERTIES, INC.
10400 Fernwood Road
Bethesda, Maryland 20817
September 25, 1993
Courtyard Management Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Gentlemen:
Reference is made to those certain Management Agreements ("Management
Agreements") of even date hereof between HMH Courtyard Properties, Inc. as
"Owner" thereunder and Courtyard Management Corporation as "Management Company"
thereunder relating to the operation of fifty-four (54) Courtyards By Marriott
(the "Hotel(s)") in those locations set forth in Exhibit A to this letter
agreement ("Letter Agreement"). This Letter Agreement, when executed by you,
will constitute Owner's and Management Company's further mutual agreement with
respect to certain matters set forth in the Management Agreements.
1. Definitions. The following terms, when used in this Letter Agreement,
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shall have the meanings indicated.
"Actual FF&E Balance" shall have the meaning set forth in paragraph 6(f) of
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this Letter Agreement.
"Average FF&E Balance" shall have the meaning set forth in paragraph 6(f)
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of this Letter Agreement.
"Bonus Incentive Fee" shall mean (a) with respect to any Sale or Partial
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Sale of any Hotel(s), the lesser of (i) fifty percent (50%) of the Net
Excess Sales Proceeds with respect to such Sale or Partial Sale, or (ii)
the cumulative amount of the Base Management Fee which is calculated in
accordance with, and (but for the provisions of paragraph 2(a) and 6(a) of
this Letter Agreement) would be otherwise payable to Management Company
pursuant to the Management Agreement applicable to such Hotel(s) (to the
extent not deferred under Section 5.02 B of such Management Agreement) and
paragraph 6(a) of this Letter Agreement from the period between the date
hereof and the earlier of (x) the closing date of such Sale and (y) the
close of Fiscal Year 2000; and (b) with respect to any one or more
Financing Transactions,
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the lesser of (i) fifty percent (50%) of the Cumulative Net Financing
Proceeds with respect to such Financing Transactions or (ii) the cumulative
amount of the Base Management Fee which is calculated in accordance with
and (but for the provisions of paragraph 2(a) and 6(a) of this Letter
Agreement) would be otherwise payable to Management Company pursuant to the
Management Agreement applicable to such Hotel(s) (to the extent not
deferred under Section 5.02 B of such Management Agreement) and paragraph
6(a) of this Letter Agreement for the period between the date hereof and
the earlier of the dates referred to in clauses (x) and (y) of provision
(a) of this definition; provided, however, that there shall be no Bonus
Incentive Fee payable from Cumulative Net Financing Proceeds in accordance
with this provision (b) of this definition until the date which is thirty
(30) days after the date upon which all of the Exchange Bonds have been
retired and paid in full. In calculating the Bonus Incentive Fee, any
amounts paid under provision (b) of this definition shall be credited
against amounts payable under provision (a).
"Consolidated Hotel" shall mean any Hotel which is subject to the
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consolidation provisions of paragraph 6(a) and has not been the subject of
a Deconsolidation Event.
"Consolidated FF&E Reserve" shall mean the consolidated FF&E Reserve
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maintained pursuant to paragraph 6(a).
"Cumulative Net Financing Proceeds" shall mean the cash proceeds actually
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received by Owner or its Affiliates from one or more Financing
Transactions, net of any Transaction Costs payable by Owner in connection
therewith, of any Hotel(s) from and after the date hereof in excess of (i)
Owner's then Priority Basis for such Hotel(s) and (ii) any amounts funded
by Owner in connection with a Deconsolidation Event pursuant to paragraph
6(f). In the event a Hotel is the subject of more than one Financing
Transaction due to a refinancing of debt incurred in any prior Financing
Transactions, Cumulative Net Financing Proceeds shall be the excess of the
highest principal amount borrowed in any one such Financing Transaction
over (x) Owner's then Priority Basis, (y) all Transaction Costs incurred
with respect to all such Financing Transactions, and (z) any amounts funded
by Owner in connection with a Deconsolidation Event pursuant to paragraph
6(f). In the event any Hotel is the subject of more than one Financing
Transactions but in differing pools or groups of Hotels, Cumulative Net
Financing Proceeds will be allocated to such Hotel on a fair and equitable
basis.
"Deconsolidated Hotel" shall mean any Hotel which has been subject to a
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Deconsolidation Event.
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"Deconsolidation Event" shall have the meaning set forth in paragraph 6(a).
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"Deferred Payments" shall have the meaning set forth in paragraph (b) in
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the definition of "Gross Sales Price".
"Exchange Bonds" shall have the same meaning set forth (at page 48) in
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Marriott Corporation's June 19, 1993 "Notice of 1993 Annual Meeting and
Proxy Statement."
"Financing Transaction" shall mean, with respect to any Hotel(s), any
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transaction which results in one or more mortgages, deeds of trust or other
security devices affecting such Hotel(s) and which secures a debt or
liability (absolute or contingent) of the Owner or any of its Affiliates in
an amount equal to at least 25% of the then Priority Basis of the Hotel. A
Financing Transaction shall not include leases of any of the Hotel's FF&E
or lines of credit pursuant to which Owner finances any Hotel's Working
Capital, FF&E or building improvements or additions agreed to by both Owner
and Management Company under Section 8.03 of the Management Agreements or
required to be made by Owner with its own funds under any of the provisions
of the Management Agreements.
"Gross Sales Price" shall mean all of the consideration actually received
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by Owner in connection with a Sale or one or more Partial Sales of any of
the Hotels, as and when received. In calculating Gross Sales Price the
following shall apply:
(a) There shall be excluded from Gross Sales Price the aggregate
amount of all deposits in cash reserve accounts (excluding the FF&E
Reserve), house banks and similar cash accounts not transferred as part of
a Sale. There shall be added to Gross Sales Price the amount of the FF&E
Reserve if such Reserve is retained by Owner and not transferred to the
purchaser.
(b) There shall be included in Gross Sales Price only consideration
which is actually received and available to Owner. Accordingly (but
without limiting the foregoing), any portion of the purchase price which is
"held back", deposited in escrow or which is payable on some future date or
event (including purchase money indebtedness, "earnout" payments or other
payments based in whole or in part on some future date or event
(collectively, "Deferred Payments") shall be excluded from Gross Sales
Price except if, and to the extent the same are actually received by, and
become available to, Owner. If any interest is payable to Owner in
connection with any Deferred Payments, Management Company
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shall receive interest on the payment of any Bonus Incentive Fees
attributable to such Deferred Payments at the same time Owner receives such
interest, such interest to be calculated for the same period of time for
which Owner receives such interest and at a rate equal to the interest rate
applicable to the Deferred Payment.
(c) Except with respect to Deferred Payments as provided in (b)
above, the Gross Sales Price shall not be reduced by any (i) contingent
liabilities of, or claims against, Owner and its Affiliates, including,
without limitation, claims or liabilities under indemnities,
representations, warranties or claims or liabilities based on torts arising
in connection with any Sale or Partial Sale or other similar agreements
(collectively, "Liabilities"), or (ii) cash flow or other guarantees
(including without limitation any such guarantees related to future
performance, value or other contingencies, or repurchase or similar
obligations relating to the Hotel (collectively, "Guarantees")). If,
following the date of a Sale or a Partial Sale with respect to which a
Bonus Incentive Fee was paid to Management Company out of Net Excess Sales
Proceeds, any payment is made by Owner or its Affiliates on account of such
Guarantees, Gross Sales Price and the Bonus Incentive Fee shall be
recalculated based on the amount of such payment, and Management Company
shall be obligated to make the remittance to Owner in accordance with
paragraph 5 of this Letter Agreement.
(d) If all or any portion of the consideration for any Sale or
Partial Sale is non-cash consideration ("Non-Cash Consideration")
(excluding instruments or agreements reflecting Deferred Payment
obligations which shall be governed by (b) above), then (subject to the
other provisions of this definition) the Gross Sales Price shall be
calculated based upon the fair market value of the consideration received.
If such fair market value is set forth in, or determinable by reference to
the agreement of purchase and sale between the purchaser and Owner, then
such value shall, absent bad faith, be binding for purposes of this Letter
Agreement. In all other cases, the fair market value of such consideration
shall be determined by agreement of Owner and Management Company, or absent
agreement, by arbitration in accordance with Section 20.13 of the
Management Agreement.
(e) For the purposes of determining a Bonus Incentive Fee to be paid
from the Net Excess Sales Proceeds of a Partial Sale, Owner's Priority
Basis shall be prorated based upon the percentage of ownership interest
transferred in each such Partial Sale. The Priority Basis shall be
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similarly prorated on a cumulative basis for each subsequent Partial Sale
until 100% of Owner's title and ownership interest in any Hotel which is
the subject of a Partial Sale (or the entity constituting the Owner of such
Hotel) has been sold.
"Host Marriott" shall mean Host Marriott Corporation, a Delaware
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corporation, and any entity which succeeds thereto, including any successor
by merger, recapitalization, reorganization, or by acquisition of all or
substantially all of the stock or assets of Host Marriott. The term "Host
Marriott" shall also include any entity to which there has been transferred
all or substantially all of the Hotels with respect to which a Sale has not
occurred (or all or substantially all of Host Marriott's interest in the
entities owning such Hotels) together with other assets of Host Marriott
(or any Affiliate thereof) with a fair market value equal to at least 25%
of the fair market value of such Hotels.
"Net Excess Sales Proceeds" shall mean the Gross Sales Price, less the sum
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of (i) the then Priority Basis of such Hotel, or in the event of a Partial
Sale, the prorated Priority Basis of such Hotel as set forth in paragraph
(e) of the definition of "Gross Sales Price", plus (ii) Transaction Costs
incurred in connection with such Sale or Partial Sale, plus (iii) any
amounts funded by Owner in connection with a Deconsolidation Event pursuant
to paragraph 6(e).
"Owner" shall mean HMH Courtyard Properties, Inc. or any entity to which
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there has been transferred any Hotel with respect to which a Sale has not
occurred.
"Non-Cash Consideration" shall have the meaning set forth in paragraph (d)
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of the definition of "Gross Sales Price".
"Partial Sale" shall mean any sale or transfer of less than all of the
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ownership interest of any Hotel(s) or the Owner of any Hotel(s) which
results in a reduction of the beneficial ownership (directly and
indirectly) of such Owner in such Hotel(s). Notwithstanding anything to
the contrary contained herein, a Partial Sale shall not include the sale of
any stock of Host Marriott over any public stock exchange. A Partial Sale
shall, however, be subject to the same provisions set forth in the
definition of a Sale which begin with the "provided, however" clause in the
first sentence of such definition and continue for the balance of such
definition.
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"Sale" shall mean the conveyance of all of Owner's title and ownership
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interest (whether as fee owner or ground lessee) in a Hotel or group of
Hotels or of the entity constituting the Owner of such Hotel or Hotels in a
single or a related sales transaction, including a Sale/Leaseback and shall
include a condemnation (or conveyance in lieu thereof) of all or
substantially all of a Hotel; provided, however, a Sale shall not include
(a) conveyance of a Hotel to a direct or indirect wholly owned Affiliate of
Owner or Host Marriott, (b) conveyance of a Hotel through foreclosure or
exercise of a power of sale or other remedy under a mortgage, deed of trust
or other security device or by deed in lieu thereof, (c) the termination or
expiration of the Owner's interest as lessee under a lease (or other
terminable possessory interest) or the dispossession of Owner by summary or
other eviction proceedings or the surrender by Owner of its rights as
lessee (or of possession) in lieu of any of the foregoing, (d) condemnation
of a Hotel or conveyance in lieu thereof of less than all or substantially
all of a Hotel, or a conveyance of a Hotel following material casualty and
the election of Owner not to restore, or (e) the granting of a mortgage,
deed of trust or other security device. For the purpose of this definition
of a "Sale", a "related sales transaction" shall be deemed to constitute a
Sale of two (2) or more Hotels when (i) the basic terms and conditions of
such conveyance were intended to be an integrated transaction, (ii) the
purchaser or the general partner or controlling stockholder of the
purchaser or such purchaser's general partner, are the same person, firm or
entity, and (iii) the closing on the Sale and the conveyance of title to
such Hotels occurs within six (6) months of each other and within six (6)
months after the date of the contract of Sale with respect to such Hotels.
In the case of a related sales transaction, a "Sale" of any Hotel which is
part of any related sales transaction shall not be deemed to have occurred
until the last Hotel which is the subject of such transaction has been
sold, but in no event later than six (6) months after the date of the
contract of sale with respect to such Hotel. At any time on or after a
conveyance described in (a) above, the Owner originally named herein shall
still be liable to pay the Bonus Incentive Fee as and when the same shall
be due hereunder and otherwise to perform the "Owner's" obligations
hereunder with respect to such Hotels.
"Sale/Leaseback" shall mean any transaction in which, contemporaneously
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with the conveyance of the Hotel to the purchaser, the purchaser or a
related party leases the Hotel to Owner or an Affiliate of Owner.
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"Transaction Costs" shall mean all of the reasonable costs actually paid
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by or on behalf of Owner or its Affiliates to third parties who are not
Affiliates of Owner in connection with a Sale, Partial Sale or Financing
Transaction, including, without limitation, brokerage commissions,
underwriting fees and discounts, title insurance, escrow and other title
fees and expenses, recording costs, survey costs, legal, accounting,
engineering and other professional fees and expenses, deed, transfer,
sales, gains, use and other taxes (other than income taxes).
Unless the context requires otherwise, all other capitalized terms used in
this Letter Agreement shall have the same meaning they have in the Management
Agreements, as in effect on the date hereof.
2. Bonus Incentive Fee.
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(a) With respect to each Hotel, until the earlier to occur of (i) the
close of Fiscal Year 2000, or (ii) a Sale of such Hotel (including one or more
Partial Sales, but only if, on a cumulative basis, at least fifty percent (50%)
of the ownership interest in such Hotel or in the Owner of such Hotel has been
sold), or (iii) conveyance of a Hotel through the occurrence of an event
described in clause (b) and clause (c) in the definition of "Sale", the
cumulative amount of the Base Management Fee (to the extent not deferred
pursuant to Section 5.02 B thereof) and Deferred Contingent Base Fee otherwise
payable pursuant to the Management Agreement shall not be paid to Management
Company but shall be retained by Owner; provided, however, that for purposes of
all calculations, payments (other than the actual payment of Base Management
Fee) distributions and determinations under the Management Agreement (including,
without limitation, Owner's Priority, Incentive Management Fee, Operating
Profit, but excluding Owner's right to terminate the Management Agreement)
Management Company shall be deemed to have received such Base Management Fee or
Deferred Contingent Base Fee. The Base Management Fee or Deferred Contingent
Base Fee shall be remitted to Owner at the same times as it would have been paid
to Management Company under the Management Agreements.
(b) In lieu of the payment of the Base Management Fee and Deferred
Contingent Base Fee during the period provided for in paragraph 2(a), Owner
shall, so long as Owner has not terminated the Management Agreement because of
an Event of Default by Management Company, upon a Sale of any Hotel(s)
(including, without limitation, a Partial Sale) or upon a Financing Transaction
with respect to any Hotel(s), pay to Management Company the Bonus Incentive Fee
with respect to such Hotel(s). In the event of a contemporaneous Sale or
Partial Sale of Hotel(s) to a single third party purchaser or related purchasers
(including,
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without limitation, a Partial Sale) who are not Affiliates of Owner, the Net
Excess Sale Proceeds for all such Hotel(s) shall be aggregated together and the
Bonus Incentive Fee shall be calculated on a combined (as opposed to a
Hotel-by-Hotel) basis.
(c) For each Hotel, from and after the earlier to occur of (i) a Sale
(including one or more Partial Sales, but only if, on a cumulative basis, at
least fifty percent (50%) of the ownership interest in such Hotel or in the
Owner of such Hotel has been sold) or (ii) the close of Fiscal Year 2000, the
Base Management Fee shall no longer be retained by Owner under paragraph 2(a)
above, but shall be paid to Management Company in accordance with the terms of
the Management Agreement relating to such Hotel. If no Sale or Financing
Transaction has occurred prior to the close of Fiscal Year 2000, Owner shall
remain obligated to pay the Bonus Incentive Fee upon the occurrence of a Sale, a
Partial Sale, or, to the extent otherwise permitted by this Letter Agreement,
upon the occurrence of a Financing Transaction. After a Sale of a Hotel has
occurred, Management Company shall no longer be entitled to receive a Bonus
Incentive Fee with respect to any subsequent Sale, Partial Sale or Financing
Transaction with respect to such Hotel.
(d) Notwithstanding the foregoing, or anything to the contrary
contained in this Letter Agreement, in the Management Agreement, or in any
Non-Disturbance Agreement now or hereafter entered into with the Holder of a
Secured Loan, or the landlord under a lease of a Hotel or the land thereunder,
in the event of the occurrence of any of the events described in clauses (b) or
(c) of the definition of "Sale" neither Owner nor any other party, including any
Holder or lessor (except as provided below), shall then or thereafter have any
obligation to make any payment of the Bonus Incentive Fee to Management Company,
and from and after the occurrence of any such event, Management Company (to the
extent it is entitled to continue to manage the Hotel pursuant to the terms of a
Non-Disturbance Agreement or other arrangement with a successor owner of the
Hotel) shall be entitled to receive the Base Management Fee accruing from and
after the occurrence of any such event.
(e) Thirty (30) days after the date upon which all Exchange Bonds
have been retired and paid in full, Owner shall (i) present to Management
Company a computation of Cumulative Net Financing Proceeds from all Financing
Transactions occurring prior to such date and (ii) pay to Management Company
any Bonus Incentive Fee due with respect to such Cumulative Net Financing
Proceeds.
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3. Notice of Sales and Financing Transactions.
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(a) Owner shall give Management Company written notice no later than
ten (10) days prior to the scheduled closing date for any proposed Sale or
Partial Sale. Promptly, but in no event later than ten (10) days after (i)
Owner has concluded a Sale or a Partial Sale and (ii) Management Company has
delivered to Owner the Accounting Period Statement for the Accounting Period
ending on or immediately prior to the closing of the Sale or Partial Sale (and,
if the closing did not occur on the last day of an Accounting Period, a
statement of Gross Revenues for the period from the first day of the Accounting
Period in which the closing occurred to the closing date), Owner shall give
notice thereof to Management Company. The post closing notice with respect to a
Sale or Partial Sale shall include: (A) the amount of the Gross Sales Price
paid on the closing (and, in the case of a Partial Sale, paid at the time of all
prior Partial Sales, if any); (B) the Priority Basis of the Hotel(s) subject to
the Sale or a Partial Sale on the closing date and if such Priority Basis was
other than the Priority Basis on the Effective Date, a statement setting forth
the amounts and types of increases or decreases; (C) a statement of Transaction
Costs; (D) the calculation of Net Excess Sales Proceeds and Bonus Incentive Fee;
(E) any contractual Guarantees created or assumed by Owner or its Affiliates in
connection therewith (which obligation may be satisfied by delivery to
Management Company of copies of the agreements relating to such Guarantees); (F)
copies of the sales contract with respect to such Sale or Partial Sale; and (G)
in the case of a Partial Sale, copies of appropriate documentation evidencing
the percentage of the ownership interest which was transferred. If all or part
of the consideration for the Sale or Partial Sale includes Deferred Payments,
Owner shall also notify Management Company of the terms thereof and shall send
Management Company copies of executed documents or other appropriate evidence
describing the Deferred Payments. If Owner has accepted Non-Cash Consideration
as all or part of the consideration for the Sale or Partial Sale, Owner shall
describe such Non-Cash Consideration and state the fair market value thereof.
(b) Owner shall give Management Company written notice no later than
ten (10) days prior to the scheduled closing date for any proposed Financing
Transaction. Promptly, but in no event later than ten (10) days after (i) Owner
has concluded a Financing Transaction with respect to a Hotel and (ii)
Management Company has delivered to Owner the Accounting Period Statement for
the Accounting Period ending on or immediately prior to the closing of the
Financing Transaction (and if the closing did not occur on the last day of an
Accounting Period, a statement of Gross Revenues for the period from the first
day of the Accounting Period in which the closing occurred to the closing date),
Owner shall give notice thereof to the Management Company. Any post closing
notice
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with respect to a Financing Transaction shall include: (A) the amount of the
Cumulative Net Financing Proceeds received on the date of the closing, plus the
amount of all such Proceeds received from all prior Financing Transactions; (B)
the Priority Basis of the Hotel(s) subject to the Financing Transaction on the
closing date, and if such Priority Basis was other than the Priority Basis on
the date hereof, a statement setting forth the amounts and types of increases or
decreases; (C) a statement of Transaction Costs; (D) the calculation of any
Bonus Incentive Fee; and (E) any contractual Guarantees created or assumed in
connection therewith (which obligations may be satisfied by delivery to
Management Company of copies of agreements relating to such Guarantees).
(c) At the time of the giving of any notice of a Sale or a Partial
Sale or a Financing Transaction which relates to more than one Hotel (or a Hotel
and other assets), Owner shall also set forth in such notice a statement
allocating, as appropriate, the Gross Sales Price, Net Excess Sales Proceeds and
the Cumulative Net Financing Proceeds between the sold or financed Hotels and
such other assets.
(d) Absent bad faith, the statements of Owner set forth in notices
given under (a), (b) and (c) of this paragraph 3 shall be binding and conclusive
upon the parties with respect to the matters set forth therein, unless within
ninety (90) days after the giving of such notice Management Company sends Owner
notice (i) stating that it disputes one or more items set forth in Owner's
notice and (ii) sets forth in reasonable detail the disputed item, the amount of
the disputed item as calculated by Management Company and the basis for such
calculation. Notwithstanding the foregoing, if the Gross Revenues for the period
preceding the closing date shall be revised as a result of an Annual Operating
Statement (or audit thereof) the Bonus Incentive Fee shall be recalculated based
upon such revised figures.
4. Payment of Bonus Incentive Fee.
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(a) Simultaneously with delivery of Owner's notice under paragraph 3,
Owner shall pay to Management Company any Bonus Incentive Fee then payable in
immediately available funds, as calculated pursuant to this Letter Agreement.
(b) When actually received by Owner, the principal amount of any
Deferred Payments shall be prorated between Owner and Management Company based
upon the ratio that existed at the time of such Sale or Partial Sale between
Owner's Priority Basis and the amount of the Bonus Incentive Fee that would have
been paid on the date of such Sale or Partial Sale, had the Net Excess Sales
Proceeds been received in full on such date, until the Bonus
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Incentive Fee with respect to such Deferred Payments has been paid in full.
(c) If Owner subsequently receives a Deferred Payment and such
Deferred Payment would increase Management Company's Bonus Incentive Fee, Owner
shall, subject to paragraph 5 below, promptly (but in any event within ten (10)
days following receipt) (i) notify Management Company of receipt of such
Deferred Payment together with a calculation of (x) the additional Bonus
Incentive Fee due to Management Company and (y) any interest due thereon in
accordance with the provisions of clause (b) in the definition of Gross Sales
Price, and (ii) remit to Management Company such additional Bonus Incentive Fee
plus any interest due thereon. If Owner shall fail to pay any amount due to
Management Company within the time period provided for in paragraph 4(c), (i)
such amounts shall bear interest at the Interest Rate, and (ii) Management
Company shall have all rights and remedies available to it at law or in equity
with respect to Owner's failure to make such payments.
(d) Notwithstanding any election by Owner to negotiate, sell or
monetize any note or similar instrument evidencing an obligation to make
Deferred Payment at a discount (i.e., for consideration which is less than the
face value of the principal amount outstanding of such Deferred Payments), no
such discount shall apply with respect to the calculation of Net Excess Sales
Proceeds for the purpose of determining any amounts due on account of any Bonus
Incentive Fee, and the Bonus Incentive Fee shall continue to be calculated and
paid as if Owner still owned such note or similar instrument.
(e) No payment of any Bonus Incentive Fee shall be payable from the
NetExcess Sales Proceeds of any one or more Partial Sales unless and until the
cumulative amount of such proceeds equals ten percent (10%) or more of the
Priority Basis of the Hotel(s) which were the subject of such Partial Sales or
which are owned by the ownership entity which was the subject of such Partial
Sales.
(f) If, due to an Event of Default by Owner under a Management
Agreement with respect to a particular Hotel, Management Company terminates the
Management Agreement pursuant to Section 16.03 A thereof, the amount of any Base
Management Fee with respect to such Hotel which has not been paid to Management
Company but has been retained by Owner pursuant to paragraph 2(a) of this Letter
Agreement shall become immediately due and payable by Owner.
(g) Host Marriott hereby guarantees the timely payments to Management
Company by Owner under this paragraph 4.
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5. Adjustment for Guarantees.
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(a) At any time and from time to time up to the tenth (10th)
anniversary date of the closing of a Sale, Partial Sale or a Financing
Transaction, Owner may notify Management Company that it or its Affiliate has
paid a Guarantee in connection with such Sale, Partial Sale or Financing
Transaction. Such notice shall be accompanied by a calculation indicating the
reduction, if any, in the Bonus Incentive Fee which has resulted from the
payment of such Guarantee. Within thirty (30) days after receipt of such
notice, Management Company shall remit to Owner any overpayment in the Bonus
Incentive Fee previously paid to Management Company. In addition, any
additional payments of Bonus Incentive Fee (pursuant to paragraph 4(c) or
otherwise) with respect to such Hotel shall be made only after taking into
account the Guarantees theretofore paid by Owner with respect to such Hotel.
(b) If, at any time and from time to time until the full amount of
all Deferred Payments with respect to a particular sale have been received in
full, there shall be a default in the payment of any such Deferred Payments,
Owner may notify Management Company that such a default has occurred. Such
notice shall be accompanied by a calculation indicating the reduction, if any,
in the Bonus Incentive Fee which has resulted from such default. Within thirty
(30) days after the receipt of such notice Management Company shall refund to
Owner any overpayment in the Bonus Incentive Fee previously paid to Management
Company. To the extent defaulted amounts are subsequently recovered by Owner,
Owner shall promptly remit to Management Company any portion thereof
attributable to such refunded Bonus Incentive Fee.
(c) If Management Company shall fail to pay any amount due to Owner
within the time period provided for in paragraph 5(a) and 5(b), (i) such amounts
shall bear interest at the Interest Rate, and (ii) Owner shall have all rights
and remedies available to it at law or in equity with respect to Management
Company's failure to make such payments.
(d) Marriott International hereby guarantees the timely payments to
Owner by Management Company under this paragraph 5.
6. Consolidation.
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(a) Until the earlier of (i) the close of the year 2000 or (ii) such
time as any given Hotel has been the subject of either a Sale or one or more
Partial Sales but only if, on a cumulative basis, at least 50% of the ownership
interest has been sold, or a Financing Transaction (a "Deconsolidation Event"),
(x) Management Company shall be permitted to commingle all of such Hotel's
Working Capital and banking accounts, including the FF&E
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Reserve, into one or more accounts under Management Company's control in
accordance with practices currently in effect as of the date of the Management
Agreement, and (y) the reporting requirements of each such Hotel pursuant to the
Management Agreement therefor and the calculation, payment, distribution,
determination or deposit, as the case may be, of each such Hotel's Gross
Revenues, FF&E Reserve, Owner's Priority, Management Company's Base Management
Fee, Courtyard by Marriott System Fee, Incentive Management Fee, Chain Services,
Operating Profit and Owner's right to terminate the Management Agreement with
respect to each such Hotel shall be consolidated with the reporting requirements
and the calculation, payment, distribution, determination or deposit, as the
case may be, with respect to all Consolidated Hotel(s).
(b) From and after the occurrence of a Deconsolidation Event with
respect to any Hotel, except with respect to a Financing Transaction (provision
for which is made in paragraph 6(c) hereof), the reporting requirements for such
Hotel and the calculation, payment, distribution, determination or deposit, as
the case may be, of such Hotel's Gross Revenues, FF&E Reserve, Owner's Priority,
Base Management Fee, System Fee, Incentive Management Fee, Operating Profit and
Owner's right to terminate shall be done solely with respect to such Hotel and
shall not be consolidated with the reporting requirements and such calculation,
payment, distribution, determination or deposit with any other Hotel without
Management Company's prior consent.
(c) Notwithstanding the provision of clause (i) of paragraph 6(a)
above, from and after the occurrence of a Deconsolidation Event which is due to
a Financing Transaction which occurs prior to the close of the year 2000 with
respect to all or any group of the Hotels, the reporting requirements for all
such Hotels and the calculation, payment, distribution, determination or
deposit, as the case may be, of such Hotels' Gross Revenues, FF&E Reserve,
Owner's Priority, Base Management Fee, the Courtyard by Marriott System Fee,
Incentive Management Fee, Operating Profit and Owner's right to terminate shall
be consolidated with respect to all Hotels which are the subject of the same or
related Financing Transaction until the later of (i) the close of the year 2000
or (ii) the earlier to occur of (x) the maturity of the loan or loans which is
the subject of such Financing Transaction or (y) the close of the year 2002.
(d) Owner shall give Management Company prompt notice of any
Deconsolidation Event accompanied by reasonable documentation evidencing the
occurrence thereof, and paragraph 6(a) of this Letter Agreement shall terminate
with respect to the Deconsolidated Hotels as of the Deconsolidation Event,
except with respect to Hotels which are subject to a Financing Transaction,
special provision for which is made in paragraph 6(c), above.
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<PAGE>
(e) Notwithstanding the provisions of paragraph (a) above, to the
extent the determination of a Hotel's Gross Revenues, FF&E Reserve, Owner's
Priority, Base Management Fee, Courtyard by Marriott System Fee, Incentive
Management Fee, Operating Profit or Owner's termination rights after a
Deconsolidation Event requires calculation of such Hotel's Gross Revenues, FF&E
Reserve, Owner's Priority, Base Management Fee, Courtyard by Marriott System
Fee, Incentive Management Fee, Operating Profit or Owner's termination rights
prior to such Deconsolidation Event, then, for such purposes only, the
calculation of such Revenues, Reserve, Priority, Fee or Profit prior to such
Deconsolidation Event shall be maintained on a deconsolidated (i.e.,
Hotel-by-Hotel) basis. Accordingly, in order to be able to utilize the same
after a Deconsolidation Event or a Partial Sale, and in order to determine the
amount of a Qualified Loan with respect to any Hotel or Hotel(s) Management
Company shall, during the period from and after the date hereof and prior to a
Deconsolidation Event, in addition to the reporting required under paragraph (a)
above, maintain records and provide reports on a quarterly basis to Owner
describing each Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Priority
Basis, Management Company's Base Management Fee, System Fee, Incentive
Management Fee and Operating Profit on a deconsolidated (i.e., Hotel-by-Hotel)
basis as if paragraph (a) above did not exist. Such quarterly reports shall be
subject to Fiscal Year end audit and adjustments. However, in no event shall
the foregoing in any manner modify the amounts owed by Management Company or
Owner with respect to the period prior to the Deconsolidation Event, calculated
on a consolidated basis. So long as the original Owner named herein, or Host
Marriott or any of its subsidiaries or Afiliates, is the Owner of any Hotel,
that portion of Section 9.05, if any, which grants Owner the right to request
Management Analysis Reports on any individual Hotels shall be waived.
(f) Upon the occurrence of a Deconsolidation Event with respect to
any Hotel, such Hotel, as a Deconsolidated Hotel, shall no longer be a
participant in the Consolidated FF&E Reserve maintained under paragraph 6(a).
Accordingly, upon receipt of Owner's notice of a proposed Deconsolidation Event,
Management Company shall compute the "Average FF&E Balance" (defined below) and
the "Actual FF&E Balance" (defined below) as of the close of the Accounting
Period immediately preceding the Deconsolidation Event. For purposes of this
computation:
(i) "Actual FF&E Balance" shall mean, with respect to any
-------------------
Consolidated Hotel which is about to become a Deconsolidated
Hotel, the difference between (x) the actual aggregate amount
(per guestroom) which has been contributed to the Consolidated
FF&E Reserve by such Hotel; less (y) the actual aggregate amount
----
(per guestroom) which has been
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<PAGE>
withdrawn from the Consolidated FF&E Reserve by such Hotel.
(ii) "Average FF&E Balance" shall mean, with respect to all
--------------------
Consolidated Hotels, including those in (i) above, the difference
between (x) the average aggregate amount (per guestroom) which
has been contributed to the Consolidated FF&E Reserve by all such
Consolidated Hotels; less (y) the average aggregate amount (per
----
guestroom) which has been withdrawn from the Consolidated FF&E
Reserve by all such Consolidated Hotels.
The contributions and withdrawals referred to in (i) and (ii) above shall be
those which were made from the period between the Effective Date of the
Management Agreements and the close of the Accounting Period immediately prior
to the date of the Deconsolidation Event.
If seventy-five percent (75%) of the Average FF&E Balance exceeds the Actual
FF&E Balance, the amount of such excess (multiplied by the number of guestrooms
in the Hotel in question) shall be paid by Owner into the consolidated FF&E
Reserve for use, in accordance with the Management Agreement, at the
Consolidated Hotels. If the Actual FF&E Balance exceeds one hundred twenty-five
percent (125%) of the Average FF&E Balance, the amount of such excess
(multiplied by the number of guestrooms in the Hotel in question) shall be
transferred (such transfer to occur after the completion of the calculations
referred to in this subsection (e) but in no event prior to the Deconsolidation
Event) by Management Company from such consolidated FF&E Reserve to the separate
FF&E Reserve for the Deconsolidated Hotel which shall be established as of the
date of such Deconsolidation Event, for use in accordance with the Management
Agreement applicable to such Deconsolidated Hotel. All such payments and
transfers shall be made either on or immediately after the date of the
Deconsolidation Event.
7. Interim Distributions. So long as the Original Owner named herein, or
---------------------
Host Marriott or any of its subsidiaries or Affiliates, is the Owner of any Inn,
Management Company agrees that the interim distributions of Owner's Distribution
which are described in the second to last sentence of Section 5.02 A of the
Management Agreement which is applicable to such Inn shall (notwithstanding the
provisions of said Section 5.02 A regarding the frequency of such distributions)
be made twice per Accounting Period, rather than once per Accounting Period.
The first interim distribution (in the amount of one-half of the estimated
Owner's Distribution for each Accounting Period) shall be made by no later than
the twentieth (20th) day after the beginning of such Accounting Period. The
second interim distribution (in the amount of the remainder of such Owner's
Distribution) with respect to
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<PAGE>
such Accounting Period shall be made by no later than the fifth (5th) day after
the end of such Accounting Period. In addition, there will be an adjustment (if
necessary) of these interim distributions as of the delivery of the Accounting
Period Statement with respect to such Accounting Period, and any such adjustment
shall be included in the first interim distribution referred to above for the
following Accounting Period. The foregoing shall have no effect on the
frequency of the preparation of Accounting Period Statements, which shall
continue to be as set forth in Section 5.02 of the Management Agreement.
8. Conflict With Management Agreement. In the event of a conflict between
----------------------------------
the terms, conditions and provisions hereof and the Management Agreements, the
terms, conditions and provisions of this Letter Agreement shall prevail.
9. Ratification. As amended hereby, the Management Agreements remain in
------------
full force and effect and are hereby ratified and confirmed.
10. Governing Law. This Letter Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Maryland without giving
effect to principles of conflicts of law.
11. Notices. Any notices by either party to this Letter Agreement shall
-------
be given in accordance with Section 20.09 of the Management Agreements.
If the foregoing correctly sets forth our agreement with respect to the
matters contained herein, please indicate your agreement by signing a copy of
this Letter Agreement in the space provided and returning it to us.
Very truly yours,
HMH COURTYARD PROPERTIES, INC.
By: /s/ Christopher G. Townsend
------------------------------
Vice President
Accepted and agreed:
COURTYARD MANAGEMENT CORPORATION
By: /s/ James Sullivan
---------------------
Vice President
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<PAGE>
Accepted and agreed:
MARRIOTT INTERNATIONAL, INC.
By: /s/ James Sullivan
---------------------
Vice President
[FORM OF GUARANTEE ATTACHED TO ORIGINAL]
Accepted and agreed:
HOST MARRIOTT CORPORATION
By: /s/ Stephen J. McKenna
-----------------------
Vice President
[FORM OF GUARANTEE ATTACHED TO ORIGINAL]
-17-
<PAGE>
Exhibit 10.15(ii)
HMH PROPERTIES, INC.
10400 Fernwood Road
Bethesda, Maryland 20817
September 25, 1993
Residence Inn By Marriott, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Gentlemen:
Reference is made to those certain Management Agreements ("Management
Agreements") of even date hereof between HMH Properties, Inc. as "Owner"
thereunder and Residence Inn by Marriott, Inc. as "Management Company"
thereunder relating to the operation of eighteen (18) Residence Inns By Marriott
(the "Inn(s)") in those locations set forth in Exhibit A to this letter
agreement ("Letter Agreement"). This Letter Agreement, when executed by you,
will constitute Owner's and Management Company's further mutual agreement with
respect to certain matters set forth in the Management Agreements.
1. Definitions. The following terms, when used in this Letter Agreement,
-----------
shall have the meanings indicated.
"Actual FF&E Balance" shall have the meaning set forth in paragraph 6(f) of
-------------------
this Letter Agreement.
"Average FF&E Balance" shall have the meaning set forth in paragraph 6(f)
--------------------
of this Letter Agreement.
"Bonus Incentive Fee" shall mean (a) with respect to any Sale or Partial
-------------------
Sale of any Inn(s), the lesser of (i) fifty percent (50%) of the Net Excess
Sales Proceeds with respect to such Sale or Partial Sale, or (ii) the
cumulative amount of the Base Management Fee which is calculated in
accordance with, and (but for the provisions of paragraph 2(a) and 6(a) of
this Letter Agreement) would be otherwise payable to Management Company
pursuant to the Management Agreement applicable to such Inn(s) (to the
extent not deferred under Section 5.02 B of such Management Agreement) and
paragraph 6(a) of this Letter Agreement from the period between the date
hereof and the earlier of (x) the closing date of such Sale and (y) the
close of Fiscal Year 2000; and (b) with respect to any one or more
Financing Transactions, the
<PAGE>
lesser of (i) fifty percent (50%) of the Cumulative Net Financing Proceeds
with respect to such Financing Transactions or (ii) the cumulative amount
of the Base Management Fee which is calculated in accordance with and (but
for the provisions of paragraph 2(a) and 6(a) of this Letter Agreement)
would be otherwise payable to Management Company pursuant to the Management
Agreement applicable to such Inn(s) (to the extent not deferred under
Section 5.02 B of such Management Agreement) and paragraph 6(a) of this
Letter Agreement for the period between the date hereof and the earlier of
the dates referred to in clauses (x) and (y) of provision (a) of this
definition; provided, however, that there shall be no Bonus Incentive Fee
payable from Cumulative Net Financing Proceeds in accordance with this
provision (b) of this definition until the date which is thirty (30) days
after the date upon which all of the Exchange Bonds have been retired and
paid in full. In calculating the Bonus Incentive Fee, any amounts paid
under provision (b) of this definition shall be credited against amounts
payable under provision (a).
"Consolidated Inn" shall mean any Inn which is subject to the consolidation
----------------
provisions of paragraph 6(a) and has not been the subject of a
Deconsolidation Event.
"Consolidated FF&E Reserve" shall mean the consolidated FF&E Reserve
-------------------------
maintained pursuant to paragraph 6(a).
"Cumulative Net Financing Proceeds" shall mean the cash proceeds actually
---------------------------------
received by Owner or its Affiliates from one or more Financing
Transactions, net of any Transaction Costs payable by Owner in connection
therewith, of any Inn(s) from and after the date hereof in excess of (i)
Owner's then Priority Basis for such Inn(s) and (ii) any amounts funded by
Owner in connection with a Deconsolidation Event pursuant to paragraph
6(f). In the event an Inn is the subject of more than one Financing
Transaction due to a refinancing of debt incurred in any prior Financing
Transactions, Cumulative Net Financing Proceeds shall be the excess of the
highest principal amount borrowed in any one such Financing Transaction
over (x) Owner's then Priority Basis, (y) all Transaction Costs incurred
with respect to all such Financing Transactions, and (z) any amounts funded
by Owner in connection with a Deconsolidation Event pursuant to paragraph
6(f). In the event any Inn is the subject of more than one Financing
Transactions but in differing pools or groups of Inns, Cumulative Net
Financing Proceeds will be allocated to such Inn on a fair and equitable
basis.
"Deconsolidated Inn" shall mean any Inn which has been subject to a
------------------
Deconsolidation Event.
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<PAGE>
"Deconsolidation Event" shall have the meaning set forth in paragraph 6(a).
---------------------
"Deferred Payments" shall have the meaning set forth in paragraph (b) in
-----------------
the definition of "Gross Sales Price".
"Exchange Bonds" shall have the same meaning set forth (at page 48) in
--------------
Marriott Corporation's June 19, 1993 "Notice of 1993 Annual Meeting and
Proxy Statement."
"Financing Transaction" shall mean, with respect to any Inn(s), any
---------------------
transaction which results in one or more mortgages, deeds of trust or other
security devices affecting such Inn(s) and which secures a debt or
liability (absolute or contingent) of the Owner or any of its Affiliates in
an amount equal to at least 25% of the then Priority Basis of the Inn. A
Financing Transaction shall not include leases of any of the Inn's FF&E or
lines of credit pursuant to which Owner finances any Inn's Working Capital,
FF&E or building improvements or additions agreed to by both Owner and
Management Company under Section 8.03 of the Management Agreements or
required to be made by Owner with its own funds under any of the provisions
of the Management Agreements.
"Gross Sales Price" shall mean all of the consideration actually received
-----------------
by Owner in connection with a Sale or one or more Partial Sales of any of
the Inns, as and when received. In calculating Gross Sales Price the
following shall apply:
(a) There shall be excluded from Gross Sales Price the aggregate
amount of all deposits in cash reserve accounts (excluding the FF&E
Reserve), house banks and similar cash accounts not transferred as part of
a Sale. There shall be added to Gross Sales Price the amount of the FF&E
Reserve if such Reserve is retained by Owner and not transferred to the
purchaser.
(b) There shall be included in Gross Sales Price only consideration
which is actually received and available to Owner. Accordingly (but
without limiting the foregoing), any portion of the purchase price which is
"held back", deposited in escrow or which is payable on some future date or
event (including purchase money indebtedness, "earnout" payments or other
payments based in whole or in part on some future date or event
(collectively, "Deferred Payments") shall be excluded from Gross Sales
Price except if, and to the extent the same are actually received by, and
become available to, Owner. If any interest is payable to Owner in
connection with any Deferred Payments, Management Company
-3-
<PAGE>
shall receive interest on the payment of any Bonus Incentive Fees
attributable to such Deferred Payments at the same time Owner receives such
interest, such interest to be calculated for the same period of time for
which Owner receives such interest and at a rate equal to the interest rate
applicable to the Deferred Payment.
(c) Except with respect to Deferred Payments as provided in (b)
above, the Gross Sales Price shall not be reduced by any (i) contingent
liabilities of, or claims against, Owner and its Affiliates, including,
without limitation, claims or liabilities under indemnities,
representations, warranties or claims or liabilities based on torts arising
in connection with any Sale or Partial Sale or other similar agreements
(collectively, "Liabilities"), or (ii) cash flow or other guarantees
(including without limitation any such guarantees related to future
performance, value or other contingencies, or repurchase or similar
obligations relating to the Inn (collectively, "Guarantees")). If,
following the date of a Sale or a Partial Sale with respect to which a
Bonus Incentive Fee was paid to Management Company out of Net Excess Sales
Proceeds, any payment is made by Owner or its Affiliates on account of such
Guarantees, Gross Sales Price and the Bonus Incentive Fee shall be
recalculated based on the amount of such payment, and Management Company
shall be obligated to make the remittance to Owner in accordance with
paragraph 5 of this Letter Agreement.
(d) If all or any portion of the consideration for any Sale or
Partial Sale is non-cash consideration ("Non-Cash Consideration")
(excluding instruments or agreements reflecting Deferred Payment
obligations which shall be governed by (b) above), then (subject to the
other provisions of this definition) the Gross Sales Price shall be
calculated based upon the fair market value of the consideration received.
If such fair market value is set forth in, or determinable by reference to
the agreement of purchase and sale between the purchaser and Owner, then
such value shall, absent bad faith, be binding for purposes of this Letter
Agreement. In all other cases, the fair market value of such consideration
shall be determined by agreement of Owner and Management Company, or absent
agreement, by arbitration in accordance with Section 20.13 of the
Management Agreement.
(e) For the purposes of determining a Bonus Incentive Fee to be paid
from the Net Excess Sales Proceeds of a Partial Sale, Owner's Priority
Basis shall be prorated based upon the percentage of ownership interest
transferred in each such Partial Sale. The Priority Basis shall be
-4-
<PAGE>
similarly prorated on a cumulative basis for each subsequent Partial Sale
until 100% of Owner's title and ownership interest in any Inn which is the
subject of a Partial Sale (or the entity constituting the Owner of such
Inn) has been sold.
"Host Marriott" shall mean Host Marriott Corporation, a Delaware
-------------
corporation, and any entity which succeeds thereto, including any successor
by merger, recapitalization, reorganization, or by acquisition of all or
substantially all of the stock or assets of Host Marriott. The term "Host
Marriott" shall also include any entity to which there has been transferred
all or substantially all of the Inns with respect to which a Sale has not
occurred (or all or substantially all of Host Marriott's interest in the
entities owning such Inns) together with other assets of Host Marriott (or
any Affiliate thereof) with a fair market value equal to at least 25% of
the fair market value of such Inns.
"Net Excess Sales Proceeds" shall mean the Gross Sales Price, less the sum
-------------------------
of (i) the then Priority Basis of such Inn, or in the event of a Partial
Sale, the prorated Priority Basis of such Inn as set forth in paragraph (e)
of the definition of "Gross Sales Price", plus (ii) Transaction Costs
incurred in connection with such Sale or Partial Sale, plus (iii) any
amounts funded by Owner in connection with a Deconsolidation Event pursuant
to paragraph 6(e).
"Owner" shall mean HMH Properties, Inc. or any entity to which there has
-----
been transferred any Inn with respect to which a Sale has not occurred.
"Non-Cash Consideration" shall have the meaning set forth in paragraph (d)
----------------------
of the definition of "Gross Sales Price".
"Partial Sale" shall mean any sale or transfer of less than all of the
------------
ownership interest of any Inn(s) or the Owner of any Inn(s) which results
in a reduction of the beneficial ownership (directly and indirectly) of
such Owner in such Inn(s). Notwithstanding anything to the contrary
contained herein, a Partial Sale shall not include the sale of any stock of
Host Marriott over any public stock exchange. A Partial Sale shall,
however, be subject to the same provisions set forth in the definition of a
Sale which begin with the "provided, however" clause in the first sentence
of such definition and continue for the balance of such definition.
"Sale" shall mean the conveyance of all of Owner's title and ownership
----
interest (whether as fee owner or ground lessee)
-5-
<PAGE>
in an Inn or group of Inns or of the entity constituting the Owner of such
Inn or Inns in a single or a related sales transaction, including a
Sale/Leaseback and shall include a condemnation (or conveyance in lieu
thereof) of all or substantially all of an Inn; provided, however, a Sale
shall not include (a) conveyance of an Inn to a direct or indirect wholly
owned Affiliate of Owner or Host Marriott, (b) conveyance of an Inn through
foreclosure or exercise of a power of sale or other remedy under a
mortgage, deed of trust or other security device or by deed in lieu
thereof, (c) the termination or expiration of the Owner's interest as
lessee under a lease (or other terminable possessory interest) or the
dispossession of Owner by summary or other eviction proceedings or the
surrender by Owner of its rights as lessee (or of possession) in lieu of
any of the foregoing, (d) condemnation of an Inn or conveyance in lieu
thereof of less than all or substantially all of an Inn, or a conveyance of
an Inn following material casualty and the election of Owner not to
restore, or (e) the granting of a mortgage, deed of trust or other security
device. For the purpose of this definition of a "Sale", a "related sales
transaction" shall be deemed to constitute a Sale of two (2) or more Inns
when (i) the basic terms and conditions of such conveyance were intended to
be an integrated transaction, (ii) the purchaser or the general partner or
controlling stockholder of the purchaser or such purchaser's general
partner, are the same person, firm or entity, and (iii) the closing on the
Sale and the conveyance of title to such Inns occurs within six (6) months
of each other and within six (6) months after the date of the contract of
Sale with respect to such Inns. In the case of a related sales
transaction, a "Sale" of any Inn which is part of any related sales
transaction shall not be deemed to have occurred until the last Inn which
is the subject of such transaction has been sold, but in no event later
than six (6) months after the date of the contract of sale with respect to
such Inn. At any time on or after a conveyance described in (a) above, the
Owner originally named herein shall still be liable to pay the Bonus
Incentive Fee as and when the same shall be due hereunder and otherwise to
perform the "Owner's" obligations hereunder with respect to such Inns.
"Sale/Leaseback" shall mean any transaction in which, contemporaneously
--------------
with the conveyance of the Inn to the purchaser, the purchaser or a related
party leases the Inn to Owner or an Affiliate of Owner.
"Transaction Costs" shall mean all of the reasonable costs actually paid by
-----------------
or on behalf of Owner or its Affiliates to third parties who are not
Affiliates of Owner in connection
-6-
<PAGE>
with a Sale, Partial Sale or Financing Transaction, including, without
limitation, brokerage commissions, underwriting fees and discounts, title
insurance, escrow and other title fees and expenses, recording costs,
survey costs, legal, accounting, engineering and other professional fees
and expenses, deed, transfer, sales, gains, use and other taxes (other than
income taxes).
Unless the context requires otherwise, all other capitalized terms used in
this Letter Agreement shall have the same meaning they have in the Management
Agreements, as in effect on the date hereof.
2. Bonus Incentive Fee.
-------------------
(a) With respect to each Inn, until the earlier to occur of (i) the
close of Fiscal Year 2000, or (ii) a Sale of such Inn (including one or more
Partial Sales, but only if, on a cumulative basis, at least fifty percent (50%)
of the ownership interest in such Inn or in the Owner of such Inn has been
sold), or (iii) conveyance of an Inn through the occurrence of an event
described in clause (b) and clause (c) in the definition of "Sale", the
cumulative amount of the Base Management Fee (to the extent not deferred
pursuant to Section 5.02 B thereof) and Deferred Contingent Base Fee otherwise
payable pursuant to the Management Agreement shall not be paid to Management
Company but shall be retained by Owner; provided, however, that for purposes of
all calculations, payments (other than the actual payment of Base Management
Fee) distributions and determinations under the Management Agreement (including,
without limitation, Owner's Priority, Incentive Management Fee, Operating
Profit, but excluding Owner's right to terminate the Management Agreement)
Management Company shall be deemed to have received such Base Management Fee or
Deferred Contingent Base Fee. The Base Management Fee or Deferred Contingent
Base Fee shall be remitted to Owner at the same times as it would have been paid
to Management Company under the Management Agreements.
(b) In lieu of the payment of the Base Management Fee and Deferred
Contingent Base Fee during the period provided for in paragraph 2(a), Owner
shall, so long as Owner has not terminated the Management Agreement because of
an Event of Default by Management Company, upon a Sale of any Inn(s) (including,
without limitation, a Partial Sale) or upon a Financing Transaction with respect
to any Inn(s), pay to Management Company the Bonus Incentive Fee with respect to
such Inn(s). In the event of a contemporaneous Sale or Partial Sale of Inn(s)
to a single third party purchaser or related purchasers (including, without
limitation, a Partial Sale) who are not Affiliates of Owner, the Net Excess Sale
Proceeds for all such Inn(s) shall be aggregated
-7-
<PAGE>
together and the Bonus Incentive Fee shall be calculated on a combined (as
opposed to an Inn-by-Inn) basis.
(c) For each Inn, from and after the earlier to occur of (i) a Sale
(including one or more Partial Sales, but only if, on a cumulative basis, at
least fifty percent (50%) of the ownership interest in such Inn or in the Owner
of such Inn has been sold) or (ii) the close of Fiscal Year 2000, the Base
Management Fee shall no longer be retained by Owner under paragraph 2(a) above,
but shall be paid to Management Company in accordance with the terms of the
Management Agreement relating to such Inn. If no Sale or Financing Transaction
has occurred prior to the close of Fiscal Year 2000, Owner shall remain
obligated to pay the Bonus Incentive Fee upon the occurrence of a Sale, a
Partial Sale, or, to the extent otherwise permitted by this Letter Agreement,
upon the occurrence of a Financing Transaction. After a Sale of an Inn has
occurred, Management Company shall no longer be entitled to receive a Bonus
Incentive Fee with respect to any subsequent Sale, Partial Sale or Financing
Transaction with respect to such Inn.
(d) Notwithstanding the foregoing, or anything to the contrary
contained in this Letter Agreement, in the Management Agreement, or in any
Non-Disturbance Agreement now or hereafter entered into with the Holder of a
Secured Loan, or the landlord under a lease of an Inn or the land thereunder, in
the event of the occurrence of any of the events described in clauses (b) or (c)
of the definition of "Sale" neither Owner nor any other party, including any
Holder or lessor (except as provided below), shall then or thereafter have any
obligation to make any payment of the Bonus Incentive Fee to Management Company,
and from and after the occurrence of any such event, Management Company (to the
extent it is entitled to continue to manage the Inn pursuant to the terms of a
Non-Disturbance Agreement or other arrangement with a successor owner of the
Inn) shall be entitled to receive the Base Management Fee accruing from and
after the occurrence of any such event.
(e) Thirty (30) days after the date upon which all Exchange Bonds have
been retired and paid in full, Owner shall (i) present to Management Company a
computation of Cumulative Net Financing Proceeds from all Financing Transactions
occurring prior to such date and (ii) pay to Management Company any Bonus
Incentive Fee due with respect to such Cumulative Net Financing Proceeds.
3. Notice of Sales and Financing Transactions.
------------------------------------------
(a) Owner shall give Management Company written notice no later than
ten (10) days prior to the scheduled closing date for any proposed Sale or
Partial Sale. Promptly, but in no event later than ten (10) days after (i)
Owner has concluded a Sale or a
-8-
<PAGE>
Partial Sale and (ii) Management Company has delivered to Owner the Accounting
Period Statement for the Accounting Period ending on or immediately prior to the
closing of the Sale or Partial Sale (and, if the closing did not occur on the
last day of an Accounting Period, a statement of Gross Revenues for the period
from the first day of the Accounting Period in which the closing occurred to the
closing date), Owner shall give notice thereof to Management Company. The post
closing notice with respect to a Sale or Partial Sale shall include: (A) the
amount of the Gross Sales Price paid on the closing (and, in the case of a
Partial Sale, paid at the time of all prior Partial Sales, if any); (B) the
Priority Basis of the Inn(s) subject to the Sale or a Partial Sale on the
closing date and if such Priority Basis was other than the Priority Basis on the
Effective Date, a statement setting forth the amounts and types of increases or
decreases; (C) a statement of Transaction Costs; (D) the calculation of Net
Excess Sales Proceeds and Bonus Incentive Fee; (E) any contractual Guarantees
created or assumed by Owner or its Affiliates in connection therewith (which
obligation may be satisfied by delivery to Management Company of copies of the
agreements relating to such Guarantees); (F) copies of the sales contract with
respect to such Sale or Partial Sale; and (G) in the case of a Partial Sale,
copies of appropriate documentation evidencing the percentage of the ownership
interest which was transferred. If all or part of the consideration for the
Sale or Partial Sale includes Deferred Payments, Owner shall also notify
Management Company of the terms thereof and shall send Management Company copies
of executed documents or other appropriate evidence describing the Deferred
Payments. If Owner has accepted Non-Cash Consideration as all or part of the
consideration for the Sale or Partial Sale, Owner shall describe such Non-Cash
Consideration and state the fair market value thereof.
(b) Owner shall give Management Company written notice no later than
ten (10) days prior to the scheduled closing date for any proposed Financing
Transaction. Promptly, but in no event later than ten (10) days after (i) Owner
has concluded a Financing Transaction with respect to an Inn and (ii) Management
Company has delivered to Owner the Accounting Period Statement for the
Accounting Period ending on or immediately prior to the closing of the Financing
Transaction (and if the closing did not occur on the last day of an Accounting
Period, a statement of Gross Revenues for the period from the first day of the
Accounting Period in which the closing occurred to the closing date), Owner
shall give notice thereof to the Management Company. Any post closing notice
with respect to a Financing Transaction shall include: (A) the amount of the
Cumulative Net Financing Proceeds received on the date of the closing, plus the
amount of all such Proceeds received from all prior Financing Transactions; (B)
the Priority Basis of the Inn(s) subject to the Financing Transaction on the
closing date, and if such Priority Basis was other than the Priority Basis
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<PAGE>
on the date hereof, a statement setting forth the amounts and types of increases
or decreases; (C) a statement of Transaction Costs; (D) the calculation of any
Bonus Incentive Fee; and (E) any contractual Guarantees created or assumed in
connection therewith (which obligations may be satisfied by delivery to
Management Company of copies of agreements relating to such Guarantees).
(c) At the time of the giving of any notice of a Sale or a Partial Sale
or a Financing Transaction which relates to more than one Inn (or an Inn and
other assets), Owner shall also set forth in such notice a statement allocating,
as appropriate, the Gross Sales Price, Net Excess Sales Proceeds and the
Cumulative Net Financing Proceeds between the sold or financed Inns and such
other assets.
(d) Absent bad faith, the statements of Owner set forth in notices
given under (a), (b) and (c) of this paragraph 3 shall be binding and conclusive
upon the parties with respect to the matters set forth therein, unless within
ninety (90) days after the giving of such notice Management Company sends Owner
notice (i) stating that it disputes one or more items set forth in Owner's
notice and (ii) sets forth in reasonable detail the disputed item, the amount of
the disputed item as calculated by Management Company and the basis for such
calculation. Notwithstanding the foregoing, if the Gross Revenues for the period
preceding the closing date shall be revised as a result of an Annual Operating
Statement (or audit thereof) the Bonus Incentive Fee shall be recalculated based
upon such revised figures.
4. Payment of Bonus Incentive Fee.
------------------------------
(a) Simultaneously with delivery of Owner's notice under paragraph 3,
Owner shall pay to Management Company any Bonus Incentive Fee then payable in
immediately available funds, as calculated pursuant to this Letter Agreement.
(b) When actually received by Owner, the principal amount of any
Deferred Payments shall be prorated between Owner and Management Company based
upon the ratio that existed at the time of such Sale or Partial Sale between
Owner's Priority Basis and the amount of the Bonus Incentive Fee that would have
been paid on the date of such Sale or Partial Sale, had the Net Excess Sales
Proceeds been received in full on such date, until the Bonus Incentive Fee with
respect to such Deferred Payments has been paid in full.
(c) If Owner subsequently receives a Deferred Payment and such Deferred
Payment would increase Management Company's Bonus Incentive Fee, Owner shall,
subject to paragraph 5 below, promptly (but in any event within ten (10) days
following receipt)
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<PAGE>
(i) notify Management Company of receipt of such Deferred Payment together with
a calculation of (x) the additional Bonus Incentive Fee due to Management
Company and (y) any interest due thereon in accordance with the provisions of
clause (b) in the definition of Gross Sales Price, and (ii) remit to Management
Company such additional Bonus Incentive Fee plus any interest due thereon. If
Owner shall fail to pay any amount due to Management Company within the time
period provided for in paragraph 4(c), (i) such amounts shall bear interest at
the Interest Rate, and (ii) Management Company shall have all rights and
remedies available to it at law or in equity with respect to Owner's failure to
make such payments.
(d) Notwithstanding any election by Owner to negotiate, sell or
monetize any note or similar instrument evidencing an obligation to make
Deferred Payment at a discount (i.e., for consideration which is less than the
face value of the principal amount outstanding of such Deferred Payments), no
such discount shall apply with respect to the calculation of Net Excess Sales
Proceeds for the purpose of determining any amounts due on account of any Bonus
Incentive Fee, and the Bonus Incentive Fee shall continue to be calculated and
paid as if Owner still owned such note or similar instrument.
(e) No payment of any Bonus Incentive Fee shall be payable from the Net
Excess Sales Proceeds of any one or more Partial Sales unless and until the
cumulative amount of such proceeds equals ten percent (10%) or more of the
Priority Basis of the Inn(s) which were the subject of such Partial Sales or
which are owned by the ownership entity which was the subject of such Partial
Sales.
(f) If, due to an Event of Default by Owner under a Management
Agreement with respect to a particular Inn, Management Company terminates the
Management Agreement pursuant to Section 16.03 A thereof, the amount of any Base
Management Fee with respect to such Inn which has not been paid to Management
Company but has been retained by Owner pursuant to paragraph 2(a) of this Letter
Agreement shall become immediately due and payable by Owner.
(g) Host Marriott hereby guarantees the timely payments to Management
Company by Owner under this paragraph 4.
5. Adjustment for Guarantees.
-------------------------
(a) At any time and from time to time up to the tenth (10th)
anniversary date of the closing of a Sale, Partial Sale or a Financing
Transaction, Owner may notify Management Company that it or its Affiliate has
paid a Guarantee in connection with such
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<PAGE>
Sale, Partial Sale or Financing Transaction. Such notice shall be accompanied
by a calculation indicating the reduction, if any, in the Bonus Incentive Fee
which has resulted from the payment of such Guarantee. Within thirty (30) days
after receipt of such notice, Management Company shall remit to Owner any
overpayment in the Bonus Incentive Fee previously paid to Management Company.
In addition, any additional payments of Bonus Incentive Fee (pursuant to
paragraph 4(c) or otherwise) with respect to such Inn shall be made only after
taking into account the Guarantees theretofore paid by Owner with respect to
such Inn.
(b) If, at any time and from time to time until the full amount of all
Deferred Payments with respect to a particular sale have been received in full,
there shall be a default in the payment of any such Deferred Payments, Owner may
notify Management Company that such a default has occurred. Such notice shall
be accompanied by a calculation indicating the reduction, if any, in the Bonus
Incentive Fee which has resulted from such default. Within thirty (30) days
after the receipt of such notice Management Company shall refund to Owner any
overpayment in the Bonus Incentive Fee previously paid to Management Company.
To the extent defaulted amounts are subsequently recovered by Owner, Owner shall
promptly remit to Management Company any portion thereof attributable to such
refunded Bonus Incentive Fee.
(c) If Management Company shall fail to pay any amount due to Owner
within the time period provided for in paragraph 5(a) and 5(b), (i) such amounts
shall bear interest at the Interest Rate, and (ii) Owner shall have all rights
and remedies available to it at law or in equity with respect to Management
Company's failure to make such payments.
(d) Marriott International hereby guarantees the timely payments to
Owner by Management Company under this paragraph 5.
6. Consolidation.
-------------
(a) Until the earlier of (i) the close of the year 2000 or (ii) such
time as any given Inn has been the subject of either a Sale or one or more
Partial Sales but only if, on a cumulative basis, at least 50% of the ownership
interest has been sold, or a Financing Transaction (a "Deconsolidation Event"),
(x) Management Company shall be permitted to commingle all of such Inn's Working
Capital and banking accounts, including the FF&E Reserve, into one or more
accounts under Management Company's control in accordance with practices
currently in effect as of the date of the Management Agreement, and (y) the
reporting requirements of each such Inn pursuant to the Management Agreement
therefor and the calculation, payment, distribution, determination or deposit,
as the case may be, of each such Inn's Gross Revenues,
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<PAGE>
FF&E Reserve, Owner's Priority, Management Company's Base Management Fee,
Residence Inn by Marriott System Fee, Incentive Management Fee, Chain Services,
Operating Profit and Owner's right to terminate the Management Agreement with
respect to each such Inn shall be consolidated with the reporting requirements
and the calculation, payment, distribution, determination or deposit, as the
case may be, with respect to all Consolidated Inn(s).
(b) From and after the occurrence of a Deconsolidation Event with
respect to any Inn, except with respect to a Financing Transaction (provision
for which is made in paragraph 6(c) hereof), the reporting requirements for such
Inn and the calculation, payment, distribution, determination or deposit, as the
case may be, of such Inn's Gross Revenues, FF&E Reserve, Owner's Priority, Base
Management Fee, System Fee, Incentive Management Fee, Operating Profit and
Owner's right to terminate shall be done solely with respect to such Inn and
shall not be consolidated with the reporting requirements and such calculation,
payment, distribution, determination or deposit with any other Inn without
Management Company's prior consent.
(c) Notwithstanding the provision of clause (i) of paragraph 6(a)
above, from and after the occurrence of a Deconsolidation Event which is due to
a Financing Transaction which occurs prior to the close of the year 2000 with
respect to all or any group of the Inns, the reporting requirements for all such
Inns and the calculation, payment, distribution, determination or deposit, as
the case may be, of such Inns' Gross Revenues, FF&E Reserve, Owner's Priority,
Base Management Fee, the Residence Inn System Fee, Incentive Management Fee,
Operating Profit and Owner's right to terminate shall be consolidated with
respect to all Inns which are the subject of the same or related Financing
Transaction until the later of (i) the close of the year 2000 or (ii) the
earlier to occur of (x) the maturity of the loan or loans which is the subject
of such Financing Transaction or (y) the close of the year 2002.
(d) Owner shall give Management Company prompt notice of any
Deconsolidation Event accompanied by reasonable documentation evidencing the
occurrence thereof, and paragraph 6(a) of this Letter Agreement shall terminate
with respect to the Deconsolidated Inns as of the Deconsolidation Event, except
with respect to Inns which are subject to a Financing Transaction, special
provision for which is made in paragraph 6(c), above.
(e) Notwithstanding the provisions of paragraph (a) above, to the
extent the determination of an Inn's Gross Revenues, FF&E Reserve, Owner's
Priority, Base Management Fee, Residence Inn System Fee, Incentive Management
Fee, Operating Profit or Owner's termination rights after a Deconsolidation
Event requires calculation of such Inn's Gross Revenues, FF&E Reserve, Owner's
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<PAGE>
Priority, Base Management Fee, Residence Inn System Fee, Incentive Management
Fee, Operating Profit or Owner's termination rights prior to such
Deconsolidation Event, then, for such purposes only, the calculation of such
Revenues, Reserve, Priority, Fee or Profit prior to such Deconsolidation Event
shall be maintained on a deconsolidated (i.e., Inn-by-Inn) basis. Accordingly,
in order to be able to utilize the same after a Deconsolidation Event or a
Partial Sale, and in order to determine the amount of a Qualified Loan with
respect to any Inn or Inn(s) Management Company shall, during the period from
and after the date hereof and prior to a Deconsolidation Event, in addition to
the reporting required under paragraph (a) above, maintain records and provide
reports on a quarterly basis to Owner describing each Inn's Gross Revenues, FF&E
Reserve, Owner's Priority, Priority Basis, Management Company's Base Management
Fee, System Fee, Incentive Management Fee and Operating Profit on a
deconsolidated (i.e., Inn-by-Inn) basis as if paragraph (a) above did not
exist. Such quarterly reports shall be subject to Fiscal Year end audit and
adjustments. However, in no event shall the foregoing in any manner modify the
amounts owed by Management Company or Owner with respect to the period prior to
the Deconsolidation Event, calculated on a consolidated basis. So long as the
original Owner named herein, or Host Marriott or any of its subsidiaries or
Afiliates, is the Owner of any Inn, that portion of Section 9.05, if any, which
grants Owner the right to request Management Analysis Reports on any individual
Inns shall be waived.
(f) Upon the occurrence of a Deconsolidation Event with respect to any
Inn, such Inn, as a Deconsolidated Inn, shall no longer be a participant in the
Consolidated FF&E Reserve maintained under paragraph 6(a). Accordingly, upon
receipt of Owner's notice of a proposed Deconsolidation Event, Management
Company shall compute the "Average FF&E Balance" (defined below) and the "Actual
FF&E Balance" (defined below) as of the close of the Accounting Period
immediately preceding the Deconsolidation Event. For purposes of this
computation:
(i) "Actual FF&E Balance" shall mean, with respect to any
-------------------
Consolidated Inn which is about to become a Deconsolidated Inn,
the difference between (x) the actual aggregate amount (per
guestroom) which has been contributed to the Consolidated FF&E
Reserve by such Inn; less (y) the actual aggregate amount (per
----
guestroom) which has been withdrawn from the Consolidated FF&E
Reserve by such Inn.
(ii) "Average FF&E Balance" shall mean, with respect to all
--------------------
Consolidated Inns, including those in (i) above, the difference
between (x) the average aggregate amount (per guestroom) which
has been contributed to the Consolidated FF&E Reserve by all
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<PAGE>
such Consolidated Inns; less (y) the average aggregate amount
----
(per guestroom) which has been withdrawn from the Consolidated
FF&E Reserve by all such Consolidated Inns.
The contributions and withdrawals referred to in (i) and (ii) above shall be
those which were made from the period between the Effective Date of the
Management Agreements and the close of the Accounting Period immediately prior
to the date of the Deconsolidation Event.
If seventy-five percent (75%) of the Average FF&E Balance exceeds the Actual
FF&E Balance, the amount of such excess (multiplied by the number of guestrooms
in the Inn in question) shall be paid by Owner into the consolidated FF&E
Reserve for use, in accordance with the Management Agreement, at the
Consolidated Inns. If the Actual FF&E Balance exceeds one hundred twenty-five
percent (125%) of the Average FF&E Balance, the amount of such excess
(multiplied by the number of guestrooms in the Inn in question) shall be
transferred (such transfer to occur after the completion of the calculations
referred to in this subsection (e) but in no event prior to the Deconsolidation
Event) by Management Company from such consolidated FF&E Reserve to the separate
FF&E Reserve for the Deconsolidated Inn which shall be established as of the
date of such Deconsolidation Event, for use in accordance with the Management
Agreement applicable to such Deconsolidated Inn. All such payments and
transfers shall be made either on or immediately after the date of the
Deconsolidation Event.
7. Interim Distributions. So long as the Original Owner named herein, or
---------------------
Host Marriott or any of its subsidiaries or Affiliates, is the Owner of any Inn,
Management Company agrees that the interim distributions of Owner's Distribution
which are described in the second to last sentence of Section 5.02 A of the
Management Agreement which is applicable to such Inn shall (notwithstanding the
provisions of said Section 5.02 A regarding the frequency of such distributions)
be made twice per Accounting Period, rather than once per Accounting Period.
The first interim distribution (in the amount of one-half of the estimated
Owner's Distribution for each Accounting Period) shall be made by no later than
the twentieth (20th) day after the beginning of such Accounting Period. The
second interim distribution (in the amount of the remainder of such Owner's
Distribution) with respect to such Accounting Period shall be made by no later
than the fifth (5th) day after the end of such Accounting Period. In addition,
there will be an adjustment (if necessary) of these interim distributions as of
the delivery of the Accounting Period Statement with respect to such Accounting
Period, and any such adjustment shall be included in the first interim
distribution referred to above for the following Accounting Period. The
foregoing shall have no effect on the frequency of the preparation
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<PAGE>
of Accounting Period Statements, which shall continue to be as set forth in
Section 5.02 of the Management Agreement.
8. Conflict With Management Agreement. In the event of a conflict between
----------------------------------
the terms, conditions and provisions hereof and the Management Agreements, the
terms, conditions and provisions of this Letter Agreement shall prevail.
9. Ratification. As amended hereby, the Management Agreements remain in
------------
full force and effect and are hereby ratified and confirmed.
10. Governing Law. This Letter Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Maryland without giving
effect to principles of conflicts of law.
11. Notices. Any notices by either party to this Letter Agreement shall
-------
be given in accordance with Section 20.09 of the Management Agreements.
If the foregoing correctly sets forth our agreement with respect to the
matters contained herein, please indicate your agreement by signing a copy of
this Letter Agreement in the space provided and returning it to us.
Very truly yours,
HMH PROPERTIES, INC.
By: /s/ Christopher G. Townsend
------------------------------
Vice President
Accepted and agreed:
Residence Inn by Marriott, Inc.
By: /s/ James Sullivan
---------------------
Vice President
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<PAGE>
Accepted and agreed:
MARRIOTT INTERNATIONAL, INC.
By: /s/ James Sullivan
---------------------
Vice President
[FORM OF GUARANTEE ATTACHED TO ORIGINAL]
Accepted and agreed:
HOST MARRIOTT CORPORATION
By: /s/ Stephen J. McKenna
-----------------------
Vice President
[FORM OF GUARANTEE ATTACHED TO ORIGINAL]
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<PAGE>
Exhibit 10.15(iii)
HMH PROPERTIES, INC.
10400 Fernwood Road
Bethesda, Maryland 20817
September 25, 1993
Fairfield FMC Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Gentlemen:
Reference is made to those certain Management Agreements ("Management
Agreements") of even date hereof between HMH Properties, Inc. as "Owner"
thereunder and Fairfield FMC Corporation as "Management Company" thereunder
relating to the operation of thirty (30) Fairfield Inns (the "Hotel(s)") in
those locations set forth in Exhibit A to this letter agreement ("Letter
Agreement"). This Letter Agreement, when executed by you, will constitute
Owner's and Management Company's further mutual agreement with respect to
certain matters set forth in the Management Agreements.
1. Definitions. The following terms, when used in this Letter Agreement,
-----------
shall have the meanings indicated.
"Actual FF&E Balance" shall have the meaning set forth in paragraph 6(f) of
-------------------
this Letter Agreement.
"Average FF&E Balance" shall have the meaning set forth in paragraph 6(f)
--------------------
of this Letter Agreement.
"Bonus Incentive Fee" shall mean (a) with respect to any Sale or Partial
-------------------
Sale of any Hotel(s), the lesser of (i) fifty percent (50%) of the Net
Excess Sales Proceeds with respect to such Sale or Partial Sale, or (ii)
the cumulative amount of the Base Management Fee which is calculated in
accordance with, and (but for the provisions of paragraph 2(a) and 6(a) of
this Letter Agreement) would be otherwise payable to Management Company
pursuant to the Management Agreement applicable to such Hotel(s) (to the
extent not deferred under Section 5.02 B of such Management Agreement) and
paragraph 6(a) of this Letter Agreement from the period between the date
hereof and the earlier of (x) the closing date of such Sale and (y) the
close of Fiscal Year 2000; and (b) with respect to any one or more
Financing Transactions,
<PAGE>
the lesser of (i) fifty percent (50%) of the Cumulative Net Financing
Proceeds with respect to such Financing Transactions or (ii) the cumulative
amount of the Base Management Fee which is calculated in accordance with
and (but for the provisions of paragraph 2(a) and 6(a) of this Letter
Agreement) would be otherwise payable to Management Company pursuant to the
Management Agreement applicable to such Hotel(s) (to the extent not
deferred under Section 5.02 B of such Management Agreement) and paragraph
6(a) of this Letter Agreement for the period between the date hereof and
the earlier of the dates referred to in clauses (x) and (y) of provision
(a) of this definition; provided, however, that there shall be no Bonus
Incentive Fee payable from Cumulative Net Financing Proceeds in accordance
with this provision (b) of this definition until the date which is thirty
(30) days after the date upon which all of the Exchange Bonds have been
retired and paid in full. In calculating the Bonus Incentive Fee, any
amounts paid under provision (b) of this definition shall be credited
against amounts payable under provision (a).
"Consolidated Hotel" shall mean any Hotel which is subject to the
------------------
consolidation provisions of paragraph 6(a) and has not been the subject of
a Deconsolidation Event.
"Consolidated FF&E Reserve" shall mean the consolidated FF&E Reserve
-------------------------
maintained pursuant to paragraph 6(a).
"Cumulative Net Financing Proceeds" shall mean the cash proceeds actually
---------------------------------
received by Owner or its Affiliates from one or more Financing
Transactions, net of any Transaction Costs payable by Owner in connection
therewith, of any Hotel(s) from and after the date hereof in excess of (i)
Owner's then Priority Basis for such Hotel(s) and (ii) any amounts funded
by Owner in connection with a Deconsolidation Event pursuant to paragraph
6(f). In the event a Hotel is the subject of more than one Financing
Transaction due to a refinancing of debt incurred in any prior Financing
Transactions, Cumulative Net Financing Proceeds shall be the excess of the
highest principal amount borrowed in any one such Financing Transaction
over (x) Owner's then Priority Basis, (y) all Transaction Costs incurred
with respect to all such Financing Transactions, and (z) any amounts funded
by Owner in connection with a Deconsolidation Event pursuant to paragraph
6(f). In the event any Hotel is the subject of more than one Financing
Transactions but in differing pools or groups of Hotels, Cumulative Net
Financing Proceeds will be allocated to such Hotel on a fair and equitable
basis.
"Deconsolidated Hotel" shall mean any Hotel which has been subject to a
--------------------
Deconsolidation Event.
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<PAGE>
"Deconsolidation Event" shall have the meaning set forth in paragraph 6(a).
---------------------
"Deferred Payments" shall have the meaning set forth in paragraph (b) in
-----------------
the definition of "Gross Sales Price".
"Exchange Bonds" shall have the same meaning set forth (at page 48) in
--------------
Marriott Corporation's June 19, 1993 "Notice of 1993 Annual Meeting and
Proxy Statement."
"Financing Transaction" shall mean, with respect to any Hotel(s), any
---------------------
transaction which results in one or more mortgages, deeds of trust or other
security devices affecting such Hotel(s) and which secures a debt or
liability (absolute or contingent) of the Owner or any of its Affiliates in
an amount equal to at least 25% of the then Priority Basis of the Hotel. A
Financing Transaction shall not include leases of any of the Hotel's FF&E
or lines of credit pursuant to which Owner finances any Hotel's Working
Capital, FF&E or building improvements or additions agreed to by both Owner
and Management Company under Section 8.03 of the Management Agreements or
required to be made by Owner with its own funds under any of the provisions
of the Management Agreements.
"Gross Sales Price" shall mean all of the consideration actually received
-----------------
by Owner in connection with a Sale or one or more Partial Sales of any of
the Hotels, as and when received. In calculating Gross Sales Price the
following shall apply:
(a) There shall be excluded from Gross Sales Price the aggregate
amount of all deposits in cash reserve accounts (excluding the FF&E
Reserve), house banks and similar cash accounts not transferred as part of
a Sale. There shall be added to Gross Sales Price the amount of the FF&E
Reserve if such Reserve is retained by Owner and not transferred to the
purchaser.
(b) There shall be included in Gross Sales Price only consideration
which is actually received and available to Owner. Accordingly (but
without limiting the foregoing), any portion of the purchase price which is
"held back", deposited in escrow or which is payable on some future date or
event (including purchase money indebtedness, "earnout" payments or other
payments based in whole or in part on some future date or event
(collectively, "Deferred Payments") shall be excluded from Gross Sales
Price except if, and to the extent the same are actually received by, and
become available to, Owner. If any interest is payable to Owner in
connection with any Deferred Payments, Management Company
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<PAGE>
shall receive interest on the payment of any Bonus Incentive Fees
attributable to such Deferred Payments at the same time Owner receives such
interest, such interest to be calculated for the same period of time for
which Owner receives such interest and at a rate equal to the interest rate
applicable to the Deferred Payment.
(c) Except with respect to Deferred Payments as provided in (b)
above, the Gross Sales Price shall not be reduced by any (i) contingent
liabilities of, or claims against, Owner and its Affiliates, including,
without limitation, claims or liabilities under indemnities,
representations, warranties or claims or liabilities based on torts arising
in connection with any Sale or Partial Sale or other similar agreements
(collectively, "Liabilities"), or (ii) cash flow or other guarantees
(including without limitation any such guarantees related to future
performance, value or other contingencies, or repurchase or similar
obligations relating to the Hotel (collectively, "Guarantees")). If,
following the date of a Sale or a Partial Sale with respect to which a
Bonus Incentive Fee was paid to Management Company out of Net Excess Sales
Proceeds, any payment is made by Owner or its Affiliates on account of such
Guarantees, Gross Sales Price and the Bonus Incentive Fee shall be
recalculated based on the amount of such payment, and Management Company
shall be obligated to make the remittance to Owner in accordance with
paragraph 5 of this Letter Agreement.
(d) If all or any portion of the consideration for any Sale or
Partial Sale is non-cash consideration ("Non-Cash Consideration")
(excluding instruments or agreements reflecting Deferred Payment
obligations which shall be governed by (b) above), then (subject to the
other provisions of this definition) the Gross Sales Price shall be
calculated based upon the fair market value of the consideration received.
If such fair market value is set forth in, or determinable by reference to
the agreement of purchase and sale between the purchaser and Owner, then
such value shall, absent bad faith, be binding for purposes of this Letter
Agreement. In all other cases, the fair market value of such consideration
shall be determined by agreement of Owner and Management Company, or absent
agreement, by arbitration in accordance with Section 20.13 of the
Management Agreement.
(e) For the purposes of determining a Bonus Incentive Fee to be paid
from the Net Excess Sales Proceeds of a Partial Sale, Owner's Priority
Basis shall be prorated based upon the percentage of ownership interest
transferred in each such Partial Sale. The Priority Basis shall be
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<PAGE>
similarly prorated on a cumulative basis for each subsequent Partial Sale
until 100% of Owner's title and ownership interest in any Hotel which is
the subject of a Partial Sale (or the entity constituting the Owner of such
Hotel) has been sold.
"Host Marriott" shall mean Host Marriott Corporation, a Delaware
-------------
corporation, and any entity which succeeds thereto, including any successor
by merger, recapitalization, reorganization, or by acquisition of all or
substantially all of the stock or assets of Host Marriott. The term "Host
Marriott" shall also include any entity to which there has been transferred
all or substantially all of the Hotels with respect to which a Sale has not
occurred (or all or substantially all of Host Marriott's interest in the
entities owning such Hotels) together with other assets of Host Marriott
(or any Affiliate thereof) with a fair market value equal to at least 25%
of the fair market value of such Hotels.
"Net Excess Sales Proceeds" shall mean the Gross Sales Price, less the sum
-------------------------
of (i) the then Priority Basis of such Hotel, or in the event of a Partial
Sale, the prorated Priority Basis of such Hotel as set forth in paragraph
(e) of the definition of "Gross Sales Price", plus (ii) Transaction Costs
incurred in connection with such Sale or Partial Sale, plus (iii) any
amounts funded by Owner in connection with a Deconsolidation Event pursuant
to paragraph 6(e).
"Owner" shall mean HMH Properties, Inc. or any entity to which there has
-----
been transferred any Hotel with respect to which a Sale has not occurred.
"Non-Cash Consideration" shall have the meaning set forth in paragraph (d)
----------------------
of the definition of "Gross Sales Price".
"Partial Sale" shall mean any sale or transfer of less than all of the
------------
ownership interest of any Hotel(s) or the Owner of any Hotel(s) which
results in a reduction of the beneficial ownership (directly and
indirectly) of such Owner in such Hotel(s). Notwithstanding anything to
the contrary contained herein, a Partial Sale shall not include the sale of
any stock of Host Marriott over any public stock exchange. A Partial Sale
shall, however, be subject to the same provisions set forth in the
definition of a Sale which begin with the "provided, however" clause in the
first sentence of such definition and continue for the balance of such
definition.
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<PAGE>
"Sale" shall mean the conveyance of all of Owner's title and ownership
----
interest (whether as fee owner or ground lessee) in a Hotel or group of
Hotels or of the entity constituting the Owner of such Hotel or Hotels in a
single or a related sales transaction, including a Sale/Leaseback and shall
include a condemnation (or conveyance in lieu thereof) of all or
substantially all of a Hotel; provided, however, a Sale shall not include
(a) conveyance of a Hotel to a direct or indirect wholly owned Affiliate of
Owner or Host Marriott, (b) conveyance of a Hotel through foreclosure or
exercise of a power of sale or other remedy under a mortgage, deed of trust
or other security device or by deed in lieu thereof, (c) the termination or
expiration of the Owner's interest as lessee under a lease (or other
terminable possessory interest) or the dispossession of Owner by summary or
other eviction proceedings or the surrender by Owner of its rights as
lessee (or of possession) in lieu of any of the foregoing, (d) condemnation
of a Hotel or conveyance in lieu thereof of less than all or substantially
all of a Hotel, or a conveyance of a Hotel following material casualty and
the election of Owner not to restore, or (e) the granting of a mortgage,
deed of trust or other security device. For the purpose of this definition
of a "Sale", a "related sales transaction" shall be deemed to constitute a
Sale of two (2) or more Hotels when (i) the basic terms and conditions of
such conveyance were intended to be an integrated transaction, (ii) the
purchaser or the general partner or controlling stockholder of the
purchaser or such purchaser's general partner, are the same person, firm or
entity, and (iii) the closing on the Sale and the conveyance of title to
such Hotels occurs within six (6) months of each other and within six (6)
months after the date of the contract of Sale with respect to such Hotels.
In the case of a related sales transaction, a "Sale" of any Hotel which is
part of any related sales transaction shall not be deemed to have occurred
until the last Hotel which is the subject of such transaction has been
sold, but in no event later than six (6) months after the date of the
contract of sale with respect to such Hotel. At any time on or after a
conveyance described in (a) above, the Owner originally named herein shall
still be liable to pay the Bonus Incentive Fee as and when the same shall
be due hereunder and otherwise to perform the "Owner's" obligations
hereunder with respect to such Hotels.
"Sale/Leaseback" shall mean any transaction in which, contemporaneously
--------------
with the conveyance of the Hotel to the purchaser, the purchaser or a
related party leases the Hotel to Owner or an Affiliate of Owner.
-6-
<PAGE>
"Transaction Costs" shall mean all of the reasonable costs actually paid
-----------------
by or on behalf of Owner or its Affiliates to third parties who are not
Affiliates of Owner in connection with a Sale, Partial Sale or Financing
Transaction, including, without limitation, brokerage commissions,
underwriting fees and discounts, title insurance, escrow and other title
fees and expenses, recording costs, survey costs, legal, accounting,
engineering and other professional fees and expenses, deed, transfer,
sales, gains, use and other taxes (other than income taxes).
Unless the context requires otherwise, all other capitalized terms used in
this Letter Agreement shall have the same meaning they have in the Management
Agreements, as in effect on the date hereof.
2. Bonus Incentive Fee.
-------------------
(a) With respect to each Hotel, until the earlier to occur of (i) the
close of Fiscal Year 2000, or (ii) a Sale of such Hotel (including one or more
Partial Sales, but only if, on a cumulative basis, at least fifty percent (50%)
of the ownership interest in such Hotel or in the Owner of such Hotel has been
sold), or (iii) conveyance of a Hotel through the occurrence of an event
described in clause (b) and clause (c) in the definition of "Sale", the
cumulative amount of the Base Management Fee (to the extent not deferred
pursuant to Section 5.02 B thereof) and Deferred Contingent Base Fee otherwise
payable pursuant to the Management Agreement shall not be paid to Management
Company but shall be retained by Owner; provided, however, that for purposes of
all calculations, payments (other than the actual payment of Base Management
Fee) distributions and determinations under the Management Agreement (including,
without limitation, Owner's Priority, Incentive Management Fee, Operating
Profit, but excluding Owner's right to terminate the Management Agreement)
Management Company shall be deemed to have received such Base Management Fee or
Deferred Contingent Base Fee. The Base Management Fee or Deferred Contingent
Base Fee shall be remitted to Owner at the same times as it would have been paid
to Management Company under the Management Agreements.
(b) In lieu of the payment of the Base Management Fee and Deferred
Contingent Base Fee during the period provided for in paragraph 2(a), Owner
shall, so long as Owner has not terminated the Management Agreement because of
an Event of Default by Management Company, upon a Sale of any Hotel(s)
(including, without limitation, a Partial Sale) or upon a Financing Transaction
with respect to any Hotel(s), pay to Management Company the Bonus Incentive Fee
with respect to such Hotel(s). In the event of a contemporaneous Sale or
Partial Sale of Hotel(s) to a single third party purchaser or related purchasers
(including,
-7-
<PAGE>
without limitation, a Partial Sale) who are not Affiliates of Owner, the Net
Excess Sale Proceeds for all such Hotel(s) shall be aggregated together and the
Bonus Incentive Fee shall be calculated on a combined (as opposed to a
Hotel-by-Hotel) basis.
(c) For each Hotel, from and after the earlier to occur of (i) a Sale
(including one or more Partial Sales, but only if, on a cumulative basis, at
least fifty percent (50%) of the ownership interest in such Hotel or in the
Owner of such Hotel has been sold) or (ii) the close of Fiscal Year 2000, the
Base Management Fee shall no longer be retained by Owner under paragraph 2(a)
above, but shall be paid to Management Company in accordance with the terms of
the Management Agreement relating to such Hotel. If no Sale or Financing
Transaction has occurred prior to the close of Fiscal Year 2000, Owner shall
remain obligated to pay the Bonus Incentive Fee upon the occurrence of a Sale, a
Partial Sale, or, to the extent otherwise permitted by this Letter Agreement,
upon the occurrence of a Financing Transaction. After a Sale of a Hotel has
occurred, Management Company shall no longer be entitled to receive a Bonus
Incentive Fee with respect to any subsequent Sale, Partial Sale or Financing
Transaction with respect to such Hotel.
(d) Notwithstanding the foregoing, or anything to the contrary
contained in this Letter Agreement, in the Management Agreement, or in any
Non-Disturbance Agreement now or hereafter entered into with the Holder of a
Secured Loan, or the landlord under a lease of a Hotel or the land thereunder,
in the event of the occurrence of any of the events described in clauses (b) or
(c) of the definition of "Sale" neither Owner nor any other party, including any
Holder or lessor (except as provided below), shall then or thereafter have any
obligation to make any payment of the Bonus Incentive Fee to Management Company,
and from and after the occurrence of any such event, Management Company (to the
extent it is entitled to continue to manage the Hotel pursuant to the terms of a
Non-Disturbance Agreement or other arrangement with a successor owner of the
Hotel) shall be entitled to receive the Base Management Fee accruing from and
after the occurrence of any such event.
(e) Thirty (30) days after the date upon which all Exchange Bonds
have been retired and paid in full, Owner shall (i) present to Management
Company a computation of Cumulative Net Financing Proceeds from all Financing
Transactions occurring prior to such date and (ii) pay to Management Company any
Bonus Incentive Fee due with respect to such Cumulative Net Financing Proceeds.
-8-
<PAGE>
3. Notice of Sales and Financing Transactions.
------------------------------------------
(a) Owner shall give Management Company written notice no later than
ten (10) days prior to the scheduled closing date for any proposed Sale or
Partial Sale. Promptly, but in no event later than ten (10) days after (i)
Owner has concluded a Sale or a Partial Sale and (ii) Management Company has
delivered to Owner the Accounting Period Statement for the Accounting Period
ending on or immediately prior to the closing of the Sale or Partial Sale (and,
if the closing did not occur on the last day of an Accounting Period, a
statement of Gross Revenues for the period from the first day of the Accounting
Period in which the closing occurred to the closing date), Owner shall give
notice thereof to Management Company. The post closing notice with respect to a
Sale or Partial Sale shall include: (A) the amount of the Gross Sales Price
paid on the closing (and, in the case of a Partial Sale, paid at the time of all
prior Partial Sales, if any); (B) the Priority Basis of the Hotel(s) subject to
the Sale or a Partial Sale on the closing date and if such Priority Basis was
other than the Priority Basis on the Effective Date, a statement setting forth
the amounts and types of increases or decreases; (C) a statement of Transaction
Costs; (D) the calculation of Net Excess Sales Proceeds and Bonus Incentive Fee;
(E) any contractual Guarantees created or assumed by Owner or its Affiliates in
connection therewith (which obligation may be satisfied by delivery to
Management Company of copies of the agreements relating to such Guarantees); (F)
copies of the sales contract with respect to such Sale or Partial Sale; and (G)
in the case of a Partial Sale, copies of appropriate documentation evidencing
the percentage of the ownership interest which was transferred. If all or part
of the consideration for the Sale or Partial Sale includes Deferred Payments,
Owner shall also notify Management Company of the terms thereof and shall send
Management Company copies of executed documents or other appropriate evidence
describing the Deferred Payments. If Owner has accepted Non-Cash Consideration
as all or part of the consideration for the Sale or Partial Sale, Owner shall
describe such Non-Cash Consideration and state the fair market value thereof.
(b) Owner shall give Management Company written notice no later than
ten (10) days prior to the scheduled closing date for any proposed Financing
Transaction. Promptly, but in no event later than ten (10) days after (i) Owner
has concluded a Financing Transaction with respect to a Hotel and (ii)
Management Company has delivered to Owner the Accounting Period Statement for
the Accounting Period ending on or immediately prior to the closing of the
Financing Transaction (and if the closing did not occur on the last day of an
Accounting Period, a statement of Gross Revenues for the period from the first
day of the Accounting Period in which the closing occurred to the closing date),
Owner shall give notice thereof to the Management Company. Any post closing
notice
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<PAGE>
with respect to a Financing Transaction shall include: (A) the amount of the
Cumulative Net Financing Proceeds received on the date of the closing, plus the
amount of all such Proceeds received from all prior Financing Transactions; (B)
the Priority Basis of the Hotel(s) subject to the Financing Transaction on the
closing date, and if such Priority Basis was other than the Priority Basis on
the date hereof, a statement setting forth the amounts and types of increases or
decreases; (C) a statement of Transaction Costs; (D) the calculation of any
Bonus Incentive Fee; and (E) any contractual Guarantees created or assumed in
connection therewith (which obligations may be satisfied by delivery to
Management Company of copies of agreements relating to such Guarantees).
(c) At the time of the giving of any notice of a Sale or a Partial
Sale or a Financing Transaction which relates to more than one Hotel (or a Hotel
and other assets), Owner shall also set forth in such notice a statement
allocating, as appropriate, the Gross Sales Price, Net Excess Sales Proceeds and
the Cumulative Net Financing Proceeds between the sold or financed Hotels and
such other assets.
(d) Absent bad faith, the statements of Owner set forth in notices
given under (a), (b) and (c) of this paragraph 3 shall be binding and conclusive
upon the parties with respect to the matters set forth therein, unless within
ninety (90) days after the giving of such notice Management Company sends Owner
notice (i) stating that it disputes one or more items set forth in Owner's
notice and (ii) sets forth in reasonable detail the disputed item, the amount of
the disputed item as calculated by Management Company and the basis for such
calculation. Notwithstanding the foregoing, if the Gross Revenues for the period
preceding the closing date shall be revised as a result of an Annual Operating
Statement (or audit thereof) the Bonus Incentive Fee shall be recalculated based
upon such revised figures.
4. Payment of Bonus Incentive Fee.
------------------------------
(a) Simultaneously with delivery of Owner's notice under paragraph 3,
Owner shall pay to Management Company any Bonus Incentive Fee then payable in
immediately available funds, as calculated pursuant to this Letter Agreement.
(b) When actually received by Owner, the principal amount of any
Deferred Payments shall be prorated between Owner and Management Company based
upon the ratio that existed at the time of such Sale or Partial Sale between
Owner's Priority Basis and the amount of the Bonus Incentive Fee that would have
been paid on the date of such Sale or Partial Sale, had the Net Excess Sales
Proceeds been received in full on such date, until the Bonus
-10-
<PAGE>
Incentive Fee with respect to such Deferred Payments has been paid in full.
(c) If Owner subsequently receives a Deferred Payment and such
Deferred Payment would increase Management Company's Bonus Incentive Fee, Owner
shall, subject to paragraph 5 below, promptly (but in any event within ten (10)
days following receipt) (i) notify Management Company of receipt of such
Deferred Payment together with a calculation of (x) the additional Bonus
Incentive Fee due to Management Company and (y) any interest due thereon in
accordance with the provisions of clause (b) in the definition of Gross Sales
Price, and (ii) remit to Management Company such additional Bonus Incentive Fee
plus any interest due thereon. If Owner shall fail to pay any amount due to
Management Company within the time period provided for in paragraph 4(c), (i)
such amounts shall bear interest at the Interest Rate, and (ii) Management
Company shall have all rights and remedies available to it at law or in equity
with respect to Owner's failure to make such payments.
(d) Notwithstanding any election by Owner to negotiate, sell or
monetize any note or similar instrument evidencing an obligation to make
Deferred Payment at a discount (i.e., for consideration which is less than the
face value of the principal amount outstanding of such Deferred Payments), no
such discount shall apply with respect to the calculation of Net Excess Sales
Proceeds for the purpose of determining any amounts due on account of any Bonus
Incentive Fee, and the Bonus Incentive Fee shall continue to be calculated and
paid as if Owner still owned such note or similar instrument.
(e) No payment of any Bonus Incentive Fee shall be payable from the
Net Excess Sales Proceeds of any one or more Partial Sales unless and until the
cumulative amount of such proceeds equals ten percent (10%) or more of the
Priority Basis of the Hotel(s) which were the subject of such Partial Sales or
which are owned by the ownership entity which was the subject of such Partial
Sales.
(f) If, due to an Event of Default by Owner under a Management
Agreement with respect to a particular Hotel, Management Company terminates the
Management Agreement pursuant to Section 16.03 A thereof, the amount of any Base
Management Fee with respect to such Hotel which has not been paid to Management
Company but has been retained by Owner pursuant to paragraph 2(a) of this Letter
Agreement shall become immediately due and payable by Owner.
(g) Host Marriott hereby guarantees the timely payments to Management
Company by Owner under this paragraph 4.
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<PAGE>
5. Adjustment for Guarantees.
-------------------------
(a) At any time and from time to time up to the tenth (10th)
anniversary date of the closing of a Sale, Partial Sale or a Financing
Transaction, Owner may notify Management Company that it or its Affiliate has
paid a Guarantee in connection with such Sale, Partial Sale or Financing
Transaction. Such notice shall be accompanied by a calculation indicating the
reduction, if any, in the Bonus Incentive Fee which has resulted from the
payment of such Guarantee. Within thirty (30) days after receipt of such
notice, Management Company shall remit to Owner any overpayment in the Bonus
Incentive Fee previously paid to Management Company. In addition, any
additional payments of Bonus Incentive Fee (pursuant to paragraph 4(c) or
otherwise) with respect to such Hotel shall be made only after taking into
account the Guarantees theretofore paid by Owner with respect to such Hotel.
(b) If, at any time and from time to time until the full amount of
all Deferred Payments with respect to a particular sale have been received in
full, there shall be a default in the payment of any such Deferred Payments,
Owner may notify Management Company that such a default has occurred. Such
notice shall be accompanied by a calculation indicating the reduction, if any,
in the Bonus Incentive Fee which has resulted from such default. Within thirty
(30) days after the receipt of such notice Management Company shall refund to
Owner any overpayment in the Bonus Incentive Fee previously paid to Management
Company. To the extent defaulted amounts are subsequently recovered by Owner,
Owner shall promptly remit to Management Company any portion thereof
attributable to such refunded Bonus Incentive Fee.
(c) If Management Company shall fail to pay any amount due to Owner
within the time period provided for in paragraph 5(a) and 5(b), (i) such amounts
shall bear interest at the Interest Rate, and (ii) Owner shall have all rights
and remedies available to it at law or in equity with respect to Management
Company's failure to make such payments.
(d) Marriott International hereby guarantees the timely payments to
Owner by Management Company under this paragraph 5.
6. Consolidation.
-------------
(a) Until the earlier of (i) the close of the year 2000 or (ii) such
time as any given Hotel has been the subject of either a Sale or one or more
Partial Sales but only if, on a cumulative basis, at least 50% of the ownership
interest has been sold, or a Financing Transaction (a "Deconsolidation Event"),
(x) Management Company shall be permitted to commingle all of such Hotel's
Working Capital and banking accounts, including the FF&E
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<PAGE>
Reserve, into one or more accounts under Management Company's control in
accordance with practices currently in effect as of the date of the Management
Agreement, and (y) the reporting requirements of each such Hotel pursuant to the
Management Agreement therefor and the calculation, payment, distribution,
determination or deposit, as the case may be, of each such Hotel's Gross
Revenues, FF&E Reserve, Owner's Priority, Management Company's Base Management
Fee, Fairfield Inn System Fee, Incentive Management Fee, Chain Services,
Operating Profit and Owner's right to terminate the Management Agreement with
respect to each such Hotel shall be consolidated with the reporting requirements
and the calculation, payment, distribution, determination or deposit, as the
case may be, with respect to all Consolidated Hotel(s).
(b) From and after the occurrence of a Deconsolidation Event with
respect to any Hotel, except with respect to a Financing Transaction (provision
for which is made in paragraph 6(c) hereof), the reporting requirements for such
Hotel and the calculation, payment, distribution, determination or deposit, as
the case may be, of such Hotel's Gross Revenues, FF&E Reserve, Owner's Priority,
Base Management Fee, System Fee, Incentive Management Fee, Operating Profit and
Owner's right to terminate shall be done solely with respect to such Hotel and
shall not be consolidated with the reporting requirements and such calculation,
payment, distribution, determination or deposit with any other Hotel without
Management Company's prior consent.
(c) Notwithstanding the provision of clause (i) of paragraph 6(a)
above, from and after the occurrence of a Deconsolidation Event which is due to
a Financing Transaction which occurs prior to the close of the year 2000 with
respect to all or any group of the Hotels, the reporting requirements for all
such Hotels and the calculation, payment, distribution, determination or
deposit, as the case may be, of such Hotels' Gross Revenues, FF&E Reserve,
Owner's Priority, Base Management Fee, the Fairfield Inn System Fee, Incentive
Management Fee, Operating Profit and Owner's right to terminate shall be
consolidated with respect to all Hotels which are the subject of the same or
related Financing Transaction until the later of (i) the close of the year 2000
or (ii) the earlier to occur of (x) the maturity of the loan or loans which is
the subject of such Financing Transaction or (y) the close of the year 2002.
(d) Owner shall give Management Company prompt notice of any
Deconsolidation Event accompanied by reasonable documentation evidencing the
occurrence thereof, and paragraph 6(a) of this Letter Agreement shall terminate
with respect to the Deconsolidated Hotels as of the Deconsolidation Event,
except with respect to Hotels which are subject to a Financing Transaction,
special provision for which is made in paragraph 6(c), above.
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<PAGE>
(e) Notwithstanding the provisions of paragraph (a) above, to the
extent the determination of a Hotel's Gross Revenues, FF&E Reserve, Owner's
Priority, Base Management Fee, Fairfield Inn System Fee, Incentive Management
Fee, Operating Profit or Owner's termination rights after a Deconsolidation
Event requires calculation of such Hotel's Gross Revenues, FF&E Reserve, Owner's
Priority, Base Management Fee, Fairfield Inn System Fee, Incentive Management
Fee, Operating Profit or Owner's termination rights prior to such
Deconsolidation Event, then, for such purposes only, the calculation of such
Revenues, Reserve, Priority, Fee or Profit prior to such Deconsolidation Event
shall be maintained on a deconsolidated (i.e., Hotel-by-Hotel) basis.
Accordingly, in order to be able to utilize the same after a Deconsolidation
Event or a Partial Sale, and in order to determine the amount of a Qualified
Loan with respect to any Hotel or Hotel(s) Management Company shall, during the
period from and after the date hereof and prior to a Deconsolidation Event, in
addition to the reporting required under paragraph (a) above, maintain records
and provide reports on a quarterly basis to Owner describing each Hotel's Gross
Revenues, FF&E Reserve, Owner's Priority, Priority Basis, Management Company's
Base Management Fee, System Fee, Incentive Management Fee and Operating Profit
on a deconsolidated (i.e., Hotel-by-Hotel) basis as if paragraph (a) above did
not exist. Such quarterly reports shall be subject to Fiscal Year end audit and
adjustments. However, in no event shall the foregoing in any manner modify the
amounts owed by Management Company or Owner with respect to the period prior to
the Deconsolidation Event, calculated on a consolidated basis. So long as the
original Owner named herein, or Host Marriott or any of its subsidiaries or
Afiliates, is the Owner of any Hotel, that portion of Section 9.05, if any,
which grants Owner the right to request Management Analysis Reports on any
individual Hotels shall be waived.
(f) Upon the occurrence of a Deconsolidation Event with respect to
any Hotel, such Hotel, as a Deconsolidated Hotel, shall no longer be a
participant in the Consolidated FF&E Reserve maintained under paragraph 6(a).
Accordingly, upon receipt of Owner's notice of a proposed Deconsolidation Event,
Management Company shall compute the "Average FF&E Balance" (defined below) and
the "Actual FF&E Balance" (defined below) as of the close of the Accounting
Period immediately preceding the Deconsolidation Event. For purposes of this
computation:
(i) "Actual FF&E Balance" shall mean, with respect to any
-------------------
Consolidated Hotel which is about to become a Deconsolidated
Hotel, the difference between (x) the actual aggregate amount
(per guestroom) which has been contributed to the Consolidated
FF&E Reserve by such Hotel; less (y) the actual aggregate amount
----
(per guestroom) which has been
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<PAGE>
withdrawn from the Consolidated FF&E Reserve by such Hotel.
(ii) "Average FF&E Balance" shall mean, with respect to all
--------------------
Consolidated Hotels, including those in (i) above, the difference
between (x) the average aggregate amount (per guestroom) which
has been contributed to the Consolidated FF&E Reserve by all such
Consolidated Hotels; less (y) the average aggregate amount (per
----
guestroom) which has been withdrawn from the Consolidated FF&E
Reserve by all such Consolidated Hotels.
The contributions and withdrawals referred to in (i) and (ii) above shall be
those which were made from the period between the Effective Date of the
Management Agreements and the close of the Accounting Period immediately prior
to the date of the Deconsolidation Event.
If seventy-five percent (75%) of the Average FF&E Balance exceeds the Actual
FF&E Balance, the amount of such excess (multiplied by the number of guestrooms
in the Hotel in question) shall be paid by Owner into the consolidated FF&E
Reserve for use, in accordance with the Management Agreement, at the
Consolidated Hotels. If the Actual FF&E Balance exceeds one hundred twenty-five
percent (125%) of the Average FF&E Balance, the amount of such excess
(multiplied by the number of guestrooms in the Hotel in question) shall be
transferred (such transfer to occur after the completion of the calculations
referred to in this subsection (e) but in no event prior to the Deconsolidation
Event) by Management Company from such consolidated FF&E Reserve to the separate
FF&E Reserve for the Deconsolidated Hotel which shall be established as of the
date of such Deconsolidation Event, for use in accordance with the Management
Agreement applicable to such Deconsolidated Hotel. All such payments and
transfers shall be made either on or immediately after the date of the
Deconsolidation Event.
7. Interim Distributions. So long as the Original Owner named herein, or
---------------------
Host Marriott or any of its subsidiaries or Affiliates, is the Owner of any
Hotel, Management Company agrees that the interim distributions of Owner's
Distribution which are described in the second to last sentence of Section 5.02
A of the Management Agreement which is applicable to such Hotel shall
(notwithstanding the provisions of said Section 5.02 A regarding the frequency
of such distributions) be made twice per Accounting Period, rather than once per
Accounting Period. The first interim distribution (in the amount of one-half of
the estimated Owner's Distribution for each Accounting Period) shall be made by
no later than the twentieth (20th) day after the beginning of such Accounting
Period. The second interim distribution (in the amount of the remainder of such
Owner's Distribution) with respect to
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<PAGE>
such Accounting Period shall be made by no later than the fifth (5th) day after
the end of such Accounting Period. In addition, there will be an adjustment (if
necessary) of these interim distributions as of the delivery of the Accounting
Period Statement with respect to such Accounting Period, and any such adjustment
shall be included in the first interim distribution referred to above for the
following Accounting Period. The foregoing shall have no effect on the
frequency of the preparation of Accounting Period Statements, which shall
continue to be as set forth in Section 5.02 of the Management Agreement.
8. Conflict With Management Agreement. In the event of a conflict between
----------------------------------
the terms, conditions and provisions hereof and the Management Agreements, the
terms, conditions and provisions of this Letter Agreement shall prevail.
9. Ratification. As amended hereby, the Management Agreements remain in
------------
full force and effect and are hereby ratified and confirmed.
10. Governing Law. This Letter Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Maryland without giving
effect to principles of conflicts of law.
11. Notices. Any notices by either party to this Letter Agreement shall
-------
be given in accordance with Section 20.09 of the Management Agreements.
If the foregoing correctly sets forth our agreement with respect to the
matters contained herein, please indicate your agreement by signing a copy of
this Letter Agreement in the space provided and returning it to us.
Very truly yours,
HMH PROPERTIES, INC.
By: /s/ Christopher G. Townsend
------------------------------
Vice President
Accepted and agreed:
Fairfield FMC Corporation
By: /s/ James Sullivan
---------------------
Vice President
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<PAGE>
Accepted and agreed:
MARRIOTT INTERNATIONAL, INC.
By: /s/ James Sullivan
---------------------
Vice President
[FORM OF GUARANTEE ATTACHED TO ORGINAL]
Accepted and agreed:
HOST MARRIOTT CORPORATION
By: /s/ Stephen J. McKenna
-----------------------
Vice President
[FORM OF GUARANTEE ATTACHED TO ORGINAL]
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<PAGE>
Exhibit 10.16
FACILITIES LEASE AGREEMENT
--------------------------
THIS LEASE is made as of the 8th day of October, 1993 ("Commencement
Date"), by and between HMC RETIREMENT PROPERTIES, INC. ("Landlord"), a Delaware
corporation with a mailing address at 10400 Fernwood Road, Bethesda, Maryland
20817, and MARRIOTT SENIOR LIVING SERVICES, INC. ("Tenant"), a Delaware
corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland
20817.
R E C I T A L S:
A. The Premises were developed by a corporation which was an Affiliate
of Tenant. Both such corporations were subsidiaries of Landlord and engaged in
the business of owning and/or operating senior living retirement and health care
facilities under the Marriott trade name.
B. The lease transaction described herein is a portion of a larger
transaction involving multiple properties. As a material inducement to the
other party, each party hereto has agreed to also enter into the Related
Landlord Lease(s).
ARTICLE 1
LEASE OF PREMISES
-----------------
Section 1.01 "As-Is" Letting
---------------
A. In consideration of the Rentals, covenants and agreements to be
paid, kept and performed hereunder, Landlord, for the term and upon the
conditions hereinafter set forth, leases to Tenant and Tenant leases and takes
from Landlord, the Premises, together with all privileges, easements and
appurtenances beneficial thereto.
B. The Premises are leased to Tenant "as is" and Landlord makes no
representation or warranty, express or implied, with respect to the condition of
the Premises, or as to the compliance of the Premises with any Legal
Requirements. Tenant has examined the Premises and title to the Premises and
has found all of the same satisfactory for its purposes. Tenant accepts the
Premises subject to the existing state of title. During the term of this Lease,
Tenant shall have the nonexclusive right to use, enforce and obtain the benefits
of all guaranties and warranties relating to the construction, improvement,
alteration and repair of the Premises and all architectural and engineering
plans, drawings and specifications related thereto, and during the term of this
Lease Landlord shall execute such assignments or other transfer instruments as
are necessary to transfer the benefits of all such guaranties, warranties and
rights to Tenant, and shall not waive, surrender or modify any of Landlord's
rights with respect thereto without obtaining Tenant's prior written consent.
- 1 -
<PAGE>
Section 1.02 Tenant's Right of Possession
----------------------------
During the term of this Lease, Tenant shall have exclusive possession
(subject to the rights of existing residents therein) and control of the
Premises.
Section 1.03 Landlord's Cooperation
----------------------
A. Landlord agrees upon request by Tenant to provide all information
relevant to Landlord, its officers and directors, and to execute, and to cause
its officers and directors to sign, promptly, and without charge, all
applications (including all documents related thereto) for licenses, permits,
instruments or other general approvals required to be submitted to any
governmental authority that are necessary for the proper and successful conduct
of Tenant's lawful business operations at the Premises if and to the extent such
execution and/or information by or from Landlord and/or any of its officers and
directors is required by law, regulation or governmental practice in order for
Tenant to obtain any such license, permit, instrument or other governmental
approval; provided, however, that all costs and expenses associated therewith
shall be the sole obligation of Tenant, and Tenant shall promptly pay and
discharge the same, and provided further, that the proper execution of any such
application shall not expose Landlord to any personal liability. In all cases,
Landlord shall have a reasonable amount of time to comply with Tenant's requests
pursuant to this Section 1.03A, Landlord and Tenant shall, in good faith,
cooperate with each other in determining and complying with relevant
governmental requirements, and Tenant shall afford Landlord every reasonable
opportunity to question and challenge by appropriate administrative and/or
judicial process any relevant governmental requirement so long as such challenge
does not materially and adversely affect any material license, permit or
governmental approval of Tenant. Tenant hereby agrees that it will fully
indemnify, defend and save Landlord harmless from and against any and all costs,
losses and expenses, including, without limitation, any and all legal fees and
court costs incurred or suffered by Landlord as a result of its compliance with
the obligations imposed upon Landlord under this Section 1.03 except in the case
of Landlord's fraud or willful misconduct.
B. If Landlord should fail to comply with the requirements of Section
1.03A above, and such failure should continue for more than thirty (30) days
after Notice from Tenant specifying the required cooperation and informing
Landlord that Tenant intends to act pursuant to this Section 1.03B if such
cooperation is not provided within said thirty (30) day period and such failure
results, or with reasonable certainty will result, in the denial, non-renewal or
withdrawal of a material license, permit or governmental approval that will
materially and adversely affect Tenant's business at the Premises, then, in
addition and not as a substitution for any remedies available to Tenant under
Section 24.24 of this Lease, if such failure is not cured within such thirty
(30) day period, Tenant shall have the right to terminate this Lease by so
notifying Landlord not later than the date which is sixty (60) days after the
date of the aforesaid Notice. If Tenant elects to exercise the right described
in the preceding sentence, it shall, simultaneously with its delivery of its
Notice of termination, deliver to Landlord its irrevocable offer to purchase the
Premises for an amount equal to the Leasehold Purchase Price.
C. Landlord may accept or reject Tenant's irrevocable offer to purchase
the Premises by sending Tenant a Notice of rejection or acceptance within thirty
(30) days from the date upon which Landlord received Tenant's Notice of
termination. If Landlord fails to send Tenant a
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<PAGE>
Notice of rejection or acceptance within thirty (30) days of its receipt of
Tenant's irrevocable offer to purchase the Premises, Landlord shall be deemed to
have accepted such offer. If Landlord accepts or is deemed to have accepted
Tenant's offer to purchase, the Lease shall terminate and closing of such
purchase shall occur in accordance with the provisions of Article 21. Upon such
termination, Tenant shall pay to Landlord all Rental due through such date of
termination. Landlord shall convey the Premises to Tenant in accordance with
the provisions of Section 21.01.
D. If Landlord rejects Tenant's irrevocable offer to purchase pursuant
to Section 1.03B, this Lease shall terminate on a Minimum Rental payment date
specified by Tenant in its Notice of termination which occurs not earlier than
ninety (90) days nor later than one hundred twenty (120) days after delivery to
Landlord of Tenant's irrevocable offer to purchase, provided that this Lease
shall not terminate unless and until Tenant shall have paid all sums due
hereunder (including, without limitation, all taxes and insurance premiums) as
of the actual date of termination. Upon such termination, Tenant shall vacate
the Premises in accordance with the provisions of Section 3.04.
E. Landlord shall have the right at all times prior to either a closing
date for any purchase under Section 1.03C or the termination date under Section
1.03D, to cancel the right of Tenant to so purchase or terminate pursuant to
said sections, by complying with the requirements of Section 1.03A in sufficient
time and manner so that the subject license, permit or approval is obtained or
reinstated by a date that is prior to the aforesaid closing date or termination
date as the case may be.
END OF ARTICLE 1
ARTICLE 2
DEFINITION OF TERMS
-------------------
Section 2.01 Definition of Terms
-------------------
The following terms when used in this Lease shall have the meanings
indicated:
"Accounting Period" shall mean the four (4) week accounting periods
-----------------
having the same beginning and ending dates as Tenant's four (4) week accounting
periods, except that an Accounting Period may occasionally contain five (5)
weeks when necessary to conform Tenant's accounting system to the calendar.
"Additional Rental" shall mean any obligation of Tenant to pay money to
-----------------
Landlord under this Lease, other than Minimum Rental or Percentage Rental.
"Affiliate" shall mean any individual or entity directly or indirectly
---------
through one or more intermediaries, controlling, controlled by or under common
control with a party. The term "control," as used in the immediately preceding
sentence, means, with respect to a corporation, the right to the exercise,
directly or indirectly, of more than fifty percent (50%) of the voting
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<PAGE>
rights attributable to the shares of the controlled corporation, and, with
respect to an entity that is not a corporation, the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of the controlled entity.
"Alternative Rental" shall have the meaning set forth in Section 5.05.
------------------
"Business Day(s)" means Monday through Friday (except holidays); "normal
---------------
business hours" means 8:00 a.m. to 6:00 p.m. on Business Days; and "holidays"
means New Year's Day, President's Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
"Change of Use" shall have the meaning set forth in Section 7.02.
-------------
"Commencement Date" shall have the meaning set forth in the Preamble.
-----------------
"Effective Extended Term" means any Extended Term that has become
-----------------------
effective by reason of the occurrence of the first day of such Extended Term or
because Tenant has irrevocably exercised its option to extend the Term through
such Extended Term.
"Environmental Laws" shall mean: (a) the Comprehensive Environmental
------------------
Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as now
-- ---
or hereafter amended and the Resource Conservation and Recovery Act of 1976, as
now or hereafter amended; (b) the regulations promulgated thereunder, from time
to time; (c) all federal, state and local laws, rules and regulations (now or
hereafter in effect) dealing with the use, generation, treatment, management,
storage, disposal or abatement of Hazardous Materials or protection of human
health or the environment.
"Environmental Violation" shall mean any violation of any Environmental
-----------------------
Law at or relating to the Premises.
"Event of Default" shall have the meaning set forth in Section 20.01
----------------
"Expansion" shall have the meaning set forth in Section 9.01.
---------
"Expansion Rental" shall have the meaning set forth in Section 5.06B.
----------------
"Extended Term(s)" shall have the meaning set forth in Section 3.02.
----------------
"FF&E" shall mean all of the furniture, furnishings, and equipment
----
(including trade fixtures and equipment) owned by Landlord and/or Tenant,
situated at or on the Premises and used in connection with Tenant's use and
occupancy of the Premises.
"Fiscal Quarter" shall mean the period of time which (i) commences on
--------------
the first day of a Fiscal Year and ends on the last day of the third (3rd)
Accounting Period of such Fiscal Year; (ii) commences on the first day of the
fourth (4th) Accounting Period of a Fiscal Year and ends on the last day of the
sixth (6th) Accounting Period of such Fiscal Year; (iii) commences on the first
day of the seventh (7th) Accounting Period of a Fiscal Year and ends on the last
day of the
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<PAGE>
ninth (9th) Accounting Period of such Fiscal Year; and (iv) commences on the
first day of the tenth (10th) Accounting Period of a Fiscal Year and ends on the
last day of such Fiscal Year.
"Fiscal Year" shall mean Tenant's Fiscal Year which now ends at midnight
-----------
on the Friday closest to December 31 in each calendar year; the new Fiscal Year
begins on the Saturday immediately following said Friday. If Tenant's Fiscal
Year is changed in the future, appropriate adjustment to this Lease's reporting
and accounting procedures shall be made; provided, however, that no such change
or adjustment shall alter the Term of this Lease or in any way reduce the
payment of Percentage Rental or other payments due Landlord hereunder.
"Fixed Asset Supplies" shall mean supply items included within "Property
--------------------
and Equipment" under the Uniform System of Accounts including linen, china,
glassware, silver, uniforms, and similar items.
"GDP Deflator" shall mean the "Gross Domestic Product Implicit Price
------------
Deflator" issued from time to time by the United States Bureau of Economic
Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not
at such time so prepared and published, any comparable index selected by
Landlord and reasonably satisfactory to Tenant (a "Substitute Index") then
prepared and published by an agency of the Government of the United States,
appropriately adjusted for changes in the manner in which such index is prepared
and/or year upon which such index is based. Except as otherwise expressly
stated herein, whenever a number or amount is required to be "adjusted by the
GDP Deflator", or similar terminology, such adjustment shall be equal to the
percentage increase in the GDP Deflator which is issued for the month in which
such adjustment is to be made (or, if the GDP Deflator for such month is not yet
publicly available, the GDP Deflator for the most recent month for which the GDP
Deflator is publicly available) as compared to the GDP Deflator which was issued
for the month in which the Commencement Date occurred, it being agreed that for
purposes of this Lease, no GDP Deflator adjustment shall operate to decrease any
sum or number specified in this Lease.
"Guaranty" means that certain Agreement of Guaranty between Landlord and
--------
Guarantor of even date herewith.
"Guarantor" shall mean Marriott International, Inc., a Delaware
---------
corporation, whose mailing address is 10400 Fernwood Road, Bethesda, Maryland
20817.
"Hazardous Materials" shall mean and include any substance or material
-------------------
containing one or more of any of the following: "hazardous material",
"hazardous waste", "hazardous substance", "regulated substance", "petroleum",
"petroleum products", "pollutant", "contaminant", "polychlorinated biphenyls",
"pesticides", "asbestos", or "asbestos containing materials" as such terms are
defined in any applicable Environmental Law.
"Improvements" shall mean the buildings, parking lots, structures, and
------------
all other improvements and fixtures (other than trade fixtures owned by Tenant)
now or hereafter located on the Land together with the electrical, mechanical,
plumbing and HVAC systems installed therein.
"Indemnified Parties" shall have the meaning set forth in Section 8.01.
-------------------
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<PAGE>
"Initial Term" shall have the meaning set forth in Section 3.01.
------------
"Insubstantial Taking" shall mean a condemnation of a portion of the
--------------------
Premises that is less than all or substantially all of the Premises if (i) the
Improvements can be restored to substantially the same physical condition which
prevailed therein and thereon prior to such condemnation at a cost not exceeding
the condemnation award payable with respect thereto, (ii) the condemnation does
not cause a material reduction in the size or useability of any building on the
Premises or any material disruption to Tenant's use and occupancy of the
Premises, and (iii) such condemnation will not materially reduce the operating
profitability of its business on the Premises after any restoration when
compared to such profitability before the condemnation.
"Insurance Requirements" shall mean the requirements of any and all
----------------------
insurance policies procured in accordance with the terms hereof.
"Insurance Trustee" shall mean a bank, insurance company, pension fund,
-----------------
real estate investment trust or commercial lending institution, with financial
statements audited by an independent public accounting firm and a net worth of
at least One Hundred Million Dollars ($100,000,000). The Senior Mortgagee shall
be the Insurance Trustee if the Senior Mortgagee fulfills the requirements of
the first sentence of this paragraph. If there is no Senior Mortgagee that
fulfills the requirements of the first sentence of this paragraph, the Insurance
Trustee shall be such qualifying institution as is selected by Tenant and
approved by Landlord, such approval not to be unreasonably withheld,
conditioned, or delayed.
"Inventories" shall mean "Inventories" as defined in the Uniform System
-----------
of Accounts, such as provisions in storerooms, refrigerators, pantries and
kitchens; beverages in wine cellars and bars; other merchandise intended for
sale; fuel; mechanical supplies; stationery; and other expensed supplies and
similar items.
"Land" shall mean the real property described in Exhibit A hereto, or
----
such lesser area that from time to time may be leased by Tenant hereunder as set
forth in this Lease.
"Landlord" shall have the meaning set forth in the Preamble and its
--------
successors and assigns.
"Landlord's Audit" shall have the meaning set forth in Section 5.03.
----------------
"Landlord's Temporary Taking Award" shall have the meaning set forth in
---------------------------------
Section 15.03.
"Lease" shall mean this Facilities Lease Agreement between Landlord and
-----
Tenant dated as of the Commencement Date.
"Lease Interest Rate" shall mean the Prime Rate as set from time to time
-------------------
by Bankers Trust Company, New York, New York plus two (2) percentage points per
annum, but in no event shall the Lease Interest Rate be less than ten percent
(10%) per annum; provided, however, that the Lease Interest Rate shall not
exceed the maximum rate of interest from time
- 6 -
<PAGE>
to time permitted to be charged under applicable law with respect to the
indebtedness and party for which and against whom such interest is charged under
this Lease.
"Lease Memorandum" shall have the meaning set forth in Section 23.01.
----------------
"Leasehold Purchase Price" shall be at any particular time during the
------------------------
Term, the dollar amount equal to the present value as of the date of such
purchase of the payments of Minimum Rental, Alternative Rental if any, and
Expansion Rental if any, that would have been payable during the period
commencing on the date of such purchase and ending on the date of expiration of
the current term of this Lease (including any Effective Extended Term)
discounted to the date of purchase at an interest rate equal to the effective
interest rate on United States Treasury obligations as of the month preceding
the date of such purchase and having a maturity most nearly equal to the number
of months remaining in the current term of this Lease (including any Effective
Extended Term) as of the date of such purchase.
"Legal Requirement(s)" shall have the meaning set forth in Section 6.05.
--------------------
"Major Casualty" shall mean any damage to or destruction of all or any
--------------
portion of the Premises when such casualty is likely to result in a significant
reduction in the operating profitability of Tenant's business on the Premises
for a period exceeding twelve (12) months based upon the assumption that the
casualty will be repaired with reasonable diligence.
"Mandated Expenditure(s)" shall mean all costs in excess of Twenty Five
-----------------------
Thousand Dollars ($25,000) adjusted by the GDP Deflator, in the aggregate in any
Fiscal Year that are: (i) incurred by Tenant to (x) repair, renovate, or improve
the Premises or (y) remedy or mitigate any condition therein, thereon or
thereunder if such actions referred to in clause (x) or clause (y) (1) are
required to be made by reason of any Legal Requirement not in effect on the
Commencement Date, (2) are made to enable Tenant to continue its then current
operations in the Premises and (3) would be capitalized under generally accepted
accounting principles; (ii) incurred by Tenant pursuant to Section 8.02, Section
12.01 or Section 12.02 that are attributable to (A) remediating or correcting a
condition on the Premises that existed on the Commencement Date (whether or not
such condition was a violation of any Environmental Laws in effect on the
Commencement Date), or (B) the migration of any Hazardous Materials to the
Premises from real property other than the Premises, or (C) the adoption or
amendment of any Environmental Law that results in any act or omission occurring
after the Commencement Date constituting a violation of any Environmental Law if
and to the extent that such act or omission was not a violation of any
Environmental Law when it occurred; or (iii) costs that constitute Mandated
Expenditures pursuant to Section 14.06B.
"Minimum Rental" shall have the meaning set forth in Section 5.01.
--------------
"Mortgage" shall mean any security instrument which encumbers the
--------
Premises, including, without limitation, mortgages, deeds of trust, security
deeds and similar instruments.
"Mortgagee" shall mean the holder of, or beneficiary under, any Mortgage
---------
on Landlord's interest in the Premises.
- 7 -
<PAGE>
"Notice" shall have the meaning set forth in Section 22.01.
------
"Operating Revenues" shall mean the aggregate of all monies received by
------------------
Tenant from or with respect to the Premises, including without limitation,
moneys received for (i) the sale of goods, wares and merchandise, and (ii) the
provision of accommodations and food services and (iii) the provision of
nursing, health care and retirement community services, and (iv) the provision
of any other services or the sale of any other goods, for cash or credit on or
from the Premises during the Term hereof including, but not limited to income
arising from: rental of rooms, stores, offices and meeting and sales spaces of
every kind; license, lease and concession fees and rentals paid to Tenant (but
not including gross receipts of licensees, lessees and concessionaires); food
and beverage sales and services; sales of merchandise; service charges, to the
extent not distributed to Tenant's employees as gratuities; net receipts from
ancillary health care related services provided by third party contractors,
vending machines, stamp machines, telephones, and the like (but not including
gross receipts of same collected by or paid to others except to the extent
hereafter provided); provided, however, that Operating Revenues shall not
include the following:
(a) returns or refunds, or credits received in settlement of claims for
loss or damage to goods, wares, merchandise, or deficient services;
(b) all sales taxes, excise taxes, occupational taxes, gross receipt
taxes and similar taxes paid, whether imposed under any existing or future
rules, regulations, laws or ordinances, provided, however, that any income,
excess profits, franchise, or other taxes based upon, or measured by, Tenant's
income shall not be excluded from Operating Revenues;
(c) any receipts from the transfer of goods, wares or merchandise from
the Premises to any other facility operated by Tenant or its Affiliates;
(d) all receipts from sales to employees made at a discount; provided,
however, if the Premises are converted to a store which is closed to the general
public, but offers merchandise for sale to its employees, then such sales are to
be included in the definition of Operating Revenues;
(e) gratuities to Tenant's employees;
(f) insurance proceeds;
(g) condemnation award(s) (other than any condemnation award for a
temporary taking as described in Section 15.03 hereof); and
(h) proceeds from the sale of Tenant's FF&E or all or a substantial
part of its stock-in-trade and merchandise at a sale other than in the ordinary
course of business.
"Partial Condemnation Reduction Percentage" shall mean that percentage
-----------------------------------------
applicable in the event of a condemnation equal to the fraction whose numerator
is the fair market value of the Premises immediately prior to the effective date
of such condemnation less the fair market value of the Premises remaining
immediately after such condemnation has become effective and excluding the
portion of the Premises taken by the condemning authority and whose denominator
is the fair market value of the Premises immediately prior to the effective date
of such condemnation. Thus, for example, if the fair market value of the
Premises immediately prior to such condemnation was $20 million and the fair
market value of the premises remaining immediately after such condemnation was
$15 million, the Partial Condemnation Reduction Percentage would be 25%.
- 8 -
<PAGE>
"Partial Fiscal Year" shall mean (i) the period between the Commencement
-------------------
Date and the commencement of the first full Fiscal Year of this Lease, and (ii)
the period between the end of the last full Fiscal Year of this Lease and the
termination of this Lease, and (iii) the period between the first day of the
Fiscal Year in which Alternative Rental or Expansion Rental becomes payable in
--
lieu of Percentage Rental and the date upon which Percentage Rental ceases.
- ----
"Percentage Rental" shall have the meaning set forth in Section 5.01.
-----------------
"Premises" shall mean all of the Land and the Improvements or such
--------
lesser area or portion that from time to time may be leased by Tenant hereunder
as set forth in this Lease.
"Prospectus" shall have the meaning set forth in Section 24.17.
----------
"Related Landlord Lease" as of any date shall mean each of those leases
----------------------
described in Exhibit E hereto with respect to which as of such date Landlord
hereunder or any Affiliate of Landlord hereunder is also the landlord under such
lease or leases as of such date.
"Rental(s)" shall mean Minimum Rental, Percentage Rental, Alternative
---------
Rental, Additional Rental, and Expansion Rental either collectively or any one
or more of same as the context may indicate.
"Sale of the Premises" shall mean any sale, assignment, transfer or
--------------------
other disposition, for value or otherwise, voluntary or involuntary, of the fee
simple title to the Land and/or the Premises. For purposes of this Lease, a
Sale of the Premises shall also include a lease (subject to this Lease) of all
or substantially all of the Premises or Land and any sale, assignment, transfer
or other disposition, for value or otherwise, voluntary or involuntary, in a
single transaction or a series of related transactions, of the controlling
interest in Landlord. If Landlord is a corporation, the phrase "controlling
interest" shall mean the right to exercise, directly or indirectly, more than
fifty percent (50%) of the voting rights attributable to the shares of Landlord
(through ownership of such shares or by contract). If Landlord is not a
corporation, the phrase "controlling interest" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of Landlord.
"Senior Mortgagee" shall mean the holder, of, or beneficiary under, from
----------------
time to time the most senior Mortgage against Landlord's interest in the
Premises.
"Site Assessment" shall have the meaning ascribed to it in Section
---------------
12.02.
"Site Reviewer" shall have the meaning ascribed to it in Section 12.02.
-------------
"Special Rental Advance" shall have the meaning ascribed to it in
----------------------
Section 5.07.
"Substantial Taking" shall mean a condemnation of a portion of the
------------------
Premises that is less than all or substantially all of the Premises and that is
not an Insubstantial Taking.
- 9 -
<PAGE>
"Surviving Obligations" shall mean any obligations of Tenant under this
---------------------
Lease, actual or contingent, which arise on or prior to the expiration or prior
termination of this Lease and which survive such expiration or termination by
their own terms.
"Tenant" shall have the meaning set forth in the Preamble and its
------
successors and assigns.
"Term" shall have the meaning set forth in Section 3.01.
----
"Uniform System of Accounts" shall mean the Uniform System of Accounts
--------------------------
for Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association
of New York City, Inc.
"Use Award" shall have the meaning set forth in Section 15.03.
---------
"Year" shall mean a calendar year commencing on January 1 and ending on
----
December 31. A Partial Year shall mean that portion of a Year that occurs
during the Term in the case of the Year in which the Commencement Date occurs
and the Year in which the expiration or termination of this Lease occurs.
END OF ARTICLE 2
ARTICLE 3
TERM
----
Section 3.01 Term
----
The "Term" shall consist of the Initial Term, the Extended Term(s), if
any, and any extensions of the Term of this Lease pursuant to Section 9.03A.
The Initial Term of this Lease shall commence on the Commencement Date, and,
unless sooner terminated as otherwise provided herein, shall expire on December
31, 2013.
Section 3.02 Extended Term
-------------
If Tenant has not given Notice of its intention to terminate this Lease
pursuant to Section 3.03 and the Initial Term has not been sooner terminated,
the Term of this Lease shall automatically be extended on the same terms and
conditions as set forth herein for an Extended Term of five (5) years (the
"First Extended Term"). If Tenant has not given Notice of its intention to
terminate pursuant to Section 3.03 and the Initial Term and the First Extended
Term has not been sooner terminated, the Term of the Lease shall automatically
be extended on the same terms and conditions as set forth herein for one (1)
additional Extended Term of five (5) full Years (the "Second Extended Term").
If Tenant has not given Notice of its intention to terminate pursuant to Section
3.03 and the Initial Term, the First Extended Term or the Second Extended Term
have not been sooner terminated, the Term of the Lease shall automatically be
extended on the same terms and conditions as set forth herein for one (1)
additional Extended Term of five (5) full years (the "Third Extended Term"). If
Tenant has not given Notice of its intention to terminate pursuant to Section
3.03 and the Initial Term, the First Extended Term, the Second Extended Term and
the Third Extended Term have not been sooner terminated, the
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<PAGE>
Term of the Lease shall automatically be extended on the same terms and
conditions as set forth herein for one (1) additional Extended Term of five (5)
Years (the "Fourth Extended Term"). Notwithstanding the foregoing, Tenant may
elect at any time throughout the Term to exercise, by Notice to Landlord, its
option to extend the Term through any or all Extended Terms. If and to the
extent Tenant elects by written notice to Landlord to exercise its option to
extend the Term through any Extended Term, Tenant's option to terminate this
Lease pursuant to Section 3.03 with respect to such Extended Term for which
Tenant has exercised its extension option shall no longer be applicable, but
such option to terminate pursuant to Section 3.03 shall continue to apply to any
Extended Term with respect to which such option to extend was not exercised
pursuant to this Section 3.02. All elections to extend the Term shall be
irrevocable after exercised.
Section 3.03 Notice of Termination
---------------------
Tenant may terminate the Lease at the end of the Initial Term or at the
end of any Extended Term upon Notice to Landlord not less than twenty-four (24)
calendar months prior to the expiration of the Initial Term or the then current
Extended Term, as the case may be. In addition, Tenant may terminate this Lease
if Tenant gives a Notice of termination to Landlord after the date which is
twenty-four (24) months prior to the expiration of the Initial Term or the then
current Extended Term, as the case may be (but prior to the last day of the
Initial Term or the then current Extended Term and prior to the expiration of
the thirty (30) day period referenced below), and in such event this Lease shall
terminate on the date which is twenty-four (24) months after the date upon which
Tenant delivers such Notice; except that if, after the beginning of the
twenty-four (24) month period prior to the expiration of the Initial Term or the
then current Extended Term, as the case may be, Tenant does not give a Notice of
termination within thirty (30) days after Landlord requests Tenant to notify
Landlord whether Tenant intends to terminate this Lease, the Term of this Lease
shall be automatically extended for the next Extended Term and Tenant's right to
terminate this Lease prior to the expiration of the next Extended Term shall
cease to have any further force or effect.
Section 3.04 Obligations of Parties at Termination
-------------------------------------
A. Promptly upon the effective date of any termination of this Lease,
Tenant shall peaceably surrender the Premises to Landlord in the same condition
as the Premises were in as of the Commencement Date subject only to such
additions and alterations as have been permitted pursuant to Article 9 hereof
and subject to reasonable wear and tear. Tenant shall assign and deliver to
Landlord Tenant's entire interest in any and all service contracts, guaranties
and warranties relating to the construction, improvement, alteration and repair
of the Premises and all architectural and engineering plans, drawings and
specifications related thereto; and if Landlord so requests, cause any person or
entity occupying the Premises by, through or under Tenant to be evicted and
removed from the Premises.
B. Rental shall be paid through the date of termination. Within ninety
(90) days after this Lease terminates, Tenant shall deliver to Landlord a
complete and final accounting, prepared in accordance with the provisions of
Section 5.03 hereof of Operating Revenues together with
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<PAGE>
all payments of Rental due hereunder. Landlord's right to audit Tenant's books
and records as described in Section 5.03 and to receive Percentage Rental and
Additional Rental, if any, together with interest at the Lease Interest Rate
shall survive the termination of this Lease.
C. If Landlord, directly or indirectly, intends to conduct upon
termination of this Lease a business or use at the Premises similar to Tenant's
business or use, Tenant, at Landlord's request, shall (i) make available to
Landlord such books and records as are appropriate to such business and/or use
(but not including employee or resident records which must remain confidential
either under Legal Requirements or reasonable policies of Tenant, or any
proprietary information or property of Tenant), and (ii) assign or transfer to
Landlord or its designee, to the extent permitted by Legal Requirements, all
licenses, permits, permissions and approvals pertinent to the conduct of such
business or use on the Premises, provided that if Tenant has expended any of its
own funds within the five (5) year period preceding the termination date in the
acquisition or maintenance of any such license, permit, permission or approval
(other than annual license fees whether prepaid or paid currently), or if there
are any deposits or escrow funds relevant thereto that Tenant assigns and
transfers to Landlord, Landlord shall, as a condition of receiving an assignment
or transfer of such license, permit, deposit, escrow fund, permission or
approval (if requested by Landlord), reimburse Tenant therefor. The cost of
effectuating any such transfer of any licenses, permits, permissions or
approvals shall be borne by Landlord except when termination is due to Tenant's
default.
D. The provisions of Section 10.02 shall apply upon termination of this
Lease and Tenant shall take all other appropriate actions as required under all
other applicable provisions of this Lease. The provisions of this Section 3.04,
as well as all Surviving Obligations, Landlord's right to receive the late
charges described in Section 5.02B, interest on sums outstanding at the Lease
Interest Rate and legal fees (but if termination was not due to an Event of
Default such Legal Fees shall be reasonable legal fees) and court costs, shall
survive termination of this Lease.
END OF ARTICLE 3
ARTICLE 4
ABSOLUTELY NET LEASE
--------------------
Section 4.01 Net Lease
---------
Notwithstanding any other provision of this Lease - other than Sections
5.03 and 9.03C -it is expressly understood and agreed by and between the parties
that this Lease is an absolutely net lease, and the Rentals and all other sums
payable hereunder to or on behalf of Landlord shall be paid without Notice or
demand and without set-off, counterclaim, abatement, suspension, deduction, or
defense, and Landlord is not obligated to expend any of its funds in connection
with the Premises or this Lease.
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Section 4.02 Non-Terminability of Lease
--------------------------
A. Except as otherwise expressly provided herein, this Lease shall not
terminate, nor shall Tenant have any right to terminate this Lease, nor shall
the obligations hereunder of Tenant be otherwise affected, by reason of any
damage to or destruction of all or any part of the Premises from whatever cause,
the taking of the Premises or any portion thereof by condemnation, the
prohibition, limitation or restriction of Tenant's use of the Premises, or
interference with such use by any private person or corporation or by reason of
any eviction or otherwise, or Tenant's acquisition of ownership of the Premises
otherwise than pursuant to an express provision of this Lease, or for any other
cause whether similar or dissimilar to the foregoing, any present or future
Legal Requirement to the contrary notwithstanding, it being the intention of the
parties hereto that the Rental and all other charges payable hereunder to or on
behalf of Landlord, shall continue to be payable in all events and the
obligations of Tenant hereunder shall continue unaffected, unless the
requirement to pay or perform the same shall be terminated pursuant to an
express provision of this Lease.
B. Tenant covenants and agrees that it will remain obligated under this
Lease in accordance with its terms, and that Tenant will not take any action to
terminate, rescind, reject or avoid this Lease or any term, part, or provision
hereof, notwithstanding the bankruptcy, insolvency, reorganization, composition,
readjustment, liquidation, dissolution, winding-up or other proceeding affecting
Landlord or any assignee of Landlord in any such proceeding and notwithstanding
any action with respect to this Lease which may be taken by any trustee or
receiver of Landlord or of any assignee of Landlord in any such proceeding or by
any court in any such proceeding.
C. Except as otherwise expressly provided in this Lease, Tenant waives
all rights now or hereafter conferred by law or obtainable in equity (i) to
quit, terminate or surrender this Lease or the Premises, or any part thereof, or
(ii) to any abatement, suspension, deferment or reduction of any Rentals or
charges payable hereunder to or on behalf of Landlord, regardless of whether
such rights shall arise from any present or future constitution, statute or rule
of law.
END OF ARTICLE 4
ARTICLE 5
RENTAL
------
Section 5.01 Rental
------
Tenant covenants to pay Landlord Rental for the Premises as follows:
(i) Commencing with the Commencement Date and continuing to the end of
the Term (including all Extended Terms), Minimum Rental in an amount equal to
Three Million Three Hundred Nineteen Thousand Dollars ($3,319,000) per Year for
each Year; plus
(ii) For each Fiscal Year or Partial Fiscal Year (including all
Extended Terms), Percentage Rental equal to four and one-half percent (4.5%) of
that portion of the Operating Revenues for such Fiscal Year or Partial Fiscal
Year that exceed $9,326,000.00
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<PAGE>
multiplied, in the case of a Partial Fiscal Year, by a fraction the numerator of
which is the number of days in such Partial Fiscal Year and the denominator of
which is 365.
Section 5.02 Payment of Rental
-----------------
A. Minimum Rental shall be paid quarterly, in advance, on or before the
first day of January, April, July and October during each Year. Minimum Rental
for any Partial Fiscal Year shall be prorated and computed by multiplying the
annual Minimum Rental by a fraction, the numerator of which is the number of
days in such partial Year and the denominator of which is three hundred and
sixty-five (365) or three hundred sixty-six (366) as the case may be. Payments
for any Partial Fiscal Year shall be made in the same manner and at the same
times as payments are to be made during a full Fiscal Year as provided in this
Section. Percentage Rental shall be calculated on a Fiscal Year (or Partial
Fiscal Year) basis and shall be paid in arrears on or before forty-five (45)
days after the end of each Fiscal Year or Partial Fiscal Year in which
Percentage Rental become due. All installments of Rental not paid by Tenant
when same become due shall bear interest from the date due until paid at the
Lease Interest Rate. Time is of the essence, and installments of Rental shall
become due and payable without Notice or demand. All Rental payments shall be
made in lawful money of the United States of America and shall be paid to
Landlord at Landlord's address for receipt of Notices or to such other party
and/or to such other address as Landlord may from time to time designate by
Notice to Tenant in accordance with this Lease.
B. Tenant acknowledges that late payment of Rental by Tenant to
Landlord will cause Landlord to incur costs not contemplated in this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges and late
charges that may be imposed upon Landlord by the terms of any mortgage covering
the Premises. Accordingly, in addition to the interest payable by Tenant
pursuant to Section 5.02A, after a period of five (5) days following the date
all or any portion of Rental is due and unpaid Tenant shall pay to Landlord an
amount equal to five percent (5%) of the amount of such unpaid installment or
portion thereof. The parties agree such late charges represent a fair and
reasonable estimate of the cost Landlord will incur by reason of the late
payment by Tenant.
C. In the event that the Premises are damaged by fire or other casualty
and Tenant discontinues all or substantially all business operations therein,
Tenant's obligation to pay Percentage Rental for the Fiscal Year in which Tenant
has so discontinued its business operations shall be computed as if such Fiscal
Year was a Partial Fiscal Year and as if the number of days in such Partial
Fiscal Year excluded the number of days during which Tenant discontinued all or
substantially all of its business operations in the Premises.
D. If, at any time during the Term, there is a good faith dispute
between Landlord and Tenant with respect to the amount of Percentage Rental
properly due hereunder Tenant's failure to pay the disputed amount shall not be
deemed an Event of Default with respect to the provisions of Section 20.01 and
20.02 until such time as the dispute is resolved; provided, that Tenant shall
pay any such disputed amount of Percentage Rental into an escrow account to be
held and invested by the Insurance Trustee or such other escrow agent as may be
mutually approved by Landlord and Tenant (specifically created for such purpose
with interest to follow
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<PAGE>
final distribution of principal) as soon as such disputed amount becomes known,
and the provisions of Section 5.02B shall apply to any such disputed amount
ultimately determined to be due Landlord but with payment into the escrow
account being deemed payment to Landlord for purposes of Section 5.02B.
Section 5.03 Records; Audit by Landlord
--------------------------
A. Tenant shall keep, in appropriate detail and in accordance with
standard accounting practices, at its principal business office, records of all
sums constituting, and specifically excluded from, Operating Revenues with
respect to each Fiscal Year for a period of not less than four (4) Fiscal Years
after the expiration of the Fiscal Year to which such records relate. Tenant
shall deliver to Landlord a statement from an appropriate corporate officer, or
general partner of Tenant, certifying the annual Operating Revenues within sixty
(60) days after the end of each Fiscal Year. If there is any overpayment of
Percentage Rental, the excess shall be credited against any future Percentage
Rental when next due. If Landlord delivers its written request to Tenant,
within thirty (30) days after receipt of any such certified statement, for
copies of records and data to support such statement, then Tenant shall provide
same to Landlord within thirty (30) days after receipt of such written request.
Landlord shall be entitled, at its own expense, to audit such statement and
supporting records and data, provided Landlord shall cause such audit to
commence within ninety (90) days after receipt of said statement and to be
completed within one hundred twenty (120) days after receipt of all information
requested by Landlord reasonably related to such audit. In order to provide
finality, absent fraud and, except as otherwise provided below in this Section,
Tenant shall be entitled to treat such statement as being correct if Landlord
does not so audit or otherwise challenge said statement within the time period
above provided, and Landlord shall have no right thereafter to question or
examine the same. If the audit or any audit hereinafter referred to in this
Section (collectively a "Landlord's Audit") discloses an understatement of
annual Operating Revenues, Tenant shall immediately pay Landlord the additional
Percentage Rental found to be due plus interest thereon at the Lease Interest
Rate. However, if Landlord's Audit discloses that Percentage Rental has been
overpaid by Tenant, the excess shall be credited against any future Percentage
Rental when next due hereunder. Tenant shall have the right to be informed as
to any interim and/or final results of any such audit. In addition, if
Landlord's Audit discloses any underpayment of the total payment of Percentage
Rental for any Fiscal Year so audited, which underpayment is in excess of three
percent (3%) of the Percentage Rental due for such Fiscal Year, Tenant shall,
upon demand and receipt of evidence of payment, pay Landlord as Additional
Rental the reasonable cost of Landlord's Audit; and Landlord shall have the
option, at Tenant's expense, to audit the certified statements and supporting
records and data for the two (2) immediately preceding Fiscal Years, with such
audit to be commenced by Landlord within sixty (60) days after Landlord's
receipt of the initial audit showing an underpayment of Percentage Rental, and
to be completed within one hundred twenty (120) days after receipt of all
information requested by Landlord reasonably related to such audit.
B. Landlord shall keep all information regarding annual Operating
Revenues with respect to the Premises in strict confidence and shall not divulge
such information to third parties except (i) to Landlord's accountants and
attorneys, or (ii) to then existing or prospective purchasers, Mortgagees,
partners, lenders, or trustees of Landlord, or (iii) in connection with any
claim relating to Percentage Rental payable under this Lease, or (iv) as may be
required by
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<PAGE>
law, or (v) to the holders of direct and indirect beneficial ownership interests
in Landlord and its Affiliates.
Section 5.04 Subleases, Licenses and Concessions
-----------------------------------
A. If Tenant should sublease all or substantially all of the Premises,
then notwithstanding any other provision of this Lease to the contrary,
Operating Revenues shall not include any rent or other consideration paid by
such subtenant to Tenant but Operating Revenues shall include all gross receipts
of such subtenant that would be included in Operating Revenues if realized by
Tenant.
B. If Tenant should ever contract with a third party subtenant,
licensee or concessionaire to deliver goods or services to the residents,
clients or customers at the Premises, which goods and services had previously
been provided by Tenant to Tenant's residents, clients or customers at the
Premises, then notwithstanding any other provision of this Lease to the
contrary, the gross receipts of such subtenant(s), licensee(s) and
concessionaire(s) that would be included in Operating Revenues if realized by
Tenant shall be included in Operating Revenues; and in any case in which the
gross receipts of any subtenant, licensee, or concessionaire are included in
Operating Revenues hereunder the rental, license, or concession fees, if any,
paid by such subtenant, licensee, or concessionaire to Tenant shall not be
included in Operating Revenues; provided, however, that the provisions of this
Section 5.04B shall not apply to the gross receipts of any one or more
subtenants, licensees or concessionaires in the event that the gross receipts of
all such subtenants, licensees or concessionaires in the applicable Fiscal Year
do not exceed Fifty Thousand Dollars ($50,000), which $50,000 amount shall be
increased on the fifth (5th) anniversary of the Commencement Date and every
fifth (5th) anniversary thereof by an amount proportionate to the percentage
increase in the GDP Deflator over the preceding five (5) year period.
C. If any subtenant, licensee or concessionaire that delivers goods or
services to Tenant's residents, clients or customers at the Premises is an
Affiliate of Tenant, the gross receipts of such subtenant, licensee or
concessionaire that would be included in Operating Revenues if realized by
Tenant shall be included in Operating Revenues and the rental, license or
concession fees, if any, paid by such subtenant, licensee or concessionaire to
Tenant shall not be included in Operating Revenues.
D. Tenant shall not enter into any sublease, license or concession
agreement or amendment thereto in which the determination of the amount of rent,
license or concession fee depends in whole or in part on, or is expressed in
whole or in part as, a percentage of the income or profits derived by such
subtenant, licensee or concessionaire or any other person or entity. In any
lease, license or concession agreement or amendment thereto executed by Tenant
in which the amount of rent, license or concession fee is determined in whole or
in part by reference to the gross sales or gross receipts of the subtenant,
licensee or concessionaire or any other person or entity, such sublease, license
or concession agreement shall contain a provision stating that the gross
receipts or gross sales of the subtenant, licensee or concessionaire or any
other person or entity shall not be determined in whole or in part by reference
to the income or profits derived by the subtenant, licensee or concessionaire or
any other person or entity from the Premises or the subject matter or such
lease, license or concession agreement (other than an
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<PAGE>
amount based on a fixed percentage or percentages of gross receipts or gross
sales). In the event that Tenant violates the provisions of this paragraph with
respect to any sublease, license or concession agreement, then in addition to
any other rights and remedies that Landlord may have under this Lease or
applicable law, the gross receipts of such subtenant, licensee or concessionaire
under such sublease, license or concession agreement that would be included in
Operating Revenues if realized by Tenant shall be included in Operating Revenues
and the rental, license or concession fee, if any, paid by such subtenant,
licensee or concessionaire shall not be included in Operating Revenues.
Section 5.05 Rental Upon Change of Use
-------------------------
Upon any Change of Use as described in Section 7.02, Tenant's obligation
to pay Percentage Rental pursuant to Section 5.01(ii) shall cease and in lieu
thereof Tenant shall pay Alternative Rental for each Fiscal Year during the
remainder of the Term of this Lease in an amount equal to the average amount per
Fiscal Year of Percentage Rental payable by Tenant for the two (2) full Fiscal
Years immediately preceding the earlier of (i) the commencement of construction
of improvements for such Change of Use, or (ii) the commencement of such Change
of Use; provided, however, that the amount of Alternative Rental shall be
increased on the anniversary of the occurrence of the Change of Use and each
annual anniversary thereafter by an amount proportionate to the percentage
increase in the GDP Deflator over the preceding twelve (12) month period. Such
Alternative Rental will be paid in arrears within forty five (45) days after the
end of each Fiscal Year and will be prorated for any partial Fiscal Years.
Section 5.06 Rental Upon Certain Expansions
------------------------------
A. If Tenant completes any Expansion at the Premises and Tenant is
either then paying, or as the result of said Expansion will be paying,
Alternative Rental pursuant to the provisions of Section 5.05, the provisions of
this Section 5.06 shall not apply.
B. If Tenant completes any Expansion at the Premises that does not
constitute a Change of Use and no such Change of Use has previously occurred
with respect to which (i) the cost of such Expansion exceeds One Million Dollars
($1,000,000), and (ii) such Expansion results, either by itself or aggregated
with any and all prior Expansions, in an increase greater than five percent (5%)
in the capacity (measured either in terms of net useable building square
footage, or the aggregate number of independent living units, assisted living
units, and nursing care rooms) of the buildings on the Premises, then, from the
first day of the first month following the date of completion of such Expansion
throughout the remaining Term of this Lease, Tenant shall pay in lieu of
Percentage Rental the lesser of either (x) Percentage Rental calculated pursuant
to Section 5.01(ii) hereof, or (y) Expansion Rental for each Fiscal Quarter
during the remainder of the Term hereof in an amount equal to the average amount
of Percentage Rental payable by Tenant for the two (2) full Fiscal Years
immediately preceding the commencement of construction of such Expansion;
provided, however, that the amount of Expansion Rental shall be increased on
each anniversary of the date such Expansion Rental first became effective by an
amount proportionate to the percentage increase in the GDP Deflator over the
preceding twelve (12) month period.
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<PAGE>
Section 5.07 Special Rental Advance
----------------------
A. Guarantor shall maintain a long-term debt rating of either (i)
"BBB-" (triple B minus) or greater by Standard & Poor's Corporation or (ii)
"Baa3" or greater by Moody's (an "Investment Grade Rating"). If throughout any
period of time during the Term Guarantor fails to maintain an Investment Grade
Rating, Tenant shall pay a Special Rental Advance to Landlord to be held by
Landlord as security against Tenant's obligation to pay Rental hereunder. The
Special Rental Advance shall be in an amount equal to one quarterly payment of
Minimum Rental and shall be paid as follows: thirty (30) days after the date on
which Guarantor's long-term debt rating was downgraded as aforesaid, Tenant
shall pay Landlord one-third (1/3) of the Special Rental Advance, thirty (30)
days later Tenant shall pay Landlord an additional one-third (1/3) of the
Special Rental Advance, and thirty (30) days later Tenant shall pay Landlord the
final one-third (1/3) of the Special Rental Advance. Tenant shall continue to
make all Rental payments due under this Lease without regard to the payment of
the Special Rental Advance. If Landlord should apply all or any portion of the
Special Rental Advance to any Rental due from Tenant under this Lease, Tenant,
within two (2) business days after Notice from Landlord, shall replace said
amount. If Guarantor subsequently achieves an Investment Grade Rating, or, on
the last day of the penultimate Fiscal Quarter of the Term of this Lease, Tenant
may then credit the Special Rental Advance against its next due Rental under
this Lease.
B. Throughout the Term, Tenant shall cause Guarantor at all times to
maintain a long-term debt rating of its senior, unsecured debt by either
Standard & Poor's Corporation or Moody's (or a successor of each or both of them
acceptable to Landlord) provided that if either or both of such companies (or
any successor(s)) shall not issue such a credit rating notwithstanding Tenant's
best efforts to obtain same, then Tenant shall propose a substitute rating
agency and such substitute rating agency's ratings for purposes of this Section
5.07 and Landlord shall in its reasonable discretion approve or disapprove such
proposed substitute rating agency and its ratings. If Tenant shall fail to
propose such a substitute rating agency, or if Landlord shall disapprove a
substitute rating agency proposed by Tenant, then Landlord, on notice to Tenant
shall have the right to reasonably designate such substitute rating agency and
rating.
END OF ARTICLE 5
ARTICLE 6
OPERATION AND MAINTENANCE OF PREMISES
-------------------------------------
Section 6.01 Operation and Maintenance of Premises
-------------------------------------
Throughout the Term, Tenant, at its own expense, shall keep and maintain
the Premises in good condition and repair, reasonable wear and tear excepted,
and in conformity with all Legal Requirements and shall make or cause to be made
all ordinary and extraordinary, foreseen and unforeseen items of maintenance,
repair, replacement and alteration to the Premises as necessary for such
purpose. Landlord shall not be required to maintain, repair, or rebuild all or
any part of the Premises. Tenant shall provide all services required and
perform all
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obligations incurred in connection with the use, operation and maintenance of
the Premises, and Tenant shall be responsible for the payment of all costs and
expenses incurred in the use, operation, or maintenance of the Premises,
including, but not limited to, management fees, real estate taxes, insurance,
supplies and materials used in the operation and maintenance of the Premises,
the cost of all maintenance, janitorial, security and service agreements for the
Premises and the equipment therein and thereon, and the cost of electricity,
water and any and all other utilities supplied to the Premises, but not
including any costs or expenses affirmatively incurred by Landlord that are not
attributable to a default by Tenant in the performance of Tenant's obligations
under this Lease.
Section 6.02 Taxes
-----
A. Tenant shall pay, prior to delinquency: (i) all taxes, including
sales, excise, value added, use and real estate taxes, assessments, levies,
fees, water and sewer rents and charges, and all other governmental charges,
general and special, ordinary and extraordinary, foreseen and unforeseen, which
are imposed or levied upon or assessed against or which arise with respect to
the Premises, any Rental or other sums payable hereunder, this Lease or the
leasehold estate hereby created or which arise in respect of the operation,
possession or use of the Premises by Tenant or the leasing, operation,
possession or use of the Premises; (ii) all gross receipts, sales, excise or
similar taxes (i.e., taxes based upon gross income which fail to take into
account deductions with respect to the Premises, such as depreciation, interest,
taxes or ordinary and necessary business expenses) imposed or levied upon,
assessed against or measured by any Rental or other sums payable hereunder; and
(iii) all charges of utilities, communications and other services serving the
Premises.
B. Notwithstanding the foregoing provisions of Section 6.02A but
subject to the provisions of Section 6.02C, Tenant shall not be required to pay
any franchise, estate, inheritance, transfer, income or similar tax assessed or
imposed against Landlord, any Rental or other sums payable hereunder, this
Lease, the Land or Improvements (other than any tax referred to in clause (ii)
of Section 6.02A). Tenant will furnish to Landlord, within ten (10) days after
demand therefor, proof of payment of all items referred to above which are
payable by Tenant.
C. If, at any time, any Federal, state or local governmental entity
shall impose upon the Rental payable to Landlord any tax or other imposition in
lieu of any existing real estate or other tax payable by Tenant as of the
Commencement Date, then notwithstanding the provisions of Section 6.02B, Tenant,
at its sole cost and expense, shall pay such tax or imposition on Landlord's
behalf the same as if such tax or imposition had been levied against Tenant or
Tenant's interest in the Premises as well as any additional income taxes
assessed against Landlord with respect to such payment.
Section 6.03 Compliance with Requirements, Covenants and Restrictions
--------------------------------------------------------
Tenant shall comply with and cause the Premises to comply with all
obligations and liabilities with respect to all Insurance Requirements
(including, without limitation, to the extent necessary to prevent cancellation
thereof and to insure full payment of any claims made under such policies)
required to be maintained by Tenant under this Lease. Tenant shall comply with,
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cause the Premises to comply with, and shall assume all easements, agreements,
covenants, conditions and restrictions applicable to the Premises or the
ownership, operation, use or possession thereof that are of record on the
Commencement Date or are hereafter executed by Tenant or are hereafter consented
to by Tenant in a writing.
B. During the Term, Tenant will not enter into or consent to any
easements, covenants, conditions or restrictions which would affect the Premises
beyond the Term or any termination of this Lease without the prior consent of
Landlord, which consent will not be unreasonably withheld, conditioned, or
delayed.
Section 6.04 Landlord's Right to Perform Tenant Obligations
----------------------------------------------
If Tenant fails promptly to make any repairs, payments or otherwise take
any actions that are Tenant's obligation to make or do under this Lease,
Landlord, at its option, may make or perform same at the expiration of any
applicable Notice and grace period provided for herein (except that in the event
of any emergency presenting immediate danger to person or property, such Notice
and grace period shall only be what is reasonable under the circumstances), and
Tenant shall pay Landlord, upon demand and receipt of evidence of payment, as
Additional Rental, Landlord's actual costs plus interest thereon from the date
of expenditure until paid at the Lease Interest Rate. The provisions of this
Section 6.04 shall be for the sole and exclusive benefit of Landlord. Nothing
contained herein shall be construed so as to require Landlord to exercise any of
its rights under this Section 6.04.
Section 6.05 Compliance with Laws
--------------------
Subject to the provisions of Section 6.06, Tenant, at its sole expense,
shall comply with and cause the Premises to comply with, and assume all
obligations and liabilities with respect to all laws, orders, ordinances, and
regulations of Federal, state, county, municipal and other authorities having
jurisdiction over the Premises and/or the business or operations conducted
thereon, or the matters which are the subject of this Lease, including but not
limited to any building, zoning or use laws, ordinances, regulations or orders,
Environmental Laws, fire department rules, and health department regulations;
whether such rules, orders, and regulations are presently in effect or hereafter
enacted (whether or not presently contemplated) which would impose any
violation, requirement, order or duty with respect to the Premises, or the use,
ownership, operation or occupation thereof (such laws, orders, ordinances and
regulations being herein referred to as "Legal Requirements").
Section 6.06 Tenant's Right to Contest
-------------------------
Notwithstanding any other provision of this Lease, Tenant shall have the
right to contest (i) the payment of any tax or other imposition, (ii) compliance
with any Legal Requirement or (iii) any lien referred to in Section 6.07 so long
as (w) at the time of any such contest, no Event of Default exists, (x) no such
contest shall subject Landlord to the risk of criminal liability, (y) any such
taxes or impositions are paid prior to the assessment of penalties or interest
thereon unless such payment would deprive Tenant of the right to contest the
validity or amount of such taxes or impositions, and (z) Tenant shall contest,
in good faith, the existence, amount or validity thereof, the amount of the
damages caused thereby, or the extent of its or Landlord's
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<PAGE>
liability therefor by appropriate proceedings which shall operate during the
pendency thereof to prevent or stay (1) the collection of, or other realization
upon, the matter contested, (2) the sale, forfeiture or loss of any of the
Premises or any portion thereof or any Rental to satisfy or to pay any damages
caused by any of the matters described in clauses (i), (ii), and (iii), (3) any
interference with the use or occupancy of any of the Premises (4) any
interference with the payment of any Rental (5) the cancellation of any
insurance policy and (6) the enforcement or execution of any injunction, order
or Legal Requirement with respect to such matter. Tenant further agrees that
any such contest shall be prosecuted to a final conclusion or settled as
expeditiously as is reasonably possible under the circumstances. Any rebate
made on account of any taxes or other impositions shall be repaid to the party
who made such payment. If and to the extent required by applicable law or
regulation, Landlord shall render to Tenant, at no cost to Landlord, any and all
reasonable assistance in contesting the validity or amount of any impositions,
including (if requested by Tenant) joining in the signing of any protests or
pleading which Tenant may reasonably deem advisable to file. Tenant shall pay
any and all losses, judgments, decrees and costs in connection with any such
contest and shall, promptly after the final determination of such contest, fully
pay and discharge the amounts which shall be levied, assessed, charged or
imposed or be determined to be payable therein or in connection therewith,
together with all penalties, fines, interest and costs thereof or in connection
therewith, and perform all acts the performance of which shall be ordered or
decreed as a result thereof. Upon termination of this Lease for any reason
other than an Event of Default, Landlord shall promptly reimburse Tenant for any
such payment made by Tenant for taxes and impositions described in Section 6.02A
attributable to the Premises applicable to any period subsequent to the
termination of the Lease.
Section 6.07 Liens
-----
Tenant shall keep the Premises free from any liens arising from any work
performed, materials furnished, or obligations incurred by or at the request of
Tenant or any subtenant, licensee or concessionaire of Tenant or arising from
any breach by Tenant of its obligations under this Lease, and any liens with
respect to any taxes Tenant is obligated to pay under this Lease or Legal
Requirements. If any lien is filed against the Premises or Tenant's leasehold
interest therein, or if any lien is filed against the Premises which arises out
of any purported act or agreement of Tenant, or any subtenant, licensee or
concessionaire of Tenant, Tenant shall discharge the same within thirty (30)
days after Tenant receives Notice of its filing by payment, filing of the bond
required by law or otherwise. If Tenant fails to discharge such lien within
such period, then, in addition to any other right or remedy of Landlord,
Landlord may, at its election, discharge the lien by paying the amount claimed
to be due, by obtaining the discharge by deposit with a court or a title
company, or by bonding. Tenant shall pay on demand, as Additional Rental, any
amount paid by Landlord for the discharge or satisfaction of any such lien,
together with interest thereon from the date of such expenditure until paid at
the Lease Interest Rate, and all reasonable attorneys' fees and other costs and
expenses of Landlord incurred in defending any such action or in obtaining the
discharge of such lien, together with all necessary disbursements in connection
therewith. Nothing contained in this Lease shall be construed as constituting
the consent or request of Landlord, express or implied, to or for the
performance by any contractor, laborer, materialman, or vendor of any labor or
services or for the furnishing of any materials for any construction,
alteration, addition, repair or demolition of or to the Premises or any part
thereof. Notice is hereby given that Landlord will not be liable
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for any labor, services or materials furnished or to be furnished to Tenant, or
to anyone holding an interest in the Premises or any part thereof through or
under Tenant, and that no mechanic's, materialmen's or other liens for any such
labor, services or materials shall attach to or affect the interest of Landlord
in and to the Premises; and appropriate notice to this effect will be included
in the Lease Memorandum and all construction contracts entered into by Tenant.
END OF ARTICLE 6
ARTICLE 7
USE
---
Section 7.01 Use
---
Tenant shall have the right to use the Premises for a residential
retirement community, including nursing care, congregate care, and all other
uses reasonably incidental thereto.
Section 7.02 Change of Use
-------------
In addition to the uses permitted under Section 7.01, Tenant may
discontinue the uses permitted under Section 7.01 and use the Premises for
office, retail sales, commercial uses and residential purposes other than a
retirement community and for any other lawful business or commercial purpose
permitted under applicable Legal Requirements (a "Change of Use"), provided such
Change of Use is commercially reasonable and does not diminish the value of the
Premises and provided further that such Change of Use occurs prior to the date
that is three (3) years prior to the expiration of the Term of this Lease
(including all Effective Extended Terms). At the request of Tenant, Landlord
shall execute such applications, petitions or other documents that may be
required to be filed with any governmental authority that are reasonably
necessary to seek and obtain such a Change of Use, provided, that Landlord shall
not be required to incur any expense in connection therewith, and provided
further that the execution of any such document shall not expose Landlord to any
personal liability.
END OF ARTICLE 7
ARTICLE 8
INDEMNIFICATION
---------------
Section 8.01 General Indemnification by Tenant
---------------------------------
A. In addition to the provisions of any indemnity provided elsewhere in
this Lease (other than Section 8.02 hereof), Tenant shall pay, protect,
indemnify, defend, save and hold harmless, Landlord, any Mortgagee, ground
lessor, and any Affiliate, partner, trustee, officer, director, employee, agent
or shareholder of Landlord, or any holder of any beneficial interest in any of
them (the "Indemnified Parties"), from and against all liabilities, obligations,
claims, damages (including punitive damages), penalties and causes of action or
judgments of any nature
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whatsoever, howsoever caused and arising out of events or circumstances causing
personal injury or property damage during the Term (except that this indemnity
shall not cover liabilities or claims arising by reason of the gross negligence
or willful misconduct of an Indemnified Party or its employees or agents),
without regard to the form of action and whether based on strict or statutory
liability, gross negligence, negligence (including the negligence of any
Indemnified Party) or any other theory of recovery at law or in equity, and all
reasonable and documented costs and expenses (including reasonable attorneys'
fees and legal costs and expenses), imposed upon or incurred by or asserted
against any of the Indemnified Parties by reason of or in connection with:
(a) Any matter pertaining to the leasing, use, non-use, occupancy,
operation, management, condition, design, construction, maintenance, repair or
restoration of any of the Premises or the employment of any persons on the
Premises;
(b) Any casualty in any manner arising from or in connection with any
of the Premises or any operations or activities thereon, whether or not Landlord
has or should have knowledge or notice of any default or condition causing or
contributing to the casualty;
(c) Any violation by Tenant (or any subtenant, concessionaire or
licensee of Tenant) of any provision of this Lease, any contract or agreement to
which Tenant (or any subtenant, concessionaire or licensee of Tenant) is a
party, any violation or alleged violation of any Legal Requirement (including
anti-discrimination laws) or any Insurance Requirement;
(d) Any contest undertaken by or on behalf of Tenant with respect to
any Legal Requirement, Insurance Requirement, tax imposition or otherwise,
regardless of whether the same is permitted pursuant to the terms hereof; except
in each case to the extent the same directly result from the gross negligence or
willful misconduct by an Indemnified Party; and
B. In addition to the provisions of any indemnity provided elsewhere in
this Lease (other than Section 8.02 hereof), Tenant shall pay, protect,
indemnify, defend, save and hold harmless, the Indemnified Parties, from and
against all liabilities, obligations, claims, damages (including punitive
damages), penalties and causes of action or judgments of any nature whatsoever,
howsoever caused, arising out of events or circumstances causing personal injury
or property damage prior to the Commencement Date (except that this indemnity
shall not cover liabilities or claims arising by reason of the gross negligence
or willful misconduct of an Indemnified Party or its employees or agents),
without regard to the form of action and whether based on strict or statutory
liability, gross negligence, negligence (including the negligence of any
Indemnified Party) or any other theory of recovery at law or in equity, and all
reasonable and documented costs and expenses (including reasonable attorneys'
fees and legal costs and expenses), imposed upon or incurred by or asserted
against any of the Indemnified Parties by reason of or in connection with:
(a) Any matter pertaining to the leasing, use, non-use, occupancy,
operation, management, maintenance, or repair (but not to the design,
development or construction) of all or any part of the Premises, or the
employment of any persons on the Premises;
(b) Any casualty in any manner arising from or in connection with any
operations or activities on the Premises (but not casualties arising from the
structural condition, design, development, or construction of the Premises),
whether or not Landlord has or should have knowledge or notice of any default or
condition causing or contributing to the casualty;
(c) Any violation by Landlord (or any tenant, affiliate, concessionaire
or licensee of Landlord) of any provision of any contract or agreement
pertaining to the retirement community operations of Landlord at the Premises,
any violation or alleged violation of any
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Legal Requirement (including anti-discrimination laws) or any Insurance
Requirement pertaining to the retirement community operations of Landlord at the
Premises;
(d) Any contest undertaken by or on behalf of Landlord with respect to
any Legal Requirement, Insurance Requirement, tax imposition or otherwise
relating to the Premises, regardless of whether the same is permitted pursuant
to the terms hereof; except in each case to the extent the same directly result
from the gross negligence or willful misconduct by an Indemnified Party; and
C. Any matter covered by Section 8.02 shall be deemed excluded
from this Section 8.01.
Section 8.02 Environmental Indemnification
-----------------------------
Tenant shall pay, protect, indemnify, defend, save and hold harmless the
Indemnified Parties, from and against all liabilities, obligations, claims
(including without limitation, claims by third parties alleging violation of or
liability under any Environmental Law), damages (including punitive damages),
penalties and causes of action or judgments, without regard to the form of
action and whether based on strict or statutory liability, Tenant's gross
negligence, negligence (including the negligence of any Indemnified Party or
their agents but not including liabilities, obligations, claims, damages, causes
of action, or judgments arising out of any gross negligence or willful
misconduct of any Indemnified Party or their agents) any other theory of
recovery at law or in equity, and all reasonable and documented costs and
expenses (including reasonable attorneys' fees, expert's legal costs and
expenses), imposed upon or incurred by or asserted against any of the
Indemnified Parties by reason of or in connection with:
(a) Tenant's failure to perform its duties and obligations as set forth
in Article 12; and
(b) All claims asserted during or after the Term by any third party for
personal or bodily injury or death where such claims allege injury or damages as
a result of exposure, that occurred during the Term, to Hazardous Material that
existed at or were located in, on, or under the Premises at any time prior to or
during the Term provided, however, that this indemnity shall not cover claims
arising by reason of the gross negligence or willful misconduct of Landlord and
its agents, or an Indemnified Party and their agents.
Section 8.03 Defense of Indemnified Parties
------------------------------
Promptly after receipt by an Indemnified Party of Notice of the
commencement or assertion against it of any claim, action or proceeding, such
Indemnified Party shall, if a claim in respect thereof is to be made against
Tenant under this Article Eight, notify Tenant thereof; but the omission so to
notify Tenant shall not relieve Tenant from any liability which it may have to
such Indemnified Party under this Article Eight except to the extent that Tenant
shall have been prejudiced by such failure. As long as no Event of Default
exists and provided that representation by counsel selected by Tenant will not,
in Indemnified Party's reasonable judgment, prejudice Indemnified Party in any
manner, Tenant, at its sole cost and expense, shall have the right by counsel
reasonably satisfactory to the Indemnified Party, to contest, resist and defend
any claim, action or proceeding with respect to which it shall have received the
Notice described in the preceding sentence; provided, however, that Tenant may
not compromise or otherwise dispose of the same without the prior written
approval of the Indemnified Party, such
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approval not to be unreasonably withheld, conditioned, or delayed so long as the
Indemnified Party receives a full release with respect to the claim, action or
proceeding. If an Event of Default exists, or, in Indemnified Party's judgment,
representation by counsel selected by Tenant will prejudice Indemnified Party in
any manner, such Indemnified Party shall have the right to retain its own
counsel and defend such action. If Tenant shall have assumed responsibility for
such contest and defense, Tenant shall not be obligated to pay any attorneys'
fees or other legal costs incurred by or on behalf of the Indemnified Party
unless an Event of Default exists. Notwithstanding the foregoing, each
Indemnified Party shall, at Tenant's request and expense, cooperate with Tenant,
at no cost or expense to the Indemnified Party, in the defense of any such
claim, action or proceeding.
Section 8.04 Payment by Tenant
-----------------
Any amounts which become payable by Tenant under this Article Eight
shall be paid as Additional Rental no later than ten (10) days after demand by
the Indemnified Party entitled thereto (which demand shall not be made more than
ten (10) days prior to the proposed date of actual payment by the Indemnified
Party to a third party) and, if such payment is not timely paid, shall bear
interest at the Lease Interest Rate from the date when due to the date of
payment.
Section 8.05 Survival
--------
Tenant's liability under this Article Eight shall survive the expiration
or earlier termination of this Lease. The failure or inability on the part of
Tenant to carry insurance required to be maintained under Article Thirteen shall
not affect in any way its indemnification obligations hereunder.
Section 8.06 Continuing Obligations
----------------------
The indemnities set forth herein shall in no way affect or impact any
other obligations on the part of Tenant or any of its Affiliates that may exist
under law or under any other agreement in favor of any Indemnified Party.
END OF ARTICLE 8
ARTICLE 9
ALTERATIONS AND EXPANSIONS
--------------------------
Section 9.01 Alterations and Expansions
--------------------------
A. Tenant may at its expense and without Landlord's prior written
consent, make any replacements or alterations to the Premises and may expand the
existing Improvements or construct additional Improvements on the Land (an
"Expansion"), provided, that (i) the fair market value of the Premises shall not
be lessened thereby, and (ii) no structural elements of the Improvements shall
be demolished without obtaining Landlord's prior written consent, which
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consent shall not be unreasonably withheld, conditioned, or delayed, and (iii)
such replacements, alterations and/or Expansions will not adversely affect the
structure or the safety of the Improvements, or adversely affect the electrical,
heating, ventilating, air-conditioning, plumbing or mechanical systems or the
functioning thereof. Landlord has the right to require from Tenant assurances,
reasonably acceptable to Landlord, to be delivered to Landlord prior to the
commencement of any work, that Tenant will fully perform and complete its
Expansion, free and clear of any mechanics' and materialmen's liens. Tenant
shall procure at its own expense such governmental approvals and permits as may
be required for any alterations made by Tenant. At Tenant's expense, Landlord
shall join in submitting Tenant's plans for any necessary governmental approval,
if required by Legal Requirements. All such construction, alterations, and
maintenance work done by, or for, Tenant shall comply with all Legal
Requirements and Insurance Requirements, be completed in a good and workmanlike
manner and with reasonable diligence, and will be completed in all material
respects in accordance with plans prepared by a licensed architect. In the
event any Expansion will cost more than One Million Dollars ($1,000,000),
adjusted by the GDP Deflator, (w) Tenant shall furnish Landlord with the plans
and specifications therefor prior to commencing work, (x) the contractor
selected by Tenant to perform the work shall be subject to Landlord's approval,
which approval shall not be unreasonably withheld, conditioned, or delayed, (y)
Tenant shall carry builder's risk insurance in amounts reasonably sufficient to
cover the cost of replacement of the work during the course of such
construction, and (z) upon the request of Landlord or any Mortgagee, provide
appropriate securities, completion bonds, or like reasonable assurances that
construction will be completed. Tenant shall also furnish Landlord with copies
of any and all final plans and specifications (including all changes and
modifications thereto) and all necessary governmental permits prepared or issued
for all alterations (whether or not Landlord's consent was required in
connection with such alterations).
B. All replacements, alterations, substitutions and Expansions made to
the Premises (but not the FF&E, Fixed Asset Supplies, or Inventories) pursuant
to this Article 9 shall be and remain part of the realty and the property of
Landlord and shall be subject to this Lease.
Section 9.02 Alterations and Expansions During Last Five Years of Term
---------------------------------------------------------
Landlord's prior written consent, which may be withheld in Landlord's
sole, absolute, and subjective discretion, shall be required for any
replacements, alterations or Expansions of or to the Premises to be constructed
during the last five (5) years of the Term (including any Effective Extended
Term), provided however, if Tenant shall then exercise its rights under Section
3.02 to extend the Term hereof so that at least ten (10) years will remain in
the Term once the construction is completed, then the provisions of Section
9.01A shall apply.
Section 9.03 Recovery of Mandated Expenditures
---------------------------------
A. Mandated Expenditures shall be amortized by Tenant in equal monthly
installments in accordance with generally accepted accounting principles
consistently applied, but in no event shall any category of Mandated
Expenditures be amortized for longer than fifteen (15) years. If, as of any
date that would otherwise be a date of expiration or termination of the Term of
this Lease, there exists an unamortized balance of Mandated Expenditures, Tenant
shall have the right, exercisable by giving Landlord Notice to such effect at
least ninety (90) days
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prior to the end of the then current term, but not the obligation, to extend the
Term as hereinafter provided and receive a credit against Minimum Rental as
herein provided. If Tenant exercises its right to extend the Term under this
Section 9.03A, Tenant shall have no further right to extend the Term of the
Lease pursuant to any of the provisions of Article 3.
B. The length of any extension of the Lease Term pursuant to this
Section 9.03, shall be determined as follows: the unamortized balance of
Mandated Expenditures shall be divided by a number equal to forty percent (40%)
of the annual Minimum Rental; the result shall be rounded to the next whole
number; and, the Term shall be extended by a number of years equal to said whole
number.
C. During any such extended Term, Tenant shall receive a credit against
Minimum Rental equal to 50% of such Minimum Rental until such time as the
aggregate amount of such rent credit equals the unamortized balance of Mandated
Expenditures plus interest thereon at the Lease Interest Rate.
D. Landlord shall have the right, but not the obligation, of avoiding
any extension of the Term pursuant to this Section 9.03, by paying to Tenant,
within thirty (30) days after Tenant's Notice pursuant to Section 9.03A, an
amount equal to the unamortized balance of Mandated Expenditures.
E. The provisions of this Section 9.03 shall not apply in the case of
any termination of this Lease due to the default of Tenant.
F. Within six (6) months after the close of each Fiscal Year, Tenant
shall deliver to Landlord a written statement of (i) the amount of Mandated
Expenditures incurred by Tenant during such Fiscal Year with sufficient
information to establish that such expenditure qualifies as a Mandated
Expenditure, (ii) the amortization period that will be applicable to each such
Mandated Expenditure and (iii) the unamortized balance of all Mandated
Expenditures as of the last day of such Fiscal Year that has been incurred
during the Term. No expenditure shall be treated as a Mandated Expenditure
unless included within the annual statement referred to in the preceding
sentence.
END OF ARTICLE 9
ARTICLE 10
FF&E, FIXED ASSET SUPPLIES AND INVENTORIES
------------------------------------------
Section 10.01 FF&E Upon Commencement Date
---------------------------
On the Commencement Date, Landlord shall make available to Tenant all of
the FF&E, Fixed Asset Supplies, and Inventories indicated on the schedules
attached hereto as Exhibit C located at the Premises and to be used and consumed
at the Premises during the Term at no further cost to Tenant. Landlord shall
have no further obligations to provide any additional FF&E, Fixed Asset Supplies
or Inventories. Thereafter during the Term, Tenant shall, at its
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own cost, replace FF&E, Fixed Asset Supplies, and Inventories as it deems
necessary and all such replacement FF&E, Fixed Asset Supplies and Inventories
shall be and remain the property of Tenant. Any net proceeds realized by Tenant
from the sale or other disposition of any FF&E owned by Landlord and identified
in Exhibit C shall be paid promptly by Tenant to Landlord.
Section 10.02 FF&E Upon Termination
---------------------
A. Landlord shall have the option, to be exercised by sending Notice to
Tenant on or before the date that is either (i) six (6) months prior to the date
of expiration of the Term of this Lease or (ii) the date of expiration or
termination of the Term of this Lease, if this Lease terminates prior to the
expiration of the Term, to purchase from Tenant upon the date of termination of
this Lease any or all of the items of FF&E, Fixed Asset Supplies, and
Inventories then located at the Premises at their then fair market value. If
the parties are unable to agree upon such fair market value within thirty (30)
days following such expiration or termination, the parties shall appoint an
independent appraiser mutually agreeable to them to determine such fair market
value, which determination shall be net of the cost to Tenant to remove such
items from the Premises, and which shall be binding on the parties. The costs
of such appraiser shall be shared equally by the parties. If Landlord exercises
its option to purchase, Landlord shall have the right to use, after the date of
expiration or termination of this Lease, the items of FF&E, Fixed Asset Supplies
and Inventories so elected to be purchased by Landlord and Landlord shall pay
such fair market value to Tenant within thirty (30) days after agreement by the
parties or determination by the appraiser; and this provision shall survive such
expiration or termination. Landlord shall not have the option of purchasing from
Tenant any computer software that is proprietary to Tenant, any Affiliate, or
the licensor of any of them (including without limitation applications used by
Tenant as part of Tenant's accounting, centralized or local sales, business
management systems and otherwise), or any leased equipment.
B. Subject to the provisions of Section 10.02A, Tenant shall remove, at
Tenant's expense, all of its FF&E, Fixed Asset Supplies, and Inventories from
the Premises on or before the date of expiration or termination of this Lease
and repair any damage caused to the Premises by such removal. If Tenant fails
to remove such items by such date and/or fails to repair such damage, Landlord
shall have the right to do so and charge Tenant the cost therefor together with
interest thereon from the date of such expenditure until paid at the Lease
Interest Rate. The provisions of this Section 10.02 shall survive the
expiration or termination of this Lease.
Section 10.03 Landlord's Security Interest in Tenant's FF&E, Fixed
----------------------------------------------------
Asset Supplies and Inventories
- ------------------------------
As security for payment by Tenant of the Rentals payable hereunder and
the performance of all of Tenant's obligations under this Lease, Tenant hereby
grants to Landlord a security interest under the Uniform Commercial Code of the
jurisdiction in which the Premises are situated in all FF&E, Fixed Asset
Supplies and Inventories now or hereafter owned by Tenant and now or hereafter
ordinarily used on or in the Premises. Tenant shall execute and deliver to
Landlord such Uniform Commercial Code financing statements and continuation
statements as Landlord determines to be necessary from time to time to perfect
and continue the perfection of Landlord's security interest in such collateral.
Tenant shall have the right to replace any such
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collateral, to remove any such collateral from the Premises and dispose of any
such collateral, in the ordinary course of Tenant's business.
END OF ARTICLE 10
ARTICLE 11
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
-----------------------------------------
Section 11.01 Trademarks, Trade Names and Service Marks
-----------------------------------------
A. During the Term, the Premises may be known as a Marriott Retirement
Community, or such other name as Tenant may from time to time designate with
additional identification utilizing one or more trademarks and/or trade names of
Tenant as may be necessary to provide local identification. All Tenant's
trademarks, service marks, trade names, logos, symbols and designs shall in all
events remain the exclusive property of Tenant and its Affiliates, and nothing
contained herein shall confer on Landlord the right to use such names,
trademarks, service marks, trade names, logos, symbols or designs other than in
strict accordance with the terms of this Lease. Except as provided in Section
11.01B, upon the expiration or termination of this Lease, any use of or right to
use said names, trademarks, service marks, trade names, logos, symbols or
designs by Landlord shall cease forthwith and Tenant shall (at Tenant's sole
cost and expense) promptly remove from the Premises any signs or similar items
which contain any of Tenant's names, trademarks, trade names, service marks,
logos, symbols or designs, provided however, that Tenant shall be responsible
for the cost of any resulting repairs that may be necessary as a result of such
removal. Included under the terms of this Section are all trademarks, service
marks, trade names, symbols, logos or designs used in conjunction with the
Premises, including but not limited to restaurant names, lounge names, etc.,
whether or not the marks contain the "Marriott" name. The right to use such
trademarks, service marks, trade names, symbols, logos or designs belongs
exclusively to Tenant, and the use thereof inures to the benefit of Tenant
whether or not the same are registered and regardless of the source of the same.
B. Landlord covenants that any items of FF&E, Inventories or Fixed
Asset Supplies which are purchased by Landlord upon the expiration or
termination of this Lease, and which are marked with the Tenant's name or any
Tenant trademark, trade name, logo, symbol or design, shall be used exclusively
in connection with the Premises until they are consumed.
C. Any computer software (including upgrades and replacements) at the
Premises owned by Tenant, an Affiliate, or the licensor of any of them is
proprietary to Tenant, such Affiliate, or the licensor of any of them and shall
in all events remain the exclusive property of Tenant, the Affiliate, or the
licensor of any of them, as the case may be, and nothing contained in this Lease
shall confer on Landlord the right to use any of such software. Upon expiration
or termination of this Lease, Tenant shall have the right to remove from the
Premises without compensation to Landlord any computer software (including
upgrades and replacements) owned by Tenant, any Affiliate, or the licensor of
any of them. Notwithstanding anything contained in this Section 11.01C to the
contrary, any computer software directly relating to the operation
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and maintenance of the Improvements and their various systems shall be and
remain the property of Landlord through the term hereof and upon any expiration
or termination of this Lease.
D. Notwithstanding any provision of Section 11.01 to the contrary, the
parties acknowledge and agree that the trade name(s), trademark(s), service
mark(s), logo(s), symbol(s) or design(s) shown on Exhibit D associated with the
Premises, are proprietary to, and the property of, Landlord and upon expiration
or termination of this Lease Tenant shall not, thereafter, make any further use
thereof.
E. Tenant and/or its Affiliates and Landlord and/or its Affiliates
shall each be entitled, in case of any breach of the covenants of Article 11 by
Landlord or Tenant or others claiming through Landlord or Tenant, to injunctive
relief and to any other right or remedy available at law. The provisions of
Article 11 shall survive expiration or termination of this Lease.
F. Nothing contained herein shall diminish or abrogate the rights of
Landlord, its subsidiaries and Affiliates to use the trademarks of Tenant and
its subsidiaries and Affiliates granted under that certain Assignment & License
Agreement of even date herewith between Host Marriott Corporation and Marriott
International, Inc. Nothing contained herein shall be construed so as to
require Landlord, after the expiration or termination of this Lease, to remove
any trade names, trademarks, logos, symbols, service marks or designs which are
integral to the Improvements, including without limitation marked wallpaper,
marked plumbing and electrical fixtures, floors, carpets and distinctive color
schemes.
END OF ARTICLE 11
ARTICLE 12
ENVIRONMENTAL HAZARDS
---------------------
Section 12.01 Compliance with Environmental Law
---------------------------------
A. During the Term, Tenant at its cost shall cause the Premises to be
in compliance with all Environmental Laws, whether or not such noncompliance is
the result of a breach of Tenant's obligations under Section 12.01B or 12.01C.
B. Tenant shall never during the Term permit to be discharged at,
released at, or otherwise disposed of Hazardous Materials in, on or under the
Premises other than in insignificant concentrations or amounts that do not
impose a significant risk of any clean up, removal, monitoring or,
responsibility under any applicable Environmental Laws and do not impose a
significant risk of harm to guests, invitees, or employees of the Premises. In
the event that with or without Tenant's knowledge or permission there is any
discharge at, release at or disposal of Hazardous Materials in, on or under the
Premises during the Term other than in insignificant concentrations or amounts
that do not impose a significant risk of any clean up, removal, monitoring or
responsibility under any applicable Environmental Law and do not impose a
materially significant risk of harm to guests, invitees or employees of the
Premises,
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Tenant shall, subject to the provisions of this Article 12, diligently clean up
and remove such Hazardous Materials.
C. During the Term and for a period of five (5) years commencing after
the expiration of the Term, if any Hazardous Materials are discovered in, on or
under the Premises and result from, are introduced by, or arise out of, or the
damage from which is materially expanded as a result of Tenant's acts, its
negligence, or the acts or negligence of its employees or agents, or the acts or
negligence of any subtenants, licensees, concessionaires, contractors or
entities acting on behalf of Tenant or any of their employees or agents, the
cost incurred in complying with Environmental Laws with respect to such
Hazardous Materials shall be borne by Tenant. Tenant's obligation under this
sub-paragraph C shall continue after expiration of the Term until no further
compliance is required with respect to such Hazardous Materials.
D. If during the Term any Hazardous Materials are discovered in, on or
under the Premises and are the result of migration from a source other than the
Premises and are not a result of Tenant's acts, its negligence, or the acts or
negligence of its employees or agents, or the acts or negligence of any
subtenants, licensees, concessionaires, contractors or entities acting on behalf
of Tenant or any of their employees or agents, the cost incurred in complying
with Environmental Laws for such Hazardous Materials shall be borne by Tenant
until the expiration of the Term. After the expiration of the Term, Tenant
shall have no further liability to Landlord for complying with Environmental
Laws for such Hazardous Materials and Landlord shall indemnify Tenant for any
liability associated with the compliance of Environmental Laws with respect to
such Hazardous Materials.
E. In the event Tenant is required to implement a plan to investigate,
monitor, abate or remove Hazardous Materials pursuant to the requirements of any
Environmental Law, Tenant shall notify Landlord of its planned method, time and
procedure for such implementation and Landlord shall have the right to require
reasonable changes in such method, time or procedure. Nothing contained herein
shall be deemed to vest any control whatsoever in Landlord with respect to
Tenant's use, management, or disposal of Hazardous Materials on the Premises.
F. During the Term, Landlord may not enter into any agreement,
settlement or consent order with any third party or governmental entity
concerning the payment or possible payment of funds, or the investigation,
monitoring, abatement or removal of Hazardous Materials located in, on, or near
the Premises without the written consent of Tenant which consent shall not be
unreasonably withheld, conditioned or delayed. If Landlord fails to obtain
Tenant's written consent prior to entering into any such agreement, settlement
or consent order, any terms, conditions, obligations or liabilities contained
therein shall be non-binding on Tenant, Tenant shall have no responsibility to
Landlord under this Article 12, and Landlord shall indemnify Tenant for any
costs or losses incurred by Tenant as a result of such agreement, settlement or
consent order.
G. During the Term, Tenant may not enter into any agreement, settlement
or consent order with any third party or governmental entity concerning the
payment or possible payment of funds, or the investigation, monitoring,
abatement or removal of Hazardous Materials located in, on, or near the Premises
without the written consent of Landlord if such agreement, settlement or consent
order will impose any financial obligations on Tenant or Landlord, which
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<PAGE>
are to be paid in whole or in part, after the expiration of the Term.
Landlord's consent shall not be unreasonably withheld, conditioned or delayed.
Failure by Tenant to obtain the Landlord's written consent shall be an Event of
Default.
H. During the Term, Tenant may elect to defend any imposition, order,
demand, decree, lawsuit or governmental action that seeks to impose liability on
Tenant or Landlord due to the existence of Hazardous Materials in, on, or near
the Premises. If Tenant elects to take such action, Tenant shall not be deemed
to be in violation of any provision of this Article 12 so long as such action or
contest by Tenant does not result in a risk of the imposition of any criminal
sanctions against Landlord or any of its directors, officers or employees,
provided however, if Landlord or Tenant is ultimately held liable for the costs
associated with the existence of such Hazardous Materials, Tenant's liability
shall not be reduced by reason of any delay in such remediation.
Section 12.02 Environmental Assessments
-------------------------
A. If Landlord has reasonable cause to believe that an Environmental
Violation may exist on the Premises, or if Landlord desires to sell or finance
the Premises, or if any Mortgagee desires to sell or participate its interest in
the Premises, or if requested by the Senior Mortgagee, or if an Event of Default
exists, or if there is less than one (1) year remaining prior to the expiration
of the Term, then, upon written direction by Landlord to Tenant, Tenant shall
engage such persons as Tenant shall select ("Site Reviewers"), such selection
subject to the reasonable approval of Landlord, to visit the Premises and
perform, as agents of Tenant, such environmental site investigations and
assessments ("Site Assessments") as may be necessary to determine whether there
exists on the Premises any Environmental Violation, and, if any Environmental
Violation exists, to estimate the cost of remediating any such Environmental
Violation; provided, however, if an Event of Default exists or if there is less
than one year remaining prior to the expiration of the Term, Tenant shall select
the Site Reviewer from a list of no less than five (5) nationally recognized
Site Reviewers, such list to be provided by Landlord, and Landlord shall have
the right to approve the Site Reviewer, such approval to be exercised in a
reasonable manner recognizing Landlord's significant interest in the adequacy of
the report and the scope of work to be performed by such Site Reviewer.
Landlord shall have the right to approve any guidance or instruction requested
by such Site Reviewer during the Site Assessment, and Landlord shall have the
right to confirm that any draft or final reports furnished by such Site
Reviewers conform to approved scope of work, guidance and instructions. If
Tenant fails or refuses to engage Site Reviewers within thirty (30) days after
such direction, Landlord may engage the Site Reviewers. If an Event of Default
or a material Environmental Violation exists that was caused by Tenant, its
employees or agents, or by any Subtenant, licensee, concessionaire, contractor
or entity acting on behalf of Tenant, or any of their employees or agents, the
cost of any Site Assessment shall be paid by Tenant. In all other cases, the
costs of an Environmental Assessment shall be paid by Landlord (or Landlord
shall cause such costs to be paid by any Mortgagee requesting such Environmental
Assessment) and Tenant may demand adequate assurances that such costs will be
paid before engaging the Site Reviewers. Such Site Assessments may, at the
option of Landlord, include both above and below the ground testing and such
other tests as may be necessary, in the reasonable opinion of the Site
Reviewers, to verify the existence of an Environmental Violation or to estimate
the cost of remediating any such Environmental Violation. Tenant shall supply
to the Site Reviewers
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<PAGE>
such historical and operational information regarding the Premises as may be
reasonably requested by the Site Reviewers to facilitate the Site Assessments,
and shall make available for meetings with the Site Reviewers appropriate
personnel having knowledge of such matters. The Site Reviewers shall include in
their report a statement estimating the cost of any remediation, monitoring and
other compliance program, if any, necessary to cure or remediate such
Environmental Violation. All of the Site Reviewers' work shall be made
available to Landlord and Tenant.
B. If Tenant fails diligently to pursue any of its obligations under
this Section 12.02 and such failure continues for a period of thirty (30) days
after Notice from Landlord, Landlord shall have the right (but no obligation),
in addition to any other rights or remedies it may have pursuant to this Lease
or under applicable law, to take any and all reasonable actions as Landlord
shall deem necessary or advisable in order to effect such compliance, for and on
behalf of Tenant and at the cost and expense of Tenant, including to enter the
Premises for the purpose of making tests, obtaining samples and surveys and
performing any other acts as may be reasonably necessary or desirable in the
reasonable discretion of Landlord, and reimbursement to Landlord of the cost
thereof shall be due and payable by Tenant as Additional Rental on demand with
interest thereon at the Lease Interest Rate from the date such cost is incurred.
C. If, during the Term, an Environmental Violation occurs or is found
to exist at the Premises which shall impose a liability to Tenant after the
expiration of the Term pursuant to this Article 12, and in the judgment of the
Site Reviewers, remediation, monitoring or other compliance program relating to
any such Environmental Violation has not or will not be completed as required by
any applicable Environmental Laws by the expiration or earlier termination of
the Term, then Tenant shall provide to Landlord, no later than thirty (30) days
prior to the expiration or earlier termination of the Term, a bond, letter of
credit or other security reasonably satisfactory to Landlord for 110% of the
amount determined by the Site Reviewers to be necessary to complete such
remediation, monitoring or other compliance program. If an Environmental
Violation occurs because of the existence of Hazardous Material in, on or under
the Premises in excess of any reportable quantity established under any
Environmental Law, and Tenant makes all notifications and undertakes and
diligently prosecutes to completion all regulatory, remedial or other actions
which are required by any applicable Environmental Law by any federal, state or
local governmental agency having jurisdiction over such affected Premises, then
Tenant shall not be in default under this Lease so long as Tenant diligently
pursues any and all such actions toward completion, and any action or non-action
by Tenant does not result in a risk of the imposition of any criminal sanctions
against Landlord or any of its directors, officers or employees.
END OF ARTICLE 12
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ARTICLE 13
INSURANCE
---------
Section 13.01 Property & Business Interruption Insurance
------------------------------------------
Tenant shall, at its own expense, commencing with the Commencement Date
and continuing throughout the Term, procure and maintain with insurance
companies of recognized responsibility (with a rating of no less than A-VII by
A.M. Best, except that such rating shall not be applicable to those insurers
providing flood and earthquake insurance under this Section) property insurance
with the following minimum coverages:
(i) insurance on the Premises (including contents) against loss or
damage by fire, lightning and all other risks covered by the usual standard
extended coverage endorsement, and with coverage in the amount of not less than
one hundred percent (100%) of the replacement cost thereof, exclusive of
footings and foundations;
(ii) insurance against loss or damage from explosion of boilers,
pressure vessels, pressure pipes and sprinklers installed in the Premises;
(iii) business interruption insurance covering loss of profits and
necessary continuing expenses (including Rentals payable under this Lease) for
interruptions caused by any occurrences covered by the insurance referred to in
subparagraphs (i) and (ii) of this Section 13.01, for a period of at least
eighteen (18) months and of a type and in amounts generally carried by prudent
owners of similar properties;
(iv) flood insurance in an amount not less than the maximum limit
available under the National Flood Insurance Program (but only if the Premises
are located in a zone identified by the Federal Emergency Management Agency as a
flood hazard area);
(v) earthquake insurance and, if the Premises are not located in a
zone identified by the Federal Emergency Management Agency as a flood hazard
area, flood insurance (but only to the extent such insurance is then carried by
prudent owners of similar properties); and
(vi) such other property risk insurance, as may from time to time be
generally carried by prudent owners of similar properties, in such amounts and
against such risks as are then customary for property similar in use to the
Premises.
Section 13.02 Application of Proceeds
-----------------------
A. All proceeds of any insurance payable on account of any casualty
other than proceeds attributable to Tenant's personal property and other than
the proceeds of insurance referred to in Section 13.01(iii) shall be paid to the
Insurance Trustee who shall hold said proceeds in trust for the parties in
accordance with the provisions of this Section 13.02; provided, however, that in
the event that the aggregate amount of such proceeds with respect to any such
casualty is less than Two Hundred Fifty Thousand Dollars ($250,000), such
proceeds shall be paid to Tenant who shall use such proceeds for the purpose of
restoration of the Premises. Insurance proceeds attributable to Tenant's
personal property shall be paid directly to Tenant and shall not be considered
when making calculations pursuant to the preceding sentence. The proceeds of
the insurance referred to in Section 13.01(iii) shall be paid to Tenant except
that any such proceeds attributable to the Rentals payable under this Lease
shall
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<PAGE>
be paid to Landlord (as a credit against such Rentals) to the extent that such
Rentals have not been previously paid by Tenant to Landlord.
B. Provided that no default hereunder has occurred and is continuing,
and provided that Tenant complies with all of the terms and conditions of this
Section 13.02, all insurance proceeds received with respect to a casualty shall
be applied to the restoration of the Premises.
C. Tenant shall commence the restoration of the Premises not later than
the date which is one hundred eighty (180) days after the date upon which the
casualty occurred and thereafter prosecute the restoration with diligence and
continuity.
D. In the case of any casualty, prior to commencing any restoration
work that will cost more than Five Hundred Thousand Dollars ($500,000) to
repair, as adjusted by the GDP Deflator, Tenant, at its sole cost shall (i)
obtain the services of a licensed architect to prepare any required plans and
specifications for such restoration to the extent that such restoration work
cannot be performed based upon previously existing plans and specifications for
the Improvements; and (ii) submit a set of final plans and specifications to
Landlord and the Senior Mortgagee for approval to the extent that such
restoration work involves a departure from or addition to previously existing
plans and specifications for the Premises (which approval may not be
unreasonably withheld, conditioned, or delayed); and further, with respect to
any casualty that will cost more than One Million Dollars to repair, (iii) the
contractor selected by Tenant to perform the work shall be subject to Landlord's
approval, which approval shall not be unreasonably withheld, conditioned or
delayed, and (iv) Tenant shall carry builder's risk insurance in amounts
reasonably sufficient to cover the cost of replacement of the work during the
course of such construction.
E. In proceeding with such restoration work, Tenant shall first expend
an amount, if any, equal to the excess of the projected cost of the restoration
work over the amount of all insurance proceeds paid to the Insurance Trustee.
Thereafter, Tenant shall be entitled to submit to the Insurance Trustee, not
more frequently than once every thirty (30) days, an invoice together with such
other documentation (including mechanics lien waivers and title insurance policy
endorsements obtained at Tenant's sole cost and expense) as is customarily
required by lenders at such time making construction loans. Upon receipt of an
invoice in proper form, the Insurance Trustee shall make a disbursement within
ten (10) business days equal to ninety percent (90%) of the amount shown on the
invoice, provided, however, that upon final completion of the restoration work,
the Insurance Trustee shall disburse the final amount due Tenant, but only if it
has received any of the following: (a) final mechanics lien waivers from all
parties having rights to mechanics liens against the Premises on account of such
restoration work, (b) appropriate endorsements or policies of title insurance
protecting Landlord and Mortgagee against mechanics liens arising out of the
restoration work, or (c) a mechanic's lien bond. In the event that the amount
disbursed upon final completion of the restoration work in accordance with the
previous sentence shall be less than the total insurance proceeds then held by
the Insurance Trustee, such excess shall be paid to Tenant.
F. In the event that Tenant shall fail to prosecute the restoration
work with diligence and continuity until completion, regardless of whether an
Event of Default has occurred, Landlord shall have the right to use any proceeds
held by Insurance Trustee to complete such
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<PAGE>
renovation work. Tenant shall be liable for any sums incurred by Landlord to
complete such restoration work in excess of the amount held and disbursed by the
Insurance Trustee.
G. In the event that an Event of Default has occurred, Tenant shall not
have access to any insurance proceeds unless and until Tenant shall have cured
such Event of Default, and until such time, Tenant shall use its own funds to
prosecute the restoration work.
H. Upon the expiration or termination of the Term of this Lease, all
insurance proceeds received by the Insurance Trustee or Tenant and not applied
to the costs of restoration shall be paid to Landlord except as otherwise
provided in Article 21.
Section 13.03 Waiver of Rights of Subrogation
-------------------------------
Landlord and Tenant hereby waive their rights of recovery against each
other, their respective officers, directors, agents and employees for loss or
damage to the Premises and any resultant business interruption to the extent
covered by the insurance maintained under Section 13.01. Should any such
policies of insurance require an endorsement to effect such a waiver, the Tenant
shall cause them to be so endorsed.
Section 13.04 Operational Insurance
---------------------
Tenant shall, at its own expense, commencing with the Commencement Date
and continuing throughout the Term, procure and maintain operational insurance
with reputable insurance companies of recognized responsibility; provided,
however, that, with respect to the first One Million Dollars ($1,000,000) of
coverage required by this Section such coverage shall be obtained from insurance
companies authorized to do business in the United States with a rating of no
less than A-VII by A.M. Best. All other coverage shall be obtained from one or
more insurance companies with an A.M. Best rating of no less than B+V with
respect to domestic insurance companies or of at least comparable standing if a
foreign-based insurer. Operational insurance required herein shall have the
following minimum coverage:
(i) comprehensive or commercial general liability insurance against
claims for death, bodily injury, or property damage occurring on, in or about
the Premises, and automobile liability insurance on vehicles operated in
conjunction with the Premises with a combined single limit of not less than One
Hundred Million Dollars ($100,000,000) per occurrence.
(ii) such other insurance as Tenant in its reasonable judgment deems
advisable for protection against claims, liabilities and losses arising out of
or connected with its operation of the Premises.
Section 13.05 Blanket and Self-Insurance
--------------------------
All insurance described in Sections 13.01 and 13.04 may be obtained by
Tenant by endorsement or equivalent means under its blanket insurance policies,
provided that such blanket policies fulfill the requirements specified herein.
With respect to the insurance described in Section 13.04 the deductible or
self-insured retention limits shall not exceed Two Hundred Fifty Thousand
Dollars ($250,000) (to be increased on the fifth (5th) anniversary of the
Commencement Date and every subsequent fifth (5th) anniversary thereof, by an
amount proportionate to the percentage increase in the GDP Deflator over the
preceding five (5) year
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<PAGE>
period) or such lesser amount as is then applicable to a majority of the other
properties covered under Tenant's company wide insurance program. As to all
insurance described in Section 13.01, deductible limits or self-insured
retentions shall not exceed Fifty Thousand Dollars ($50,000) (to be increased on
the fifth (5th) anniversary of the Commencement Date and every subsequent fifth
(5th) anniversary thereof, by an amount proportionate to the percentage increase
in the GDP Deflator over the preceding five (5) year period) or, with respect to
"high hazard classification" (as such term is customarily understood in the
insurance industry), such other amount as may then be required by responsible
insurance companies for similar properties and risks.
Section 13.06 Costs of Insurance
------------------
Insurance premiums and any costs or expenses with respect to the
insurance described in this Article 13 shall be borne by Tenant. Any losses,
costs, damages or expenses which fall within the deductible limits or are
included within an allowed self-insurance program pursuant to Section 13.05
above shall be borne by Tenant. If Tenant shall fail to pay any premium for any
such insurance, or if an Event of Default with respect to any of the provisions
of this Article 13 shall occur, Landlord may pay such premium or procure the
insurance coverages required by this Article 13 and all amounts paid by Landlord
in accordance herewith shall become Additional Rent which is due and payable
within five (5) Business Days after such expenditures are made.
Section 13.07 Defense of Claims after Termination
-----------------------------------
With respect to any claim relating to an accident or other occurrence
within a given Year for which Tenant is obligated to indemnify Landlord under
Article 8 which is not finally resolved either through litigation or settlement
prior to the expiration or termination of this Lease, Tenant shall be obligated
to continue to defend such accrued claims regardless of such expiration or
termination.
Section 13.08 Coverage and Certificates
-------------------------
All insurance policies provided for under Section 13.01 or Section 13.04
above shall be carried in the name of Tenant, with Landlord and any Mortgagee on
the Premises as additional insureds, and with loss payable, in the case of any
policies procured under Section 13.01, in accordance with the provisions of
Section 13.02. Tenant shall deliver to Landlord certificates of insurance with
respect to all policies so procured under Section 13.01 or Section 13.04,
including existing, additional and renewal policy certificates and, in the case
of insurance about to expire, shall deliver certificates of insurance with
respect to the renewal policies prior to the respective dates of expiration.
All insurance policies provided for under Section 13.01 or Section 13.04 above
shall, to the extent obtainable, have attached thereto an endorsement that such
policy shall not be cancelled or materially changed without at least thirty (30)
days' prior written Notice to Landlord, Tenant, and the holder of any Mortgage.
Upon request by Landlord or any Mortgagee, the requesting party or its
representatives shall be entitled to examine at Tenant's corporate headquarters
all insurance policies maintained by Tenant with respect to the Premises.
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<PAGE>
Section 13.09 Alternative Insurance Coverage
------------------------------
Notwithstanding any other provisions of this Lease to the contrary, if
at any time during the Term hereof Tenant is not able to obtain any one or more
of the insurance coverages required pursuant to this Article 13 because the
subject insurance coverage(s) are not then reasonably available in the insurance
marketplace, then, Tenant's failure to so obtain such insurance coverage(s)
shall not constitute an Event of Default so long as Tenant does obtain coverage
as similar to that required under this Lease as is reasonably available. For
purposes of this Section 13.09 the term "reasonably available" means that type
of coverage then obtainable from reputable insurance companies for properties
similar to the Premises and purchased by prudent owners of businesses similar to
that operated by Tenant at the Premises.
END OF ARTICLE 13
ARTICLE 14
DAMAGE BY FIRE OR OTHER CASUALTY
--------------------------------
Section 14.01 Damage by Fire or Other Casualty
--------------------------------
Subject to the provisions of Section 14.06, if during the Term the
Premises shall be damaged or destroyed by fire, or any other casualty or cause
whatsoever, Tenant shall forthwith proceed to repair and/or rebuild the same,
free of all liens, claims and encumbrances, to the same general design and
specification as existed immediately before such damage or destruction occurred,
subject to such delays as may be reasonably attributable to governmental
restrictions or failure to obtain materials or labor, or other causes (other
than financial), whether similar or dissimilar, beyond the control of Tenant.
Materials used in repair shall be as nearly like or superior in quality to
original materials as may then be reasonably procured in regular channels of
supply. All proceeds of insurance carried on the Premises pursuant to Article
13 hereof, payable as a result of such damage or destruction, shall be used for
the purpose of such repair or rebuilding in accordance with the provisions of
Article 13, and, if such insurance proceeds are not so made available by the
Insurance Trustee or Landlord in accordance with the provisions of Article 13
and such failure shall continue for a period of 90 days after Notice of such
failure is delivered by Tenant to Landlord, Tenant's obligation to repair and
rebuild hereunder shall be suspended until such time as such insurance proceeds
are so made available. If such insurance proceeds are not so made available
within one (1) year thereafter, Tenant, at its option may terminate this Lease
upon ninety (90) days prior Notice to Landlord. Upon any such termination,
Landlord shall have all rights to any insurance proceeds. In the event Tenant
is not required to repair or rebuild by the terms or conditions of this Lease,
all such insurance proceeds (whether paid to the Insurance Trustee or Tenant)
shall be paid to Landlord. If Tenant is required to, and does repair or
rebuild, any excess insurance proceeds shall be paid to Tenant.
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<PAGE>
Section 14.02 Partial Damage by Fire or Other Casualty
----------------------------------------
In the event of any partial damage or destruction, Tenant shall continue
to occupy and use the Premises to the extent that it may be practicable to do
so, and Tenant shall proceed to repair and/or rebuild the Premises in the manner
and at the time described in Sections 13.02 and 14.01.
Section 14.03 Damage Occurring After the 10th Anniversary of
----------------------------------------------
Commencement Date
- -----------------
A. In the event of a Major Casualty occurring after the tenth (10th)
anniversary of the Commencement Date, Tenant shall have the right to terminate
this Lease by so notifying Landlord not later than the date which is sixty (60)
days after the occurrence of such Major Casualty. If Tenant elects to exercise
the right described in the preceding sentence, it shall, simultaneously with its
delivery of its Notice of termination, deliver to Landlord its irrevocable offer
to purchase the Premises for an amount equal to the Lease Purchase Price.
B. Landlord may accept or reject Tenant's irrevocable offer to purchase
the Premises by sending Tenant a Notice of rejection or acceptance within thirty
(30) days from the date upon which Landlord received Tenant's Notice of
termination. If Landlord fails to send Tenant a Notice of rejection or
acceptance within thirty (30) days of its receipt of Tenant's irrevocable offer
to purchase the Premises, Landlord shall be deemed to have accepted such offer.
If Landlord accepts or is deemed to have accepted Tenant's offer to purchase,
the Lease shall terminate and closing of such purchase shall occur in accordance
with the provisions of Article 21. Upon such termination, Tenant shall pay to
Landlord all Rental due through such date of termination. Landlord shall convey
the Premises to Tenant in accordance with the provisions of Section 21.01.
C. If Landlord rejects Tenant's irrevocable offer to purchase pursuant
to Section 14.03A, this Lease shall terminate on a Minimum Rental payment date
specified by Tenant in its Notice of termination which occurs not earlier than
ninety (90) days nor later than one hundred twenty (120) days after Landlord's
receipt of Tenant's irrevocable offer to purchase, provided that this Lease
shall not terminate unless and until Tenant shall have paid all sums due
hereunder (including, without limitation, all taxes and insurance premiums) as
of the actual date of termination. Upon such termination, Tenant shall vacate
the Premises in accordance with the provisions of Section 3.04.
Section 14.04 No Abatement of Rent Due to Casualty
------------------------------------
No damages, compensation, or claim shall be payable by Landlord for
inconvenience, loss of business, or annoyance arising from any repair or
restoration of any portion of the Premises or the Improvements. If this Lease
is not terminated as a result of a casualty pursuant to Section 14.03, all
proceeds of insurance carried pursuant to Section 13.01(iii) shall be paid to
Tenant (except as otherwise provided in Section 13.02). There shall be no
abatement of Rentals following any casualty and during any period of repair or
reconstruction contemplated in this Article 14.
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<PAGE>
Section 14.05 Early Termination
-----------------
In the event of the termination of this Lease pursuant to the provisions
of Sections 14.03 or 15.04 of this Lease, the Term and the estate hereby granted
shall expire as of the date of such termination in the same manner and with the
same effect as if it were the date set for the normal expiration of the Term,
and Rental shall be apportioned as of the date of termination.
Section 14.06 Uninsurable Loss
----------------
A. If there is a casualty at or to the Premises with respect to which
all or a portion of such loss is an "uninsurable loss", then Tenant's
obligations under this Lease to repair and/or rebuild the Premises shall be
limited to only such casualties where the cost of repair and/or rebuilding (in
addition to any available insurance proceeds and exclusive of all applicable
deductible limits and self-insured retentions) will not exceed forty percent
(40%) of the fair market value of the Premises immediately prior to the
casualty. In all other circumstances, Tenant shall have the right, but not the
obligation, to terminate this Lease upon ninety (90) days Notice to Landlord
and, upon such termination, Tenant shall have no further obligations to pay any
Rentals or otherwise under this Lease.
B. All costs incurred by Tenant in repairing and/or replacing the
Premises in the event of an "uninsurable loss" shall constitute Mandated
Expenditures.
C. As used in this Section 14.06, the term "uninsurable loss" shall
mean any casualty for which insurance coverage was not then obtainable from
reputable insurance companies for properties similar to the Premises and being
purchased by prudent owners of businesses similar to that operated by Tenant at
the Premises. In no event shall the phrase "uninsurable loss" mean a loss which
is uninsurable because such loss was caused by the intentional, willful or
grossly negligent acts of Tenant, its agents, employees or contractors.
D. Upon receipt of any Notice from Tenant of a proposed termination of
this Lease pursuant to the provisions of Section 14.04A above, Landlord shall
have the right, but not any obligation, to avoid such termination by paying to
Tenant a sum equal to the amount by which the costs (in addition to any
available insurance proceeds and exclusive of all applicable deductible limits
and self-insured retention) to repair and/or rebuild the Premises in the event
of an uninsurable loss that exceeds forty percent (40%) of the fair market value
of the Premises immediately prior to the casualty. Such right in Landlord shall
be exercised by Landlord giving Notice to such effect to Tenant within ten (10)
days following Landlord's receipt of Tenant's Notice of Termination, and by
Landlord paying the requisite sum to the Insurance Trustee within thirty (30)
days thereafter, to be disbursed by the Insurance Trustee in accordance with the
provisions of Section 13.02.
END OF ARTICLE 14
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<PAGE>
ARTICLE 15
CONDEMNATION
------------
Section 15.01 Notice of Condemnation and Assignment of Rights
-----------------------------------------------
A. The party receiving any Notice of the kinds specified below shall
promptly give the other party Notice of the receipt, contents and date of the
Notice received:
(i) Notice of intended condemnation;
(ii) Service of any legal process relating to condemnation of any
portion of the Premises or Improvements;
(iii) Notice in connection with any proceedings or negotiations
with respect to such a condemnation; or
(iv) Notice of intent or willingness to make or negotiate a
private purchase, sale, or transfer in lieu of condemnation.
B. Subject to the rights of each party as set forth in this Article 15,
each party hereby irrevocably assigns to Insurance Trustee any award or payment
to which they may be or become entitled by reason of any taking of the Premises
or any part thereof, in or by condemnation or other eminent domain proceedings
pursuant to any law, general or special. Insurance Trustee shall distribute all
such condemnation proceeds to the benefit of Landlord and/or Tenant in
accordance with the provisions of this Article 15. Each party shall be entitled
to participate at its own expense in any such proceedings.
Section 15.02 Tenant's Right to Pursue a Claim
--------------------------------
Notwithstanding anything herein to the contrary, Tenant shall have the
right to pursue a claim with and retain any award from the condemning authority
or entity for damage to or loss of Tenant's leasehold estate in the Premises as
well as for any other separate damages that Tenant may suffer, provided,
however, that such award or payment to Tenant is completely separate from and
shall in no manner reduce the award or payment to Landlord for the value of the
Premises unencumbered by the Lease. If the foregoing contingency is not met,
any Tenant's award or payment shall be deemed assigned to the Insurance Trustee
pursuant to Section 15.01.
Section 15.03 Temporary Taking
----------------
In the event that the use of the Premises or any part thereof is taken
in condemnation by any governmental authority under the power of eminent domain
for a period of time, whether definite or indefinite (but less than the
acquisition of a fee simple interest in perpetuity), or whether less than, equal
to or greater than the unexpired portion of the Term of this Lease, this Lease
shall nevertheless continue in full force and effect and Tenant shall have the
right (except as hereinafter provided) to receive the entire award ("Use Award")
attributable to the unexpired portion of the Term of this Lease (including any
Effective Extended Term), and Landlord shall have the right to receive the
entire award ("Landlord's Temporary Taking Award") attributable to the period
after the expiration of the Term of this Lease (including any Effective Extended
Term), and no claim or demand of any kind shall be made by Tenant against
Landlord by reason
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<PAGE>
of such taking, no claim for abatement of Minimum Rental or Percentage Rental
and other amounts which may become due under this Lease shall be made by reason
of such taking and the rights and liabilities of the parties hereto shall be the
same as if there had been no such taking.
B. The Use Award, in such amount as may be eventually determined, shall
be paid to and held in trust by the Insurance Trustee and shall be administered
as hereinafter set forth. There shall first be deducted therefrom and paid out
all legal and other expenses, reasonable in amount, which were incurred in
obtaining such Use Award, except that Landlord shall pay that portion of such
expenses (but not to exceed the amount of Landlord's Temporary Taking Award)
that Landlord's Temporary Taking Award bears to the sum of Landlord's Temporary
Taking Award and the Use Award. The Use Award shall be administered as follows:
(i) If any such Use Award shall be in the form of rent recoverable
for such taking and shall be payable in quarterly (or more frequent)
installments, the Insurance Trustee shall pay to Landlord quarterly such
installments of the Use Award on account of and to the extent of Tenant's
obligations to pay Minimum Rental and Percentage Rental under this Lease; any
balance remaining from each such quarterly (or more frequent) installment shall
be paid by the Insurance Trustee to Tenant. The entire amount of such quarterly
(or more frequent) installments of the Use Award received by the Insurance
Trustee (whether paid to Landlord or Tenant) shall be included in the cash
receipts of Tenant during the quarter when received by the Insurance Trustee for
purposes of determining Operating Revenues.
(ii) If any such Use Award is made in a lump sum or in the form of
rent recoverable for such taking and is payable in installments less frequently
than quarterly, the lump sum or other installment shall be divided by the number
of calendar quarters included in the period for which such award has been paid,
and the Insurance Trustee shall pay to Landlord such quotient quarterly on
account of and to the extent of Tenant's obligation to pay Minimum Rental and
Percentage Rental under this Lease; any balance remaining from each such
quarterly quotient shall be paid by the Insurance Trustee to Tenant. The entire
amount of such quarterly installments of the Use Award received by the Insurance
Trustee (whether paid to Landlord or Tenant) shall be included in the cash
receipts of Tenant during the quarter in which such quarterly quotient is
distributed by the Insurance Trustee to Landlord and Tenant for purposes of
determining Operating Revenues.
(iii) If any such Use Award shall be made for the cost of repairs and
restoration following termination of such temporary taking, then the Insurance
Trustee shall apply the same to Tenant's obligation hereunder to repair and
restore as herein provided.
C. Any Use Award deposited with the Insurance Trustee shall be invested
by the Insurance Trustee in an interest-bearing account, with interest to be
added to the amount of the Use Award and distributed as part of the Use Award in
accordance with the provisions of this Section 15.03. All such interest shall
be included in Operating Revenues for the month in which such interest is
distributed by the Insurance Trustee.
Section 15.04 Total Taking
------------
If, during the Term, all or substantially all of the Premises shall be
taken in or by condemnation or other eminent domain proceedings pursuant to any
law, general or special, then this Lease shall terminate on the date such taking
becomes effective. Tenant shall pay all Rental
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and all other sums due hereunder (including, without limitation, all taxes and
insurance premiums) through such date. All condemnation proceeds shall belong
to and be paid to Landlord, except that to the extent such proceeds exceed the
Leasehold Purchase Price as of such termination date, such excess shall first be
payable to Tenant up to an amount equal to any unamortized Mandated
Expenditures, with any remaining portion of such excess being payable to
Landlord.
Section 15.05 Substantial Taking
------------------
A. In the event of a Substantial Taking, Tenant shall have the right to
terminate this Lease by so notifying Landlord not later than the date which is
sixty (60) days after the occurrence of such Substantial Taking. If Tenant
elects to exercise the right described in the preceding sentence, it shall,
simultaneously with its delivery of its Notice of termination, deliver to
Landlord its irrevocable offer to purchase the Premises for an amount equal to
the Lease Purchase Price.
B. Landlord may reject or accept Tenant's irrevocable offer to purchase
the Premises by sending Tenant a Notice of such rejection or acceptance within
thirty (30) days from the date upon which Landlord received Tenant's Notice of
termination. If Landlord fails to send Tenant a Notice of rejection or
acceptance within thirty (30) days of its receipt of Tenant's irrevocable offer
to Purchase the Premises, Landlord shall be deemed to have accepted such offer.
If Landlord accepts or is deemed to have accepted Tenant's offer to purchase,
the Lease shall terminate on a Minimum Rental payment date specified by Tenant
in its Notice of termination which occurs not earlier than ninety (90) days nor
later than one hundred twenty (120) days after Landlord's receipt of Tenant's
irrevocable offer to purchase. Upon such termination, Tenant shall pay Landlord
all Rental due through such date and Landlord and the Insurance Trustee shall
assign all their right, title and interest in condemnation proceeds payable and
shall deliver any condemnation proceeds previously paid to, and then held by,
the Insurance Trustee with respect to such Substantial Taking to Tenant and
Landlord shall convey the Premises to Tenant in accordance with the provisions
of Section 21.01.
C. If Landlord rejects Tenant's irrevocable offer to purchase pursuant
to Section 15.05A, this Lease shall terminate on a Minimum Rental payment date
specified by Tenant in its Notice of termination which occurs not earlier than
ninety (90) days nor later than one hundred twenty (120) days after Landlord's
receipt of Tenant's irrevocable offer to purchase, provided that this Lease
shall not terminate unless and until Tenant shall have paid all sums due
hereunder (including, without limitation, all taxes and insurance premiums) as
of the actual date of termination. Upon such termination, all condemnation
proceeds shall be delivered to Landlord and Tenant shall vacate the Premises in
accordance with the provisions of Section 3.04.
Section 15.06 Partial Taking
--------------
A. In the event of a Substantial Taking pursuant to which this Lease is
not terminated pursuant to the provisions of Section 15.05, then, in the event
of any condemnation of less than all or substantially all of the Premises,
Tenant shall be obligated to restore the Premises not taken by the governmental
authority to a condition as good as or better than the condition which
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prevailed thereon and therein prior to such condemnation as is practicable under
the circumstances; provided, however, that Tenant shall not be obligated to
expend any sums in excess of the condemnation proceeds. In the event of an
Insubstantial Taking, the Tenant shall not be obligated to replace any
landscaping or facilities taken by the governmental authority but shall only be
obligated to repair any damage to the Premises not taken by the governmental
authority. Materials used in repair and restoration shall be as nearly like or
superior in quality to the original materials as may then be reasonably procured
in regular channels of supply, and construction shall be completed in a
workmanlike manner free of all liens and encumbrances. All condemnation proceeds
payable on account of such condemnation other than proceeds attributable to
Tenant's personal property shall be paid to the Insurance Trustee who shall hold
said proceeds in trust for the parties in accordance with the provisions of this
Section 15.06.
B. Tenant shall commence the restoration of the Premises as soon as
practicable not later than the date which is one hundred eighty (180) days after
the date upon which the condemnation occurred and thereafter prosecute the
restoration with diligence and continuity.
C. Prior to commencing any restoration work, Tenant, at its sole cost
shall (i) obtain the services of a licensed architect to prepare any required
plans and specifications for such restoration; and (ii) submit a set of final
plans and specifications to Landlord and the Senior Mortgagee for approval
(which approval may not be unreasonably withheld, conditioned or delayed), and
further, with any restoration that will cost more than One Million Dollars
($1,000,000), (iii) the contractor selected by Tenant to perform the work shall
be subject to Landlord's approval, which approval shall not be unreasonably
withheld, conditioned, or delayed, or (iv) Tenant shall carry builder's risk
insurance in amounts reasonably sufficient to cover the cost of replacement of
the work during the course of such construction.
D. In proceeding with such restoration work, Tenant shall first expend
an amount, if any, equal to the excess of the projected cost of the restoration
work over the amount of all condemnation proceeds. Thereafter, Tenant shall be
entitled to submit to the Insurance Trustee, not more frequently than once every
thirty (30) days, an invoice together with such other documentation (including
mechanics lien waivers and title insurance policy endorsements obtained at
Tenant's sole cost and expense) as is customarily required by lenders at such
time making construction loans. Upon receipt of an invoice in proper form, the
Insurance Trustee shall make a disbursement equal to ninety percent (90%) of the
amount shown on the invoice, provided, however, that upon final completion of
the restoration work, the Insurance Trustee shall disburse to Tenant the final
ten percent (10%) due that has been so retained, but only if it has received
either final mechanics lien waivers from all parties having rights to mechanics
liens against the Premises on account of such restoration work or appropriate
endorsements or policies of title insurance protecting Landlord and Mortgagee
against mechanics liens arising out of the restoration work. In the event that
the amount disbursed in accordance with the previous sentence shall be less than
the total condemnation proceeds, such excess shall be distributed to Landlord
and Tenant as hereinafter provided in Section 15.06F and Section 15.06G.
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<PAGE>
E. Any award attributable to personal property owned by Tenant that is
not attributable to FF&E shall be paid to Tenant. Any award attributable to
FF&E shall be paid to Tenant and applied by Tenant for the purpose of replacing
such FF&E in the event and to the extent that the Premises remaining after such
condemnation requires such replacement FF&E to be fully operational.
F. In the event of a condemnation that is an Insubstantial Taking, the
condemnation proceeds remaining after application thereof to the cost of the
restoration work shall be paid to Landlord and Tenant in the following
proportions: Landlord shall receive that portion of said remaining proceeds
equal to a fraction whose numerator is the number of years in the Term of this
Lease (including all Effective Extended Terms as of the date Tenant receives
notice of such condemnation) that have elapsed as of the effective date of such
condemnation and whose denominator is the number of years in the Term of this
Lease (including all Effective Extended Terms as of the date Tenant receives
notice of such condemnation) and Tenant shall receive the balance of such
remaining proceeds. Thus, for example, if such condemnation occurred on the
last day of the 21st year of the Term and the only Effective Extended Term was
the First Extended Term, Landlord would receive 21/25th of such remaining
condemnation proceeds and Tenant would receive 4/25th of such remaining
condemnation proceeds.
G. In the event of a condemnation that is a Substantial Taking and in
the event that this Lease is not terminated pursuant to Section 15.05, the
condemnation proceeds remaining after application thereof to the cost of the
restoration work shall be allocated between Landlord and Tenant in proportion to
the value of their respective interests in the Premises; provided, however, that
in no event shall Landlord receive a portion of such remaining proceeds that is
less than the Leasehold Purchase Price multiplied by the Partial Condemnation
Reduction Percentage.
H. In the event of a condemnation that is an Insubstantial Taking,
there shall be no reduction in or abatement of the Minimum Rental or Percentage
Rental thereafter payable by Tenant. In the event of a condemnation that is a
Substantial Taking and in the event that this Lease is not terminated pursuant
to Section 15.05, there shall be a reduction in the Minimum Rental payable by
Tenant effective as of the date of the Substantial Taking in an amount equal to
nine percent (9%) of the lesser of (i) the portion of the condemnation award so
distributed to Landlord or (ii) eleven and one tenths (11.1) multiplied by the
annual Minimum Rental multiplied by the Partial Condemnation Reduction
Percentage and there shall be a reduction in the Alternative Rental or Expansion
Rental (if then applicable) in an amount equal to the Alternative Rental or
Expansion Rental payable immediately prior to such condemnation multiplied by
the Partial Condemnation Reduction Percentage.
I. In the event that Tenant shall fail to prosecute the restoration
work with diligence and continuity until completion, regardless of whether an
Event of Default has occurred, Landlord shall have the right to use any proceeds
held by Insurance Trustee to complete such restoration work. Tenant shall be
liable for any sums incurred by Landlord to complete such restoration work in
excess of the amount held and disbursed by the Insurance Trustee.
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J. In the event that an Event of Default has occurred Tenant shall not
have access to any condemnation proceeds unless and until Tenant shall have
cured such Event of Default, and until such time, Tenant shall use its own funds
to prosecute the restoration work.
END OF ARTICLE 15
ARTICLE 16
ASSIGNMENT, SALE AND SUBLETTING
-------------------------------
Section 16.01 Sale or Assignment by Landlord
------------------------------
Landlord shall have the right to assign or transfer its interest in this
Lease in connection with a Sale of the Premises subject to this Lease which
shall remain in full force and effect, provided Tenant's ability to obtain and
maintain the licenses and permits necessary for the operation of its retirement
and health care facilities is not materially and adversely affected by any
proposed sale or assignment of Landlord's interest in the Premises.
Furthermore, Landlord shall have the right to assign or transfer without
restriction its interest in this Lease as collateral security with respect to
any financing secured by an interest in the Premises. Upon any Sale of the
Premises, Landlord shall assign this Lease to the purchaser and, concurrently
with the finalization thereof, the purchaser shall, by an appropriate written
instrument, assume (subject to the provisions of Section 24.21) all of
Landlord's obligations hereunder. Any attempted sale or assignment in violation
of the provisions of this Section 16.01 shall be void and without effect.
Within thirty (30) days after Landlord sends Notice to Tenant advising Tenant of
the name, identity and address of any proposed assignee or transferee and
requesting a determination as to whether the proposed assignment or transfer
would violate the requirements of the first sentence of this Section 16.01,
Tenant shall advise Landlord by Notice to Landlord whether or not such proposed
assignment or transfer would violate such requirements and, if so, setting forth
in reasonable detail the basis for such violation (which Notice shall be binding
upon Tenant), and if Tenant fails to send such Notice to Landlord prior to the
expiration of such thirty (30) day period, such assignment or transfer shall be
deemed to comply with the requirements of the first sentence of this Section
16.01.
Section 16.02 Assignment by Tenant
--------------------
Tenant shall have the right to transfer or assign its interest in this
Lease without Landlord's consent provided that (w) the transferee or assignee is
a corporation organized under the laws of any state in the United States and in
good standing and authorized to do business in the state in which the Premises
is located, (x) such transferee or assignee assumes this Lease by an appropriate
writing, (y) Tenant shall continue to remain liable under all of the provisions
of this Lease, and (z) the Guaranty of Tenant's performance hereunder shall not
be terminated or altered by any such assignment.
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Section 16.03 Tenant's Right to Sublease
--------------------------
Tenant may sublease space or grant concessions or licenses at the
Premises so long as the terms of any such subleases, concessions or licenses do
not exceed the Term and shall expire upon any termination of this Lease.
END OF ARTICLE 16
ARTICLE 17
HOLDING OVER
------------
Section 17.01 Holdover
--------
Should Tenant continue to hold the Premises after the termination of
this Lease, whether the termination occurs by lapse of time or otherwise, such
holding over, unless otherwise agreed to by Landlord in writing, shall
constitute and be construed as a tenancy at sufferance at a daily Rental equal
to 1/91st of an amount equal to two hundred percent (200%) of the quarterly
Minimum Rental last in effect and subject to all of the other obligations
imposed on Tenant hereunder, but the foregoing shall not constitute a consent by
Landlord to such holding over and shall not prevent Landlord from exercising any
of its remedies under this Lease or applicable law by reason of such holding
over.
END OF ARTICLE 17
ARTICLE 18
ESTOPPEL CERTIFICATES
---------------------
Section 18.01 Estoppel Certificates
---------------------
Tenant agrees to furnish periodically, within ten (10) days after
written request therefor by Landlord, or any actual or prospective Mortgagee
covering the Premises, or any interest of Landlord therein or any actual or
prospective purchaser of Landlord's interest, a certificate signed by Tenant
(which may require a true and correct copy of this Lease and any and all
amendments hereto to be attached) certifying (to the extent same is true) that
this Lease is in full force and effect and unmodified; that the Term has
commenced and the full Rental is then accruing hereunder; that, subject to the
provisions of Section 5.07, no Rental under this Lease has been paid more than
ninety (90) days in advance of its due date; that the address for Notices to be
sent to Tenant is as set forth in this Lease (or has been changed by Notice duly
given and is as set forth in the certificate); that Tenant has no knowledge of
any default by Landlord then existing under this Lease; and such other matters
as may be reasonably requested by Landlord or any Mortgagee, prospective
Mortgagee or prospective purchaser. If Tenant is unable to so certify as to one
or more of the foregoing items, Tenant shall specify its reason therefor in
writing. Any such certificate may be relied upon by any prospective purchaser,
ground lessor, Mortgagee, or any beneficiary under any deed of trust on the
Improvements or the Land or any
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part thereof. Landlord agrees to furnish periodically, within ten (10) days
after written request therefor by Tenant, a certificate signed by Landlord
containing substantially the same information as described above.
END OF ARTICLE 18
ARTICLE 19
LANDLORD FINANCING
------------------
Section 19.01 Right to Finance
----------------
Landlord shall have the right, at any time, and from time to time, to
subject its interest in the Premises to one or more Mortgages without Tenant's
consent.
Section 19.02 Priority
--------
A. Landlord agrees that this Lease and any extensions, renewals,
replacements or modifications thereto and all right and interest of Tenant in
and to the Premises shall be superior to any and all Mortgages now or hereafter
granted by Landlord.
B. As more particularly described herein, Tenant has no right to
cancel, rescind or terminate this Lease except as expressly provided in the
particular provisions specified herein. Without limiting the foregoing or the
effect of Tenant's waivers set forth herein or any other provisions herein that
negates Tenant's right to cancel, terminate or rescind this Lease or any of its
obligations hereunder, if any circumstances nevertheless as a matter of law or
otherwise would give Tenant the right, immediately or after lapse of a period of
time, to cancel, rescind or terminate this Lease, or to claim a partial or total
eviction, Tenant shall not exercise such right (a) until it has given written
notice of such circumstance to the Senior Mortgagee and (b) until a reasonable
period for remedying such circumstance shall have elapsed following such written
notice by Tenant to the Senior Mortgagee (which reasonable period, if required
by the Senior Mortgagee, shall in no event be less than the greater of (i) the
period to which Landlord would be entitled (under this Lease or otherwise),
after similar notice, to effect such remedy, plus ninety (90) days, and (ii) the
period of time needed by the Senior Mortgagee to obtain possession of the
Premises by foreclosure or otherwise), plus ninety (90) days, provided that the
Senior Mortgagee shall be entitled to the additional time period referred to in
the preceding clause (i) only if the Senior Mortgagee shall with due diligence
(a) give Tenant notice of intention to remedy such circumstance and (b) commence
and continue to remedy such circumstance to the extent it is reasonably able to
do so without possession or seek possession, directly or through a receiver, and
upon obtaining possession of the Premises, commence and continue to remedy such
circumstance.
C. If at any time there shall occur a foreclosure action with respect
to the interest of Landlord under this Lease, or a deed in lieu of foreclosure,
or any similar action or proceeding, then (i) this Lease shall not terminate,
and (ii) Tenant shall attorn to and recognize the purchaser at such foreclosure
sale (whether such person is the Mortgagee or another person or entity) or
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the grantee of a deed in lieu of foreclosure as Tenant's landlord under this
Lease, except that neither such purchaser or grantee, nor anyone claiming by,
through or under any such person or grantee, shall be:
(x) liable for any action or omission of Landlord (or its predecessors
in interest);
(y) subject to any offsets or defenses which Tenant may have against
Landlord (or its predecessors in interest); or
(z) bound by any payment of Rental, other than the Special Rental
Advance if any, which Tenant might have made to Landlord (or its predecessors in
interest) for more than one Fiscal Quarter in advance of the date the same was
due under this Lease; but the foregoing shall not relieve any such purchaser or
grantee, or anyone claiming by, through or under any such purchaser or grantee
from performing all obligations of Landlord under this Lease after it acquires
title to the Premises.
Section 19.03 Mortgagee Amendments
--------------------
If at any time, any prospective Mortgagee requests any change or
modification to this Lease as a condition of granting a Mortgage to Landlord,
Tenant shall consent to such change or modification provided that (i) Landlord
bears the cost of preparing all documentation required to effect such change or
modification; (ii) such change or modification does not materially and adversely
increase Tenant's cost of operating the Premises or performing its obligations
under this Lease; and (iii) such change does not materially and adversely affect
Tenant's rights hereunder. Examples of modifications to which Tenant shall
consent include, without limitation, obligations to give copies of notices and
other documents to Mortgagees where Tenant has previously agreed to give same to
Landlord, to obtain a Mortgagee's consent or approval where Tenant has
previously agreed to obtain Landlord's consent or approval, to allow a Mortgagee
to act for Landlord in the event that Landlord fails to exercise a right granted
to Landlord hereunder, and provisions which govern the relationship between
Landlord and Mortgagee.
END OF ARTICLE 19
ARTICLE 20
DEFAULT BY TENANT
-----------------
Section 20.01 Events of Default
-----------------
The occurrence of any one or more of the following events shall
constitute an Event of Default by Tenant under this Lease:
A. Tenant shall fail to pay any Rental or other sums payable by Tenant
hereunder as and when such Rental or other sums become due and payable and such
failure shall continue for more than five (5) Business Days after Notice;
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B. Tenant shall fail to perform or observe any covenant or obligation
hereunder (other than the financial obligations referred to in subparagraph A
above) and such failure shall continue for more than thirty (30) days after
Notice; or, if such failure cannot be cured with reasonable diligence within
such thirty (30) day period, if Tenant does not commence to correct same within
said thirty (30) day period and thereafter prosecute the correction of same with
reasonable diligence and continuity to completion;
C. Any petition is filed by or against Tenant or Guarantor under any
section or chapter of the present or any future Federal Bankruptcy Code or under
any similar law or statute of the United States or any state thereof (which, in
the case of an involuntary proceeding, is not permanently discharged, dismissed,
stayed, or vacated, as the case may be, within ninety (90) days of its filing),
or if any order for relief shall be entered against Tenant in proceedings filed
under any section or chapter of the present or any future Federal Bankruptcy
Code or under any similar law or statute of the United States or any state
thereof;
D. A receiver, trustee or liquidator of Tenant or Guarantor or of all
or substantially all of the assets of Tenant or Guarantor shall be appointed.
E. An Event of Default shall have occurred under any lease that is a
Related Landlord Lease as of the date of such Event of Default thereunder. IN
THIS REGARD, IT IS SPECIFICALLY UNDERSTOOD AND AGREED THAT THE PRECEDING
SENTENCE IS A MATERIAL PART OF THE CONSIDERATION DUE LANDLORD FROM TENANT WITH
RESPECT TO THIS LEASE AND THAT LANDLORD WOULD NOT HAVE ENTERED INTO THIS LEASE
WITH TENANT WITHOUT INCLUSION IN THIS LEASE OF THE PRECEDING SENTENCE.
F. A third party lender to either Guarantor or Tenant accelerates any
indebtedness of Guarantor or Tenant, the amount of which then equals or exceeds
Fifty Million Dollars ($50,000,000), and Guarantor or Tenant fails to fully
satisfy such accelerated indebtedness within five (5) business days next
following the date such indebtedness was accelerated.
Section 20.02 Landlord's Rights Upon an Event of Default
------------------------------------------
A. If an Event of Default occurs, then, subject to the provisions of
Section 20.02B and C, Landlord may commence doing any one or more of the
following provided that such commencement is prior to the date that Tenant or
Guarantor cures such default:
(1) Terminate this Lease upon ten (10) days Notice to Tenant, in which
event Tenant shall immediately surrender the Premises to Landlord and Tenant
shall be liable to Landlord for all Surviving Obligations and to the extent
provided in Section 17.01 and to the extent hereinafter provided in this Section
20.02A. If Tenant fails to do so, Landlord may, without Notice and without
prejudice to any other remedy Landlord may have, enter upon and take possession
of the Premises and expel or remove Tenant and its effects without being liable
to prosecution or any claim for damages therefor. Tenant shall indemnify
Landlord for all loss and damage which Landlord may suffer by reason of such
Termination, whether through inability to relet the Premises or otherwise,
including any loss of Rental for the remainder of the Term. In connection with
Landlord's exercise of the remedy described in this Subparagraph, Landlord shall
have the right to seize and take possession of all of Tenant's FF&E located on
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the Premises and either use same in connection with operating the property or
dispose of same as Landlord sees fit to do. To the greatest extent permitted by
law, Tenant hereby fully, finally and forever waives any and all protections
provided by applicable law against Landlord's right of distraint.
(2) Enter upon and take possession of the Premises as Tenant's agent,
with the right but not the obligation of terminating this Lease and without
being liable to prosecution or any claim for damages therefor, and Landlord may
relet the Premises either in its own name or as Tenant's agent and in either
event receive the rent therefor, in any of which events Tenant shall pay to
Landlord on demand (i) any and all costs of re-leasing, renovating, repairing,
and altering the Premises (including but not limited to advertising costs,
commissions, finders fees, legal fees and other costs) for a new tenant or
tenants and (ii) any deficiency that may arise by reason of such reletting from
the net income from the Premises that Landlord would have received if there had
not been a default by Tenant. In addition, to the extent the Premises are not
relet, Tenant shall continue to be obligated to satisfy all of its obligations
under this Lease. In connection with Landlord's exercise of the remedy described
in this Subparagraph, Landlord shall have the right to seize and take possession
of all of Tenant's FF&E located on the Premises and either use same in
connection with operating the property or dispose of same as Landlord sees fit
to do. To the greatest extent permitted by law, Tenant hereby fully, finally
and forever waives any and all protections provided by applicable law against
Landlord's right of distraint.
(3) Do whatever Tenant is obligated to do under this Lease and enter
the Premises without being liable to prosecution or any claim for damages
therefor to accomplish this purpose. Tenant shall reimburse Landlord, as
Additional Rental, immediately upon demand for any expenses which Landlord
incurs in thus effecting compliance with this Lease on Tenant's behalf, together
with interest thereon from the date of such expenditure until paid at the Lease
Interest Rate.
(4) Bring a summary proceeding/action for ejectment in order to recover
possession of the Premises.
(5) Landlord hereby reserves the right to institute successive legal
actions to collect any damages payable to Landlord hereunder, it being intended
that a suit for damages shall not bar any subsequent suit for damages that have
subsequently accrued.
(6) Accelerate the Minimum Rentals due under this Lease. The discount
rate to be used in computing the amount of Minimum Rental due hereunder shall be
equal to the effective annual yield prevailing on the date the Event of Default
occurred with respect to United States treasury obligations having a maturity
date that is the same or nearest to the date on which this Lease would have
expired if no Event of Default occurred.
B. If an Event of Default has occurred under Section 20.01A, or if an
Event of Default has occurred under Section 20.01E that consists of the failure
of Tenant to pay any Rental or other sums payable to the Landlord under a
Related Landlord Lease as and when such Rental or other sums become due and
payable, Landlord, prior and as a condition precedent to exercising any rights
pursuant to Subsections 20.02(A)(1), (2), (4) or (6) above, shall give Guarantor
Notice of the Event of Default and afford Guarantor a period of five (5)
Business Days after Guarantor receives Notice pursuant to this Section 20.02B
within which to cure such Event of Default. If Guarantor cures such Event of
Default, Landlord shall have no further rights under this Section 20.02 with
respect to the particular Event of Default in question.
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<PAGE>
C. If an Event of Default has occurred under Section 20.01B, or under
Section 20.01B of any Related Landlord Lease Landlord, prior and as a condition
precedent to exercising any rights pursuant to Subsections 20.02A(1), (2), (4)
or (6) above, shall give Guarantor notice of such Event of Default and Guarantor
shall have thirty (30) days within which either to cure such Event of Default;
or, if such Event of Default cannot be cured with reasonable diligence within
such thirty (30) day period, to commence to correct same within said thirty (30)
day period and thereafter prosecute the correction of same with reasonable
diligence and continuity to completion. If and so long as Guarantor commences
and continues to take action to cure such Event of Default as required pursuant
to the preceding sentence and cures such Event of Default, Landlord shall have
no further rights under this Section 20.02 with respect to the particular Event
of Default in question.
D. If an Event of Default has occurred under Section 20.01A, or if an
Event of Default has occurred under Section 20.01E that consists of the failure
of Tenant to pay any Rental or other sums payable to the Landlord under a
Related Landlord Lease as and when such Rental or other sums become due and
payable, then, notwithstanding anything in applicable law to the contrary,
Landlord shall have no obligation whatsoever to mitigate any of its damages. If
any other Event of Default shall have occurred, Landlord shall be obligated to
mitigate its damages only to the extent it is required to do so under applicable
law.
Section 20.03 Implied Waiver
--------------
A. No act or thing done by Landlord or its agents during the Term shall
constitute an acceptance of an attempted surrender of the Premises, and no
agreement to accept a surrender of the Premises shall be valid unless made in
writing and signed by Landlord. No re-entry or taking possession of the
Premises by Landlord pursuant to Section 20.02(B) or otherwise shall constitute
an election by Landlord to terminate this Lease, unless a written Notice of such
intention is given to Tenant. No waiver by Landlord of any breach of this Lease
shall constitute a waiver of any other violation or breach of any of the terms
hereof.
B. No provision of this Lease shall be deemed to have been waived by
Landlord or Tenant unless such waiver is in writing and signed by such party.
The rights granted to Landlord and Tenant in this Lease shall be cumulative of
every other right or remedy which Landlord or Tenant may otherwise have at law
or in equity or by statute, and the exercise of one or more rights or remedies
shall not prejudice or impair the concurrent or subsequent exercise of other
rights or remedies.
Section 20.04 Injunctive Relief
-----------------
Landlord shall be entitled to obtain injunctive relief in case of the
violation, or attempted or threatened violation, of any of the provisions
hereof, or to a decree compelling performance of any of the provisions hereof,
to the extent that any such relief is provided by a court of equity.
END OF ARTICLE 20
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ARTICLE 21
PROVISIONS APPLICABLE TO PURCHASE
---------------------------------
BY TENANT OF THE PREMISES
-------------------------
Section 21.01 Procedures Upon Purchase
------------------------
A. If Tenant is to acquire the Premises pursuant to Section 1.03,
Section 14.03 or Section 15.05 of this Lease, the Premises shall be transferred
"As Is" on the date of transfer and otherwise as provided in Section 1.01
hereof. Landlord shall convey title to the Premises to Tenant in the same
condition of title (including all restrictions, limitations, covenants and
easements of record and all encroachments) that existed as of the Commencement
Date, subject, however, to (i) the lien of real estate taxes, water and sewer
charges and other governmental charges that are not then due and payable, (ii)
all restrictions, limitations, covenants, easements and encroachments that were
created after the Commencement Date other than those created by Landlord without
the written consent of Tenant, and (iii) all Legal Requirements, but free of the
following items ("Landlord Obligations"): (x) the lien of any security interest
created by any Mortgage on Landlord's interest, (y) the lien of any judgment,
tax assessment or other obligation incurred by Landlord that is not the
responsibility of Tenant under this Lease, and (z) any liens created on and
after the Commencement Date which have been created by or resulted solely from
acts of Landlord undertaken without the written consent of Tenant. Landlord
shall pay off and discharge all Landlord Obligations at closing of Tenant's
purchase of the Premises, but Landlord shall have the right to apply the
purchase price proceeds for the purpose of discharging such Landlord
Obligations.
B. If Landlord accepts Tenant's irrevocable offer pursuant to Section
1.03, Section 14.03 or Section 15.05 to purchase the Premises, closing of such
purchase shall be held on the date (the "Purchase Closing Date") specified by
Tenant in its notice of Termination pursuant to Section 1.03, Section 14.03 or
Section 15.05 which occurs not earlier than ninety (90) days nor later than one
hundred twenty (120) days after Landlord's receipt of Tenant's irrevocable offer
to purchase. Closing of such purchase shall be conducted by an escrow agent
(the "Closing Escrow Agent") which shall be a national title insurance company
designated by Tenant that meets with the reasonable satisfaction of Landlord.
C. On the Purchase Closing Date, Landlord shall deliver to the Closing
Escrow Agent a deed ("Landlord's Deed") conveying the Premises to Tenant or
Tenant's designee and containing no warranties other than a warranty that the
Premises are not subject to (i) the lien of any security interest created by any
Mortgage executed by Landlord on Landlord's interest, (ii) the lien of any
judgment, tax assessment or other obligation incurred by Landlord that is not
the responsibility of Tenant under this Lease and (iii) any liens created on or
after the Commencement Date which have been created by or resulted solely from
acts of Landlord undertaken without the consent of Tenant.
D. On the Purchase Closing Date, Landlord shall deliver to the Closing
Escrow Agent a written instrument (the "Assignment"), without warranty of title,
assigning and transferring to Tenant or Tenant's designee (i) Landlord's
interest in any FF&E leased by
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<PAGE>
Landlord to Tenant hereunder and any licenses or permits relating to the
Premises and (ii) Landlord's interest in any insurance proceeds payable with
respect to any casualty that has previously occurred to the Premises (if any)
(which assignment of insurance proceeds shall be consented to by the Insurance
Trustee). If and to the extent that there are any insurance proceeds previously
paid to Landlord or the Insurance Trustee which have not been applied for the
purpose of repair or restoration and are then held by Landlord or the Insurance
Trustee, Landlord and the Insurance Trustee, as the case may be, shall deliver
such insurance proceeds (the "Escrowed Insurance Proceeds") to the Closing
Escrow Agent. The Tenant shall deliver to the Closing Escrow Agent current
immediately available funds in the amount of the purchase price and any costs
payable by Tenant hereunder that are set forth in Section 21.01H ("Tenant's
Funds"). Closing Agent shall then proceed to consummate the Closing in
accordance with local custom and practice.
E. In the event that Tenant fails to perform its obligations under this
Section 21.01 on the Purchase Closing Date for any reason other than the default
of Landlord, the Tenant's Notice of Termination pursuant to Section 1.03,
Section 14.03 or Section 15.05 shall be rescinded and deemed null and void, the
Lease shall continue in full force and effect and neither Tenant nor Landlord
shall have any liability or obligation to the other by reason of such failure to
consummate settlement of such purchase except that Tenant shall pay to Landlord,
as fixed, agreed and liquidated damages for Tenant's default, the sum of Fifty
Thousand Dollars ($50,000).
F. In the event that Landlord fails to perform its obligations under
this Section 21.01 on the Purchase Closing Date for any reason other than the
default of Tenant and an order of specific performance is not obtained by Tenant
and complied with, the Lease shall terminate as of the Purchase Closing Date and
neither Tenant nor Landlord shall have any liability or obligation to the other
by reason of such failure to consummate settlement of such purchase except that
Landlord shall pay to Tenant, as fixed, agreed and liquidated damages for
Landlord's default, the sum of Fifty Thousand Dollars ($50,000).
G. All costs and expenses in connection with any such purchase,
including title insurance, transfer taxes, recording costs and the reasonable
attorney's fees of Landlord and any Mortgagee, shall be paid by Tenant.
H. Percentage Rental shall be prorated as of the date of such purchase
based upon the number of days in the Fiscal Year in which such purchase occurs
that precede the date of such purchase by prorating the dollar figure set forth
in Section 5.01(ii) so that such dollar figure is multiplied by a fraction whose
numerator is the number of days in such Fiscal Year that precede the date of
such purchase and whose denominator is three hundred sixty five (365).
END OF ARTICLE 21
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<PAGE>
ARTICLE 22
NOTICES
-------
Section 22.01 Notices
-------
A. Any Notice or demand, consent, approval or disapproval, or statement
(collectively called "Notice" or "Notices") required or permitted to be given by
the terms and provisions of this Lease, or by any law or governmental
regulation, shall be in writing (unless otherwise specified herein) and unless
otherwise required by such law or regulation, shall be personally delivered with
receipt acknowledged in writing or sent by United States mail postage prepaid as
registered or certified mail, return receipt requested or by courier service
guarantying overnight delivery. Any Notice shall be addressed to Landlord or
Tenant, as applicable, at its address specified below as said address may be
changed from time to time as hereinafter provided. By giving the other party at
least ten (10) days' prior written Notice, either party may designate a
different address or addresses for Notices. Landlord may elect to require
Tenant to send a copy of any Notice of Landlord's default to Landlord's
Mortgagee(s) simultaneously with the sending of Notice to Landlord, provided
that Landlord shall have supplied to Tenant the name and address of such
Mortgagee(s).
B. Any Notice shall be deemed given as of the date of delivery as
indicated by affidavit in case of personal delivery or by the return receipt in
the case of mailing or by the confirmation of the courier service making
delivery; and in the event of failure to deliver by reason of changed address of
which no Notice was given or refusal to accept delivery, as of the date of such
failure as indicated by affidavit or on the return receipt or by Notice of the
postal service or by the confirmation of the courier service making delivery, as
the case may be.
C. A copy of each Notice given pursuant to Section 22.01A above shall
also be sent to the addressee by FAX.
D. Notices shall be sent as follows:
To Tenant:
Marriott Senior Living Services, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: President
FAX No: (301) 380-8957
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<PAGE>
With a copy to:
Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Chief Financial Officer
FAX No: (301) 380-3969
and,
Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
FAX No: (301) 380-6727
To Landlord:
Host Marriott, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Chief Financial Officer
FAX No: (301) 380-5067
and,
Host Marriott, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
FAX No: (301) 380-6727
and,
The Senior Mortgagee
(as identified by Notice from Landlord to Tenant)
END OF ARTICLE 22
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<PAGE>
ARTICLE 23
MEMORANDUM OF LEASE
-------------------
Section 23.01 Memorandum of Lease
-------------------
A. Landlord and Tenant shall execute, acknowledge and deliver a
memorandum of this Lease (a "Lease Memorandum") in recordable form setting forth
the date of this Lease, the names of the parties hereto, the Commencement Date,
the Expiration Date, a description of the Land and the Premises, Tenant's rights
to renew this Lease, Landlord's disclaimer of liability for mechanic's liens
attributable to Tenant's use, occupancy and possession of the Premises, and such
other provisions of this Lease as either party may designate. Said Lease
Memorandum shall not in any circumstances be deemed to modify or to change any
of the provisions of this Lease.
B. Tenant shall after the expiration or termination of the Term, at the
request of Landlord, execute, acknowledge and deliver to Landlord a memorandum
in recordable form evidencing the expiration or Termination of this Lease.
END OF ARTICLE 23
ARTICLE 24
MISCELLANEOUS
-------------
Section 24.01 Partial Invalidity
------------------
In the event that any portion of this Lease shall be declared invalid by
order, decree or judgment of a court, or governmental agency having
jurisdiction, this Lease shall be construed as if such portion had not been
inserted herein, except when such construction would operate as an undue
hardship on Tenant or Landlord, constitute a substantial deviation from the
general intent and purpose of said parties as reflected in this Lease, or deny
either Tenant or Landlord to a material extent a right or benefit pursuant to
this Lease as originally written, in which event this Lease in pertinent part
shall be reformed so as to place both Landlord and Tenant to the greatest extent
permitted by law in the same relative positions as they would have enjoyed under
the Lease as originally written.
Section 24.02 Headings
--------
The article and section headings and the Table of Contents contained in
this Lease are for convenience only and shall not enlarge or limit the scope or
meaning of the various and several provisions hereof.
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<PAGE>
Section 24.03 Binding Effect
--------------
All agreements and covenants herein contained shall be binding upon the
respective heirs, personal representatives, successors, and, to the extent
permitted under this Lease, assigns of the parties hereto.
Section 24.04 Representations
---------------
Neither Landlord nor Landlord's agents have made any representations or
promises with respect to the Premises except as herein expressly set forth and
all reliance with respect to any representations or promises is based solely on
those contained herein.
Section 24.05 Amendments
----------
No amendment or modification of this Lease shall be binding or valid
unless expressed in a writing executed by both parties hereto.
Section 24.06 Brokers
-------
Neither party has engaged any agents or brokers with respect to the
negotiation and execution of this Lease and each party shall indemnify and
defend the other with respect to any claim by an agent or broker claiming
through the indemnifying party against the indemnified party.
Section 24.07 Authority to Execute
--------------------
A. Tenant represents and warrants that Tenant has the full right and
authority to enter into this Lease, and that all persons signing on behalf of
the Tenant were authorized to do so by any and all necessary or appropriate
corporate actions.
B. Landlord represents and warrants that Landlord has the full right
and authority to enter into this Lease, and that all persons signing on behalf
of Landlord were authorized to do so by any and all necessary or appropriate
corporate or partnership actions.
Section 24.08 Applicable Law
--------------
This Lease shall be governed by and construed under the laws of the
state within which the Land is located.
Section 24.09 Construction
------------
All exhibits referred to in this Lease are by this reference
incorporated fully herein. The term "this Lease" shall be considered to include
all such exhibits.
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<PAGE>
Section 24.10 Impossibility of Performance
----------------------------
In the event that any covenant or obligation of Tenant under this Lease
(other than a covenant or obligation to pay Rental or other sums payable by
Tenant hereunder) as applied to a particular circumstance cannot be fully
performed by any person or entity that had funds available for the performance
of such covenants or obligations under this Lease, then Tenant shall only be
obligated to perform such covenant or obligation as applied to such circumstance
to the extent that such covenant or obligation can be so performed.
Section 24.11 Time of Essence
---------------
Time is of the essence with respect to the rights and obligations of
Landlord and Tenant under this Lease.
Section 24.12 Attorney's Fees
---------------
Except as otherwise provided herein, in any action or proceeding
(including without limitation appellate proceedings) brought by either party
against the other under this Lease, the prevailing party shall be entitled to
recover from the other party reasonable attorneys' fees, investigation costs,
and other reasonable legal expenses and court costs incurred by such party in
such action or proceeding.
Section 24.13 No Merger
---------
There shall be no merger of this Lease or of the leasehold estate hereby
created with the fee estate in the Premises by reason of the fact that the same
person acquires or holds, directly or indirectly, this Lease or the leasehold
estate hereby created or any interest herein or in such leasehold estate as well
as the fee estate in the Premises or any interest in such fee estate.
Section 24.14 Landlord's Right to Enter
-------------------------
Landlord and its agents and designees may enter upon and examine the
Premises at reasonable times, accompanied by a representative of Tenant that
Tenant shall make available to Landlord, and show the Premises to prospective
purchasers, partners, investors, mortgagees or lessees as long as such
examination or showing shall not unreasonably interfere with the business
operations of Tenant on the Premises.
Section 24.15 Corporate Reorganization of Tenant
----------------------------------
In the event of the merger of Tenant into another corporation where
Tenant is not the surviving corporation or the consolidation of Tenant with one
or more other corporations where Tenant is not the surviving corporation, or the
sale or other disposition of all or substantially all of the assets of Tenant to
one or more other entities, the surviving entity or transferee of assets, as the
case may be, shall be deemed to have assumed all obligations, covenants and
responsibilities of Tenant under this Lease. Promptly after such corporate
reorganization, such entity shall deliver to Landlord an instrument in
recordable form reasonably acceptable to counsel for both parties, evidencing
such assumption.
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<PAGE>
Section 24.16 No Waiver
---------
The failure of either party to insist upon a strict performance of any
of the terms or provisions of this Lease or to exercise any option, right or
remedy herein contained shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
Section 24.17 Confidentiality
---------------
The parties hereby agree that the matters set forth in this Lease are
strictly confidential and each party will make every effort to ensure that such
information is not disclosed to any outside persons or entities (including the
press) without the consent of the other party, except as required by ERISA or
any other Legal Requirement reporting and disclosure rules or otherwise
specifically provided herein. For purposes of the preceding sentence, the words
"outside persons or entities" do not include the parties' attorneys,
accountants, consultants, shareholders, lenders, partners, investors, or any
prospective lenders, partners and investors. No references to Tenant or to any
Affiliate will be made in any prospectus, private placement memorandum, offering
circular or offering documentation related thereto (collectively referred to as
the "Prospectus"), issued by Landlord or one of its affiliates, which is
designated to interest potential investors in the Premises, unless Tenant has
previously received a copy of all such references. However, regardless of
whether Tenant does or does not so receive a copy of all such references,
neither Tenant nor any Affiliate will be deemed a sponsor of the offering
described in the Prospectus, nor will it have any responsibility for the
Prospectus, and the Prospectus will so state. Landlord shall indemnify, defend
and hold Tenant harmless from and against all loss, costs, liability and damage
(including reasonable attorneys' fees and expenses, and the cost of litigation)
arising out of any Prospectus or the offering described therein; and this
obligation of Landlord shall survive Termination of this Lease.
Section 24.18 Gender and Number
-----------------
Words of any gender used in the Lease shall be held to include any other
gender, and words in the singular shall be held to include the plural and vice
----
versa, when the sense requires and the following words and phrases shall have
- -----
the following meanings: (i) "including" shall mean "including without
limitation"; (ii) "provisions" shall mean "provisions, terms, agreements,
covenants and/or conditions"; (iii) "lien" shall mean "lien, charge,
encumbrance, title retention agreement, pledge, security interest, mortgage
and/or deed of trust"; (iv) "obligation" shall mean "obligation, duty,
agreement, liability, covenant and/or condition"; (v) "any of the Premises"
shall mean "the Premises or any part thereof or interest therein"; (vi) "any of
the Land" shall mean "the Land or any part thereof or interest therein"; (vii)
"any of the Improvements" shall mean "the Improvements or any part thereof or
interest therein"; and (viii) "any of the personal property" shall mean "the
personal property or any part thereof or interest therein."
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<PAGE>
Section 24.19 Survival
--------
All claims and liabilities of either party existing or arising prior to
the expiration or earlier termination of the Lease, unless otherwise
specifically provided herein, and all
Surviving Obligations shall survive such expiration or earlier Termination.
Section 24.20 Acceptance of Surrender
-----------------------
No surrender to Landlord of this Lease or of the Premises or of any part
thereof or of any interest therein shall be valid or effective unless agreed to
and accepted in writing by Landlord and the Senior Mortgagee if any, and no act
by Landlord or any representative or agent of Landlord, other than a written
acceptance, shall constitute an acceptance of any such surrender.
Section 24.21 Non-Recourse as to Landlord
---------------------------
Anything contained herein to the contrary notwithstanding, any claim
based on or in respect of any liability of Landlord under this Lease shall be
enforced only against the Premises and not against any other tangible or
intangible assets, properties or funds of (i) Landlord, (ii) any shareholder of
Landlord or any director, officer, general partner, limited partner, employee or
agent of Landlord, (or any legal representative, heir, estate, successor or
assign of any thereof), (iii) any predecessor or successor partnership or
corporation (or other entity) of Landlord, or any of its shareholders, either
directly or through Landlord or its shareholders or any predecessor or successor
partnership or corporation or their shareholders, officers, directors, employees
or agents (or other entity), or (iv) any other Affiliate of any of the
foregoing, or any director, officer, employee or agent of any thereof; provided,
however, that if, as a result of a judicial foreclosure of any Mortgage, the
interest of Landlord in the Premises is transferred to a Mortgagee or any other
person or entity and at the date of such foreclosure, Tenant has a legal
proceeding against Landlord, which is determined adversely to Landlord after the
exhaustion of all appeal periods, Tenant shall have the right to enforce any
judgment from any assets or other properties of Landlord but not against any
Mortgagee or any other person or any of the parties listed at (ii) through (iv)
above.
Section 24.22 Entire Agreement; Integration
-----------------------------
A. The Lease contains all the agreements and conditions made between
the parties hereto with respect to the matters contained herein and may not be
modified orally or in any manner other than by an agreement in writing signed by
all the parties hereto or their respective successors and assigns. All prior
written and oral understandings and agreements shall be deemed to have merged
into the Lease and have no further force and effect.
B. Landlord and Tenant are business entities having substantial
experience with the subject matter of this Lease and have each fully
participated in the negotiation and drafting of this Lease. Accordingly, this
Lease shall be construed without regard to the rule that ambiguities in a
document are to be construed against the drafter.
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<PAGE>
C. No inferences shall be drawn from the fact that the final, duly
executed Lease differs in any respect from any previous draft hereof.
D. If there is more than one Tenant, the obligations of each shall be
joint and several.
Section 24.23 Waiver of Trial by Jury
-----------------------
The parties hereto each waive all right to elect a trial by jury in any
litigation relative to this Lease.
Section 24.24 Tenant's Remedies
-----------------
Tenant shall have the right to seek all remedies at law and/or in
equity, including an order for specific performance, to obtain full performance
of all Landlord's obligations under this Lease, and/or to recover damages for
any breach by Landlord hereunder; provided, however, that Tenant shall not have
the right (i) to terminate this Lease (except as otherwise specifically provided
in this Lease) by reason of any breach of Landlord's obligations hereunder; (ii)
to set-off against Rentals hereunder any amounts owing to Tenant by Landlord; or
(iii) to assert by way of defense, cross-claim or counterclaim in any action by
Landlord to recover Rental or other sums due from Tenant any right to withhold
Rental or to pay less than the amount due hereunder. Any exercise of Tenant's
rights hereunder shall be through a separate and independent action unrelated to
any claim Landlord has against Tenant for Rental due hereunder.
Section 24.25 Landlord and Tenant Relationship
--------------------------------
The parties hereto specifically acknowledge and agree that,
notwithstanding any other provision contained in this Lease (including the
provisions for payment of Percentage Rental), it is the intent of the parties
that their relationship hereunder is and shall at all times be that of Landlord
and Tenant and not that of partners, joint venturers, lender and borrower, or
any other relationship other than that of Landlord and Tenant.
END OF ARTICLE 24
ARTICLE 25
SPECIAL PROVISIONS
------------------
Section 25.01 Supremacy of Article 25
-----------------------
Notwithstanding anything contained in this Lease to the contrary, the
provisions of this Article 25 shall be controlling and any inconsistencies
between the provisions of this Article 25 and any other provision contained in
this Lease shall be decided in favor of this Article 25.
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<PAGE>
Section 25.02 Definitions
-----------
The capitalized terms contained in this Article 25 which are not defined
below or elsewhere in this Lease shall have the meanings ascribed to them in the
Reimbursement Agreement (the "Reimbursement Agreement"), dated as of April 15,
1991, between Landlord and Allied Irish Banks, p.l.c.
Section 25.03 Landlord's Bond Obligations
---------------------------
In 1991, Landlord refinanced its Indebtedness related to the Premises by
entering into, among other agreements with the Bank, the Reimbursement
Agreement, the Borrower Documents, and the Related Documents. Landlord remains
obligated to the Bank under the terms of the Reimbursement Agreement, the
Borrower Documents, and the Related Documents, and Landlord intends to
restructure this Indebtedness (the "Restructuring") in accordance with the terms
of that certain Letter of Intent, dated July 29, 1993, between Landlord and the
Bank. In the event that Tenant is dispossessed of the Premises as a direct
result of Landlord's default under the terms of the Reimbursement Agreement, the
Borrower Documents, or the Related Documents, this Lease shall automatically
terminate and Tenant's obligations to Landlord hereunder shall expire.
Section 25.04 Lease Subordination
-------------------
Notwithstanding anything to the contrary contained in this Lease,
including, without limitation, the provisions of Section 19.02, all rights and
interests of Tenant in and to the Premises are and shall be expressly junior,
subject and subordinate in all respects to (i) that certain Mortgage Security
Agreement and Assignment of Leases and Occupancy Agreements, Rents and Profits
dated as of May 8, 1991 and recorded on that date with the Recorder's Office of
Orange County, Florida (the "Mortgage"), (ii) the Reimbursement Agreement; and
(iii) any other Related Documents; provided, however, that the Bank, at any
time, may permit, in its sole and absolute discretion, upon written
confirmation, this Lease to be treated as having priority over the lien of the
Mortgage. Notwithstanding any provision of this Lease to the contrary, the
terms of the Mortgage shall govern with respect to the disposition of any
insurance proceeds or eminent domain awards, and any obligations of Landlord to
restore the Property shall, insofar as they apply to the Bank, be limited to
insurance proceeds or eminent domain awards received by the Bank after the
deduction of all reasonable costs and expenses incurred in obtaining such
proceeds or awards.
Section 25.05 Asbestos
--------
Landlord and Tenant acknowledge the presence of Asbestos Containing
Material ("ACM") in the Premises. Landlord is in the preliminary stages of
litigation against Versar, Inc., a consulting firm (the "Consultant") that
erroneously represented to Landlord that there was no ACM in the Premises. If
Tenant, as a result of the assignment set forth in Section 25.07, is successful
in its suit against the Consultant and recovers monetary damages attributable to
the presence of ACM in the Premises, Tenant shall deduct from the gross award
obtained in such litigation or settlement thereof (the "Gross Award") all costs
incurred in pursuing said litigation such as, but not limited to, reasonable
attorneys' fees, consultant fees, in-house expenses, and
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<PAGE>
court costs and place the remainder of such award (the "Net Award") in an
interest bearing escrow account controlled by Tenant ("Escrow Account"). The
Net Award and all interest earned thereon, shall be used by Tenant to pay for
any and all costs associated with the presence of ACM in the Premises and to pay
for the remediation, monitoring or removal of such ACM by Tenant which may be
performed at Tenant's sole discretion, unless required pursuant to any
Environmental Law ("ACM Costs"). Tenant shall be reimbursed for its ACM Costs
to the extent there are funds available in the Escrow Account. Tenant shall
provide notice to Landlord prior to drawing any funds out of the Escrow Account
and shall provide Landlord with documentation reasonably satisfactory to
Landlord evidencing that the funds withdrawn from the Escrow Account will be
used to reimburse Tenant for its ACM Costs. Upon expiration of the Lease any
funds remaining in the Escrow Account, plus accrued interest, shall become the
property of Landlord.
Section 25.06 Landlord's Cooperation
----------------------
Landlord agrees upon request by Tenant to sign promptly, and without
charge, any documents (i) required by any governmental authority or (ii) that
Tenant determines are necessary or reasonably desirable to pursue litigation
against the Consultant; provided, however, that all costs and expenses
associated therewith shall be the sole obligation of Tenant, and shall not be
deducted from the Gross Award, and Tenant shall promptly pay and discharge the
same, and provided further, that the execution of any such document shall not
expose Landlord to any personal liability. Tenant hereby agrees that it will
fully indemnify, defend and save Landlord harmless from and against any and all
costs, losses and expenses, including, without limitation, any and all legal
fees and court costs incurred or suffered by Landlord as a result of its
compliance with the obligations imposed upon Landlord under this Section 25.06
or as a result of Tenant's actions or failure to act in connection with ACM in
the Premises and the suit against the Consultant.
Section 25.07 Assignment of Rights
--------------------
During the Term, and except as otherwise provided in this Article 25,
Landlord hereby assigns to Tenant all of its right, title and interest to any
awards or damages resulting from the presence of ACM in the Premises and
Landlord will not pursue any independent right of recovery against any entity by
reason of the presence of ACM in the Premises during the Term.
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<PAGE>
Section 25.08 Notices
-------
Tenant agrees to give to the Bank a copy of any notice of default under
the Lease served by Tenant upon Landlord. Landlord agrees to give to the Bank a
copy of any notice of default under the Lease served by Landlord upon Tenant.
Section 25.09 Limitation on Termination Rights
--------------------------------
Tenant hereby waives, to the extent permitted by law, the provisions of
any statute or rule of law now or hereafter in effect which may give or purport
to give Tenant any right or election to terminate or otherwise adversely affect
this Lease or the obligations of Tenant under this Lease by reason of any
foreclosure proceedings, so long as the Bonds remain outstanding.
END OF ARTICLE 25
EXECUTED under seal as of the date first written above.
TENANT:
------
ATTEST: MARRIOTT SENIOR LIVING SERVICES, INC.
By: /s/ Kevin E. Montano By: /s/ Paul E. Johnson, Jr.
----------------------- ---------------------------
Vice President President
[CORPORATE SEAL]
LANDLORD:
--------
ATTEST: HMC RETIREMENT PROPERTIES, INC.
By: /s/ Michael J. Stein By: /s/ Robert E. Parsons, Jr.
----------------------- -----------------------------
Vice President Vice President
[CORPORATE SEAL]
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<PAGE>
EXHIBITS ATTACHED TO ORIGINAL LEASE
A Description of Land and Premises with Site Plan
B [This Exhibit Intentionally Not Used]
C Schedules of Landlord's FF&E, Fixed Asset Supplies and Inventories
D Landlord's Trademarks, Etc.
E Related Landlord Leases
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<PAGE>
EXHIBIT 10.17(ii)
- --------------------------------------------------------------------------------
Amendment No. 1 to
Line of Credit and Guarantee
Reimbursement Agreement
--------------
Dated as of January __, 1994
--------------
Among
HMH Holdings, Inc.
as Borrower,
Marriott International, Inc.
as Lender,
and
Host Marriott Corporation; HMC Acquisitions, Inc.;
Host Marriott GTN Corporation; Host La Jolla, Inc.;
Marriott Properties, Inc.; and Willmar Distributors, Inc.
as Guarantors
- --------------------------------------------------------------------------------
<PAGE>
[Form of]
AMENDMENT NO. 1 TO
LINE OF CREDIT AND
GUARANTEE REIMBURSEMENT
AGREEMENT
This Amendment No. 1 to Line of Credit and Guarantee Reimbursement Agreement
(the "Amendment") dated as of January __, 1994 between HMH Holdings, Inc., a
Delaware corporation, as borrower, Marriott International, Inc., a Delaware
corporation, as lender, and Host Marriott Corporation (formerly Marriott
Corporation), a Delaware corporation ("Host Marriott"), as guarantor, HMC
Acquisitions, Inc. ("Acquisitions"), a Delaware corporation, as guarantor, and
those certain other Subsidiaries of Host Marriott signatory to this Amendment,
as additional guarantors.
RECITALS:
Whereas, the parties hereto, other than Acquisitions, entered into that
certain Line of Credit and Guarantee Reimbursement Agreement dated as of October
8, 1993 (the "Original Agreement"); and
Whereas, the Host Marriott 1994 Common Stock Offering (as defined below) will
improve Host Marriott's financial position and enhance the ability of the Host
Marriott Parties (as defined below) to perform their obligations under the
Original Agreement; and
Whereas, the mandatory prepayment provisions of the Original Agreement
require that 1994 Fiscal Year Net Cash Flow of Holdings (which would include the
proceeds of the Host Marriott 1994 Common Stock Offering to the extent not used
during such Fiscal Year for purposes permitted under the Original Agreement) be
used to repay Advances under the Original Agreement and that requirement may
prevent or impair the consummation of said common stock offering; and
Whereas, the parties hereto have therefore agreed that the proceeds of the
Host Marriott 1994 Common Stock Offering may, under the terms and conditions set
forth below (including the guarantee by Acquisitions of the Agreement) be
contributed to Acquisitions rather than used to repay Advances under the
Agreement; and
Whereas, subject to the terms and conditions set forth below, the parties
hereto have agreed to amend the Original Agreement as hereafter provided;
AGREEMENT:
Now, therefore, it is agreed:
A. CAPITALIZED TERMS. All capitalized terms used herein, unless otherwise
defined herein, shall have the same meanings as set forth in the Original
Agreement.
<PAGE>
B. SECTION 1.1 AND EXHIBIT A; DEFINED TERMS.
1. The following defined terms are added to Exhibit A to the Agreement
(as defined below):
"1994 STOCK OFFERING REGISTRATION STATEMENT" means Registration Statement
No. 33-51707 as filed with the SEC by Host Marriott on December 23,
1993.
"ACQUISITIONS" means HMC Acquisitions, Inc., a Delaware corporation and a
wholly-owned direct Subsidiary of Host Marriott.
"ACQUISITIONS GROUP" means the group of Persons consisting of Acquisitions
and each of its Subsidiaries. The composition of the Acquisitions
Group is illustrated on Exhibit F.
"ACQUISITIONS INVESTMENT" means the Investment in Acquisitions made by Host
Marriott not later than 45 days after the closing of the Host Marriott
1994 Common Stock Offering in an amount not greater than the Net
Proceeds of said offering.
"ACQUISITIONS RELEASE DATE" means the first date on which Acquisitions has
distributed to Host Marriott cumulative cash dividends of not less
than the amount of the Acquisitions Investment. Notwithstanding the
foregoing, the Acquisitions Release Date shall not occur (and any
release or discharge pursuant thereto shall be delayed) until such
time as the aggregate principal amount of Advances is less than
$280,000,000.
"AGREEMENT" means this Line of Credit and Guarantee Reimbursement
Agreement, as amended or otherwise modified from time to time.
"AMENDMENT" means that certain Amendment No. 1 to the Agreement dated as of
the Amendment Date among Marriott International and the Host Marriott
Parties.
"AMENDMENT DATE" means January __, 1994.
"HOST MARRIOTT 1994 COMMON STOCK OFFERING" means the public offering of up
to 17,500,000 shares, plus up to an additional 2,625,000 shares to
cover over-allotments, of Host Marriott Common Stock pursuant to the
1994 Stock Offering Registration Statement.
2. The following defined terms amend and replace the same terms as
defined in Exhibit A to the Original Agreement:
"GUARANTORS" means (a) Host Marriott, (b) Acquisitions, and (c) the
Subsidiary Guarantors, other than any such Persons whose guarantees
have been
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<PAGE>
released pursuant to Article Eight; and the term "Guarantor" means any
one of the Guarantors.
"HOST MARRIOTT GROUP" means the group of Persons consisting of Host
Marriott and each of its Subsidiaries (and as such on the Amendment
Date consists of Holdings, each Hospitality Group Member, each Parent
Group Member, each Ventures Group Member, and each Acquisitions Group
Member). The composition of the Host Marriott Group as of the
Amendment Date is illustrated on Exhibit F.
"HOST MARRIOTT PARTY" means Holdings, Host Marriott, Acquisitions, and each
and every Subsidiary of any of the foregoing that is a party to this
Agreement, or later becomes a party pursuant to Article Eight hereof.
"MARRIOTT INTERNATIONAL OPERATING AGREEMENT" means each agreement between a
Host Marriott Group Member and Marriott International or one of its
Affiliates (regardless of whether such agreement is termed a
management agreement, an operating lease, or otherwise), pursuant to
which Marriott International or such Affiliate operates a lodging or
senior living facility for such Host Marriott Group Member.
"MEMBER" means, with reference to the Hospitality Group, the Host Marriott
Group, the Parent Group, the Ventures Group, or the Acquisitions
Group, any Person within such group. See Exhibit F for an
illustration of the organizational structure of each such group.
"PARENT GROUP" means Host Marriott and each of its Subsidiaries other than
(i) Holdings, (ii) any Member of the Hospitality Group, (iii) any
Member of the Ventures Group, and (iv) any Member of the Acquisitions
Group. The composition of the Parent Group is illustrated on Exhibit
F.
"RESTRICTED PAYMENT BASKET-PARENT GROUP" means, during any given Fiscal
Quarter, (A) EBITDA-Parent Group plus (B) all distributions from
Holdings to the Parent Group, plus (C) the Net Proceeds of any
issuance by Parent Group of any Equity Interest or Preferred Stock
(other than the Host Marriott 1994 Common Stock Offering) to the
extent such Net Proceeds are not applied to prepay Advances, minus (D)
170 percent of Interest Expense of the Parent Group on a Combined
basis plus the aggregate amount of Dividends paid pursuant to clauses
(C), (D) and (E) of Section 5.2(e)(1), excluding dividends on
Permitted PIK Indebtedness; in each case determined on the basis of
the prior Fiscal Quarter.
"SPECIAL PURPOSE SUBSIDIARY" means any Parent Group Member or Acquisitions
Group Member (other than, in any case, Host Marriott or Acquisitions)
the sole assets of which consist of Subject Assets securing
Non-Recourse
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Indebtedness permitted under this Agreement (other than de minimis
other assets incidental to such Subject Assets).
C. SECTION 2.5(A); MANDATORY PREPAYMENTS. Section 2.5(a) of the Original
Agreement is amended and restated as follows:
(a) Mandatory Prepayments. During any period in which any Advance is
outstanding, not later than forty-five (45) days after the end of (1) the
1994 Fiscal Year, and (2) thereafter, each Fiscal Quarter, Holdings shall
prepay, and Host Marriott, Acquisitions, and the Subsidiary Guarantors shall
cause Holdings to prepay, any outstanding Advances in an amount equal to the
lesser of (A) the Net Cash Flow of Holdings and the Parent Group, determined
on a Combined basis, for such Fiscal Year or Fiscal Quarter, as the case may
be, or (B) the aggregate outstanding amount of principal and accrued interest
on all Advances; provided, however, that Holdings may, at Host Marriott's
request, reduce the prepayment required by this paragraph by the amount
necessary to allow Host Marriott to maintain a cash reserve of up to (i)
$25,000,000 with respect to Fiscal Year 1994, and (ii) $10,000,000
thereafter. The parties hereto acknowledge that the Net Cash Flow, as
defined in Exhibit A, of the Parent Group for the 1994 Fiscal Year does not
include the Net Proceeds of the Host Marriott 1994 Common Stock Offering to
the extent of the Acquisitions Investment.
D. SECTIONS 4.7 AND 4.8; REPRESENTATIONS AND WARRANTIES AS OF THE
AMENDMENT DATE. The following is added as Sections 4.7 and 4.8 of the
Agreement:
Section 4.7. Representations and Warranties as of the Amendment Date.
Each Host Marriott Party (including Acquisitions) represents and warrants
that (a) each of the representations and warranties contained in Sections 4.1
through 4.4, inclusive, is true and correct with respect to such Host
Marriott Party on and as of the Amendment Date, as though made on and as of
such date and (b) no Default or Event of Default has occurred and is
continuing on the Amendment Date. Without limiting the generality of the
foregoing, each representation made in clause (a) with respect to this
Agreement shall be deemed to apply independently to both (i) the Amendment
and (ii) the Agreement, as amended by the Amendment.
Section 4.8. Acquisitions. Host Marriott represents and warrants that as
of the Amendment Date (i) Acquisitions is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its formation, (ii) Acquisitions is a wholly owned direct Subsidiary of Host
Marriott, (iii) Acquisitions has issued no capital stock or Equity Interests
other than the [100] shares of no par value common stock owned by Host
Marriott, and (iv) said Acquisitions common stock is free and clear of all
Liens.
E. SECTION 5.2(c)(1)(C); CERTAIN PARENT GROUP GUARANTEES. Section
5.2(c)(1)(C) of the Original Agreement is amended and restated as follows:
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<PAGE>
(C) (i) any new Guarantee of obligations of a disadvantaged
business enterprise in connection with a Host Travel Plaza contract
("DBE Guarantees").
(ii) any new Guarantee of Parent Group Non-Recourse
Indebtedness secured by lodging or senior living service properties
owned by a Member of the Parent Group and any new Guarantee which
supports a Guarantee by Hospitality of Non-Recourse Indebtedness
secured by lodging or senior living service properties owned by a
Member of the Hospitality Group, in each case where (v) the Maximum
Guarantee Exposure of Parent Group Members under such new Guarantee
does not exceed 20% of the principal amount of the Indebtedness
Guaranteed thereby, (w) the principal amount of the Indebtedness
Guaranteed thereby does not exceed 70% of the Fair Market Value of
the Subject Assets, as determined on the basis of a then-current
appraisal, (x) in the case of a Guarantee supporting a Guarantee by
Hospitality, the Parent Group Guarantee can only be drawn upon in
the event that Hospitality fails to perform on its Guarantee, (y)
such Guarantee is entered into in connection with a Parent Group
or, in the case of a Guarantee described in clause (x) only, a
Hospitality Group, asset sale or financing that is permitted under
this Agreement, and (z) such Guarantee is not a Foreclosure
Guarantee.
(iii) any new Guarantee of Acquisitions Group Indebtedness
where (y) the Maximum Guarantee Exposure of Parent Group Members
under such new Guarantee does not exceed 20% of the principal
amount of the Indebtedness Guaranteed thereby, and (z) the
principal amount of the Indebtedness Guaranteed thereby does not
exceed 70% of the Fair Market Value of the Subject Assets, as
determined on the basis of a then-current appraisal.
(iv) Notwithstanding the foregoing, the aggregate Maximum
Guarantee Exposure of Parent Group Members under all Guarantees
permitted by this Section 5.2(c)(1)(C), including DBE Guarantees,
may not exceed $150,000,000 at any time outstanding.
F. SECTION 5.2(e)(1)(K); RESTRICTED PAYMENTS, INVESTMENTS, CAPITAL
EXPENDITURES--PARENT GROUP. The following is added as Section 5.2(e)(1)(K) of
the Agreement:
(K) The Acquisitions Investment.
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<PAGE>
G. SECTIONS 5.4; COVENANTS PERTAINING TO ACQUISITIONS GROUP. The
following is added as Section 5.4 of the Agreement:
Section 5.4. Covenants pertaining to Acquisitions Group. At all times
during the Revolving Credit Period:
(a) Acquisitions Group Capital Stock.
(1) Host Marriott shall at all times prior to the Acquisitions
Release Date own directly 100% of (and not dispose of any of) the capital
stock of Acquisitions.
(2) Host Marriott and Acquisitions shall not create, incur, assume,
permit or suffer to exist any Lien of any character on or with respect to
any of the Capital Stock of Acquisitions. Host Marriott and Acquisitions
shall not create, incur, assume, permit or suffer to exist any Lien of any
character on or with respect to any of the Capital Stock of any other
Acquisitions Group Member other than Liens which secure Indebtedness for
Borrowed Money of any Acquisitions Group Member.
(b) Sales, Dispositions, and Financings of Acquisitions Group Assets.
Host Marriott and Acquisitions shall not permit the Acquisitions Group to
sell, transfer, otherwise dispose of, or finance, whether in a single
transaction or a series of related transactions, (A) any Common Stock,
Preferred Stock, or Equity Interest owned by any Acquisitions Group Member,
or (B) any other asset or property of the Acquisitions Group, unless (x) the
Net Proceeds received by the Acquisitions Group are either reinvested in the
Acquisitions Group or distributed by dividend to Host Marriott, and (y) in
the case of any sale, transfer or disposition, such assets are disposed of
for fair value. For purposes of this Section 5.4(b), "reinvested in the
Acquisitions Group" includes payments of Indebtedness of Acquisitions Group
Members and Investments and Capital Expenditures permitted under subsections
(1) and (2) of Section 5.4(d).
(c) Dividends. Host Marriott and Acquisitions shall not permit any
Acquisitions Group Member to declare or make any dividend payment or other
distribution of assets, properties, cash, rights or obligations or securities
on account of any shares of any class of capital stock of, or other ownership
interest in, any Acquisitions Group Member to any Person other than the
Parent of such Acquisitions Group Member, unless such dividend is paid
pro-rata on the basis of the equity ownership of such Acquisitions Group
Member to all Persons who hold capital stock, partnership interests, or
venture interests, as the case may be, in such Acquisitions Group Member.
(d) Investments and Guarantees.
(1) Host Marriott and Acquisitions shall not permit any Acquisitions
Group Member to make any Capital Expenditures or Investments other than:
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<PAGE>
(A) Investments in Cash Equivalents;
(B) Investments or Capital Expenditures in any Acquisitions
Group Member or any Guarantor (other than any person who becomes a
Guarantor pursuant to Section 8.5(d));
(C) Investments or Capital Expenditures in any asset or
property which is (or will be as a result of such Investment or
Capital Expenditure) wholly-owned by the Acquisitions Group or a
Guarantor (other than any person who becomes a Guarantor pursuant to
Section 8.5(d)); or
(D) Other Investments or Capital Expenditures which do not, in
the aggregate, exceed an amount equal to $25,000,000 plus the
aggregate amount of any distributions received from Investments made
pursuant to this Section 5.2(d)(1)(D).
(2) Host Marriott and Acquisitions also shall not permit any
Acquisitions Group Member to make any Capital Expenditure or Investment
(other than Investments in Cash Equivalents), whether or not permitted by
Section 5.4(d)(1), unless such Capital Expenditure or Investment (i) is
consistent with the investment objective set forth on page 12 of the 1994
Stock Offering Registration Statement that "[t]he Company expects to use
the proceeds from the Offering for acquisition of lodging properties or
related assets," (ii) supports the ongoing businesses of the Acquisitions
Group at the time such Investment or Capital Expenditure is made, or (iii)
is otherwise consistent with the description of the Host Marriott Group's
business on the Amendment Date as described under the heading "BUSINESS
AND PROPERTIES" in the 1994 Stock Offering Registration Statement.
(3) Host Marriott and Acquisitions shall not permit any Acquisitions
Group Member to enter into any Guarantee other than (A) a Guarantee of the
Indebtedness of another Acquisitions Group Member or (B) a Guarantee which
replaces all liabilities of Marriott International under an existing
Guarantee of Marriott International.
(4) Except to the extent of any recourse which is permitted under
Section 5.2(c), Host Marriott and Acquisitions shall cause any instrument
evidencing any Indebtedness of any Acquisitions Group Member with a
principal amount, or Guarantee Exposure, as the case may be, in excess of
$1,000,000 to contain an unqualified statement that neither Host Marriott
nor any of its subsidiaries, other than the applicable Acquisitions Group
Member(s), is liable thereon.
(e) Outstanding Advances in Excess of $450 Million.
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<PAGE>
(1) Within forty-five (45) days after the end of any Fiscal Quarter
at any time during which the aggregate principal balance of outstanding
Advances exceeds $450,000,000, (A) Acquisitions shall dividend to Host
Marriott an amount in cash equal to 100% of Acquisitions Group Net Cash
Flow for such Fiscal Quarter (plus any portion of the Acquisition
Investment which, at the end of such Fiscal Quarter, remains held by any
Acquisitions Group Member in the form of cash or Cash Equivalents) and (B)
Host Marriott and Holdings shall cause the outstanding Advances to be
prepaid by such amount. Any prepayment pursuant to this paragraph shall
be in addition to any prepayment required under Section 2.5(a).
(2) At any time during which the aggregate principal balance of
outstanding Advances exceeds $450,000,000, no Acquisitions Group Member
may make any Investment or Capital Expenditures other than: (A)
expenditures that would fall within the definition of Existing Unit
Expenditures if that definition were made applicable to the Acquisitions
Group, or (B) any dividend permitted under Section 5.4(c) or required
under Section 5.4(e)(1).
(f) Transactions with Affiliates. Host Marriott and Acquisitions shall
cause each Acquisitions Group Member to conduct all transactions otherwise
permitted under this Agreement with any Affiliate of any Acquisitions Group
Member on Commercially Reasonable Terms. For purposes of this paragraph,
"Commercially Reasonable Terms" means, (i) if applicable, on terms comparable
to those afforded generally by Host Marriott Group Members to parties that
are not Affiliates, or (ii) in all other cases, on terms which are
commercially reasonable from the standpoint of the applicable Acquisitions
Group Member (including a requirement that any goods or services provided are
to be paid for on a timely basis at an amount in excess of the provider's
variable cost).
H. SECTION 6.1; EVENTS OF DEFAULT.
1. Section 6.1(c) of the Original Agreement is amended and restated as
follows:
(c) Any Host Marriott Party shall fail to perform or observe any
term, covenant or agreement contained in Section 5.1(a), Section 5.1(b),
Section 5.2, or Section 5.4 at any time during the Revolving Credit
Period.
2. All references to "Holdings or any Parent Group Member" in Sections
6.1(e) and 6.1(g) of the Original Agreement shall be replaced with "Holdings,
any Parent Group Member or any Acquisitions Group Member."
3. The reference to "Host Marriott, Holdings, or any other Parent
Group Member" in the first line of Section 6.1(f) shall be replaced with
"Host Marriott, Holdings, Acquisitions, or any other Parent Group or
Acquisitions Group Member."
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<PAGE>
I. SECTION 6.2(C); CERTAIN REMEDIES. Section 6.2(c) of the Original
Agreement is amended and restated as follows:
(c) By notice to Host Marriott, require the Net Cash Flow of (i) all
Parent Group Members and Acquisitions on a Combined basis, and/or (ii) all
Hospitality Group Members on a Consolidated basis, to be directed and
utilized in accordance with Section 6.4.
J. SECTION 6.4(A); UTILIZATION OF PARENT GROUP AND ACQUISITIONS GROUP NET
CASH FLOW DURING DEFAULT. The first paragraph of Section 6.4(a) of the Original
Agreement is amended and restated as follows:
(a) Parent Group Net Cash Flow. From the occurrence and during the
continuation of an Event of Default, Marriott International may, by notice to
Host Marriott, direct that all Parent Group and Acquisitions Group Combined
Net Cash Flow (plus, without duplication, any portion of the Acquisitions
Investment which at such time remains held by any Acquisitions Group Member
in the form of cash or Cash Equivalents) be provided to Marriott
International (in accordance with the provisions of Section 2.5(a), but
whether or not any Advances are outstanding, and on a quarterly basis even if
prior to Fiscal Year 1995) to be held in trust for the benefit of Host
Marriott and Holdings and utilized on behalf of Host Marriott and Holdings as
follows:
K. SECTION 8.6; GUARANTEE BY ACQUISITIONS. The following is added as
Section 8.6 of the Agreement:
Section 8.6. Guarantee by Acquisitions.
(a) Acquisitions confirms and agrees that, as of the Amendment Date, it
shall constitute a Guarantor, but not a Subsidiary Guarantor or an Additional
Subsidiary Guarantor, for all purposes under this Agreement. Without
limiting the generality of the foregoing, the release provisions of Section
8.5 are not available to Acquisitions. In addition, Acquisitions and Marriott
International each confirms that it is the intention of both such parties
that the guarantee by Acquisitions pursuant to Section 8.1(a) and this
Section 8.6(a) not constitute a fraudulent transfer or conveyance for purpose
of any bankruptcy law, the Uniform Fraudulent Conveyance Act, the Uniform
Fraudulent Transfer Act or any similar Federal or state law. To effectuate
the foregoing intention, Marriott International and Acquisitions hereby
irrevocably agree that the obligations of Acquisitions under its guarantee
set forth in Section 8.1(a) shall be limited to the maximum amount as will,
after giving effect to all other contingent and fixed liabilities of
Acquisitions and after giving effect to any collections from or payments made
by or on behalf of any other Guarantor in respect of the obligations of such
other Guarantor under its guarantee or result in the obligations of
Acquisitions under such guarantee not constituting such a fraudulent transfer
or conveyance.
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(b) Without any further notice or action being required by any Person,
Acquisitions shall be fully and unconditionally released and discharged from
all obligations under its guarantee on the Acquisitions Release Date.
(c) At the request of Holdings, Marriott International shall promptly
execute and deliver appropriate instruments in forms reasonably acceptable to
Holdings evidencing and further implementing any release and discharge
pursuant to the foregoing provision. If Host Marriott desires the
instruments evidencing or implementing any releases or discharges to be
executed prior to the effectiveness of such release and discharge as set
forth above, such instruments may be made conditional upon the occurrence of
the events necessary to cause the effectiveness of such release and
discharge, as specified in the definition of Acquisitions Release Date.
L. EXHIBIT E; REPORTING REQUIREMENTS. The following additional reporting
requirements are added to Exhibit E to the Original Agreement:
X. REPORTS PERTAINING TO ACQUISITIONS.
A. As soon as available and in any event within 105 days after the end
of each Fiscal Year (or, if such 105th day is not a Business Day,
on the next succeeding Business Day), (1) a condensed Consolidated
balance sheet of the Acquisitions Group, (2) condensed Consolidated
statements of income and detailed Net Cash Flows, with supporting
backup of key line items, of the Acquisitions Group for such Fiscal
Year, setting forth the corresponding figures for the corresponding
period of the preceding Fiscal Year, all in reasonable detail and
duly certified by a Financial Officer of Host Marriott as having
been prepared in accordance with generally accepted accounting
principles consistently applied (except to the extent required or
permitted by changes in generally accepted accounting principles).
B. Quarterly financial statements or reports pertaining to
Acquisitions, the Acquisitions Group or any Acquisitions Group
Member to the extent and at the time any such statements or reports
may be provided to any third party.
C. At any time during which the aggregate principal balance of
outstanding Advances equals or exceeds $450,000,000:
1. statements and reports pertaining to Acquisitions and the
Acquisitions Group of the type described in, and within the time
periods specified by, Sections II and III of this Exhibit E; and
2. as soon as available and in any event within 60 days after the
end of each of Fiscal Year (or if such day is not a Business
Day, on the
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next succeeding Business Day), a calculation of the reduction of
Indebtedness required under Section 5.4(e)(1)(B).
M. EXHIBIT F; ORGANIZATIONAL STRUCTURE. Exhibit F to the Original
Agreement is deleted and replaced with Exhibit F to this Amendment.
N. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective
when (such date, the "Amendment Effective Date"), and only when:
1. Marriott International shall have received (i) an original of this
Amendment fully executed by all Persons who are Host Marriott Parties as of
the Amendment Effective Date, (ii) certified copies of the resolutions of the
Board of Directors of each such Host Marriott Party which authorize such Host
Marriott Party to enter into this Amendment, and (iii) an opinion of counsel
dated as of the Amendment Date substantially the form attached hereto as
Exhibit D-1;
2. Holdings shall have received (i) an original of this Amendment
fully executed by Marriott International, (ii) a certified copy of the
resolutions of the Board of Directors of Marriott International which
authorize Marriott International to enter into this Amendment, and (iii) an
opinion of counsel dated as of the Amendment Date substantially the form
attached hereto as Exhibit D-2; and
3. The Host Marriott 1994 Common Stock Offering shall have been
consummated.
O. REFERENCE TO AND EFFECT ON THE AGREEMENT. On and after the occurrence
of the Amendment Effective Date each reference in the Original Agreement to
"This Agreement", "hereunder", "hereof" or words of like import referring to the
Agreement shall mean and be a reference to the Agreement as amended hereby.
Except as specifically amended hereby, the Original Agreement is and shall
continue to be in full force and effect and is hereby in all respects ratified
and confirmed. The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of Marriott International nor constitute a waiver of any
provision of the Agreement.
P. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
Q. GOVERNING LAW. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of Maryland.
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In witness whereof, the parties hereto have caused this Amendment to be
executed and delivered by their respective duly authorized officers as of the
Amendment Date.
LENDER: BORROWER:
Marriott International, Inc. HMH Holdings, Inc.
By: By:
----------------------------- -----------------------------
Vice President Vice President
GUARANTORS:
Host Marriott Corporation
By:
-----------------------------
Vice President
HMC Acquisitions, Inc.
By:
-----------------------------
Vice President
SUBSIDIARY GUARANTORS:
Host Marriott GTN Corporation
Host La Jolla, Inc.
Marriott Properties, Inc.
Willmar Distributors, Inc.
By:
-----------------------------
Vice President of each of the
Subsidiary Guarantors listed above
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Exhibit 10.23
WORKING CAPITAL AGREEMENT
-------------------------
THIS WORKING CAPITAL AGREEMENT (the "Agreement") is entered into as of the
25th day of September, 1993 ("Effective Date"), between (i) HMH PROPERTIES,
INC., a Delaware corporation with an address c/o Host Marriott Corporation,
10400 Fernwood Road, Bethesda, Maryland 20817; (ii) MARRIOTT CORPORATION, a
Delaware corporation with an address c/o Host Marriott Corporation, 10400
Fernwood Road, Bethesda, Maryland 20817; (iii) MARRIOTT SBM TWO CORPORATION, a
Delaware corporation with an address c/o Host Marriott Corporation, 10400
Fernwood Road, Bethesda, Maryland 20817; (iv) MICHIGAN HOST, INC., a Delaware
corporation with an address c/o Host Marriott Corporation, 10400 Fernwood Road,
Bethesda, Maryland 20817; (v) CITY CENTER HOTEL LIMITED PARTNERSHIP, a Minnesota
limited partnership with an address c/o Host Marriott Corporation, 10400
Fernwood Road, Bethesda, Maryland 20817; (vi) HOST OF BOSTON, LTD., a
Massachusetts limited partnership with an address c/o Host Marriott Corporation,
10400 Fernwood Road, Bethesda, Maryland 20817; (vii) HOST OF HOUSTON, LTD., a
Texas limited partnership with an address c/o Host Marriott Corporation, 10400
Fernwood Road, Bethesda, Maryland 20817 (each of the foregoing shall be referred
to as the "Owner", and they shall be collectively referred to as the "Owners");
and (viii) MARRIOTT HOTEL SERVICES, INC. ("Management Company"), a
<PAGE>
Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda,
Maryland 20817.
R E C I T A L S
A. Each of the Owners owns one or more of the hotels (the "Hotels") which
are listed on Exhibit "A" hereto.
B. The Owner of each of the Hotels has executed, either as of the date
hereof or previously, a management agreement or operating lease (the "Management
Agreement", and collectively, the "Management Agreements") with Management
Company (or an Affiliate of Management Company) pursuant to which Management
Company (or an Affiliate of Management Company) will manage that Hotel pursuant
to the terms and conditions which are set forth in the Management Agreement.
C. Pursuant to Section 7.01 of each of the Management Agreements, the
"Owner" (as identified in such Management Agreement) is required to provide
Management Company with the funds necessary to maintain Working Capital at
certain levels.
D. The Owners and Management Company have determined that it will be in
the best interests of the Hotels for the cash component of the Working Capital
at all of the Hotels to be aggregated together in a single "Cash Concentration
System" (as defined below).
E. With respect to the St. Louis Pavilion Hotel, Marriott Corporation
(acting as one of the general partners of the Owner) is making the Initial
Deposit on behalf of the Owner. Until it
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<PAGE>
notifies Management Company to the contrary, Marriott Corporation will continue
to act on behalf of the Owner of the St. Louis Pavilion Hotel with respect to
the various rights and responsibilities described in this Agreement.
F. As of the Effective Date, Marriott Corporation will be renamed "Host
Marriott Corporation".
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITION OF TERMS
-------------------
1.01 Definition of Terms
-------------------
The following terms, when used in this Agreement, shall have the meanings
indicated:
"Affiliate" shall mean any individual or entity directly or indirectly
---------
through one or more intermediaries, controlling, controlled by or under common
control with a party. The term "control," as used in the immediately preceding
sentence, means, with respect to a corporation, the right to exercise, directly
or indirectly, fifty percent (50%) or more of the voting rights attributable to
the shares of the controlled corporation, and, with respect to an entity that is
not a corporation, the possession, directly or indirectly, of the power to
direct or
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<PAGE>
cause the direction of the management or policies of the controlled entity.
"Balance" shall have the meaning set forth in Section 2.05.
-------
"Cash Concentration System" shall mean all of the procedures described in
-------------------------
Article II. A Hotel shall become a member of the Cash Concentration System by
depositing into the Concentration Account the amounts described in Section
2.02. A Hotel shall remain in the Cash Concentration System until the
occurrence of a Deconsolidation Event with respect to that Hotel. As a member
of the Cash Concentration System, each Hotel shall be entitled to withdraw from
the Disbursement Account the amounts described in Section 2.03.
"Concentration Account" shall mean that certain account, which shall be
---------------------
opened by Management Company pursuant to Section 2.01, into which will be
deposited the amounts described in Section 2.02.
"Deconsolidation" shall mean the withdrawal of a given Hotel from the Cash
---------------
Concentration System.
"Deconsolidation Event" shall mean any event which, under the provisions of
---------------------
Article III, causes a Deconsolidation to occur.
"Concentration Bank" shall mean the bank at which the Concentration Account
------------------
is, from time to time, being maintained.
"Disbursement Account" shall mean that certain bank account from which the
--------------------
disbursements described in Section 2.03 shall be made.
- 4 -
<PAGE>
"Disbursement Bank" shall mean the bank at which the Disbursement Account
-----------------
is, from time to time, being maintained.
"Effective Date" shall have the meaning set forth in the Preamble hereto.
--------------
"Financing Transaction" shall mean any transaction in which the Owner of a
---------------------
given Hotel obtains a Secured Loan.
"Hotel" shall mean each of the hotels listed on Exhibit "A" hereto, but
-----
only for so long as such hotel has not had a Deconsolidation Event.
"Initial Deposit" shall mean that amount, with respect to each Hotel, which
---------------
is set forth on Exhibit "A" hereto.
"Maximum Concentration Balance" shall have the meaning set forth in Section
-----------------------------
2.04.
"Minimum Concentration Balance" shall have the meaning set forth in Section
-----------------------------
2.04.
"Transfer Notice" shall have the meaning set forth in Section 2.03.
---------------
"Working Capital" shall mean assets which are used in the day-to-day
---------------
operation of the Hotel's business, including, without limitation, amounts kept
in petty cash funds, amounts deposited in operating bank accounts, receivables,
prepaid expenses and funds expended to purchase Inventories, less accounts
payable and accrued current liabilities.
- 5 -
<PAGE>
1.02 Other Defined Terms
-------------------
Any capitalized term which is not specifically defined in this Agreement
shall have the meaning set forth in the Management Agreement.
END OF ARTICLE I
- 6 -
<PAGE>
ARTICLE II
CASH CONCENTRATION SYSTEM
-------------------------
2.01 Accounts
--------
Management Company will open and maintain, in its name, the Concentration
Account and the Disbursement Account. The Concentration Account and the
Disbursement Account will each be opened at a bank designated by Management
Company and approved (such approval not to be unreasonably withheld) by each of
the Owners. As of the Effective Date, it is anticipated that the Concentration
Account will be opened at Mellon Bank, and the Disbursement Account will be
opened at Citibank; however, Management Company reserves the right to transfer
either the Concentration Account or the Disbursement Account to a different bank
or banks, from time to time, subject to the approval of the Owners as described
in the preceding sentence.
2.02 Deposits
--------
A. As of the Effective Date, each Owner will deposit into the
Concentration Account, with respect to each Hotel which is owned by such Owner,
the Initial Deposit. Thereafter, Management Company shall deposit into the
Concentration Account, with respect to each of the Hotels, the sum of the
following: (i) collections of pre-Effective-Date receivables; and (ii) the cash
component of all Gross Revenues (including, without limitation, collections of
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<PAGE>
post-Effective-Date receivables) derived from the operation of such Hotel.
B. All interest which accrues on any funds deposited in the Concentration
Account shall be retained in the Concentration Account, to be used as additional
Working Capital for all of the Hotels. Subject to the cash management policies
described in Section 2.04, such interest shall be distributed to the respective
Owners of each of the Hotels approximately once a year.
2.03 Disbursements
-------------
A. Expenditures by Management Company with respect to each Hotel for all
purposes which are authorized by and are in accordance with the Management
Agreement for such Hotel, including expenditures arising from periods prior to
the Effective Date, shall be made by checks or wire transfers drawn on the
Disbursement Account. Withdrawals from the Disbursement Account shall be made
only by representatives of Management Company who have been designated by
Management Company as having such withdrawal authority (as set forth in a notice
from Management Company to Owner). The Disbursement Bank will be authorized and
instructed to send a notice (the "Transfer Notice") to the Concentration Bank at
appropriate intervals (which are expected to be once every business day). The
Transfer Notice will set forth the amount necessary to be transferred into the
Disbursement Account to cover checks written on the Disbursement Account. The
Concentration Bank will be authorized and instructed to transfer
- 8 -
<PAGE>
from the Concentration Account into the Disbursement Account, within an
appropriate time period after the receipt of each Transfer Notice, the amount
set forth in each such Transfer Notice, in order to cover such checks. The
Disbursement Bank shall be authorized and instructed to maintain the balance in
the Disbursement Account at zero, or as close thereto as is reasonably
practicable.
B. If Management Company so elects, various expenditures and/or transfers
of funds (e.g., the transfer to the Owner of any Owner's Distribution and the
payment to Management Company of the Management Fees), which are authorized
under the respective Management Agreement for each Hotel, may be implemented by
direct payment from the Concentration Account, rather than payment from the
Disbursement Account.
C. Service charges imposed by the bank or banks which participate in the
Cash Concentration System shall be deducted from the funds deposited at such
bank or banks, and shall be accounted for as Deductions under the respective
Management Agreements for each of the Hotels.
2.04 Cash Management Policies
------------------------
A. Management Company and the respective Owners of the Hotels will consult
together on a regular basis and will establish (exercising reasonable judgment)
mutually acceptable cash management policies regarding the Concentration Account
and the Disbursement Account. Among other things, the cash management
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<PAGE>
policies will address the issue of short-term investment of the funds in the
Concentration Account. As a part of the establishment of such cash management
policies, Management Company shall establish and periodically adjust (subject to
the approval of each of the Owners, such approval not to be unreasonably
withheld) the appropriate minimum balance ("Minimum Concentration Balance")
which should be maintained in the Concentration Account, as well as the maximum
balance ("Maximum Concentration Balance") which should be maintained in the
Concentration Account. The Minimum Concentration Balance and the Maximum
Concentration Balance shall each be consistent with the cash management
requirements of other full-service hotels in the Marriott Hotel System and shall
take into account (with respect to each Hotel, and with respect to all of the
Hotels collectively) such Hotel's size, its operational and economic
performance, and any seasonal fluctuations in cash needs.
B. If, from time to time, the balance in the Concentration Account is
regularly falling below the Minimum Concentration Balance, Management Company
shall identify which Hotel or Hotels are experiencing cash needs which are
higher than previously expected. The Owner or Owners of such Hotel or Hotels
shall, within thirty (30) days after receipt of a notice from Management
Company, arrange for additional funds, in the amount set forth in Management
Company's notice, to be deposited into the Concentration Account. Such
additional funds shall be accounted for as Working Capital (i.e., a capital
asset) provided by such
- 10 -
<PAGE>
Owner(s) pursuant to Section 7.01 of the respective Management Agreement.
C. If, from time to time, the balance in the Concentration Account is
regularly above the Maximum Concentration Balance, Management Company shall
identify which Hotel or Hotels are contributing cash in excess of their
respective operating needs to the Concentration Account. Management Company
shall promptly pay to the Owner(s) of such Hotel(s) the amount of such excess,
which shall be accounted for as a return of excess Working Capital to such
Owner(s) pursuant to Section 7.01 of the respective Management Agreement.
D. During the period of time during which each Hotel is a member of the
Cash Concentration System, Management Company agrees that the interim
distributions of Owner's Distribution which are described in the last sentence
of Section 5.02 A of the Management Agreement which is applicable to such Hotel
shall (notwithstanding the provisions of said Section 5.02 A regarding the
frequency of such distributions) be made twice per Accounting Period, rather
than once per Accounting Period. The first interim distribution (in the amount
of one-half of the estimated Owner's Distribution for each Accounting Period)
shall be made by no later than the twentieth (20th) day after the beginning of
such Accounting Period. The second interim distribution (in the amount of the
remainder of such Owner's Distribution) with respect to such Accounting Period
shall be made by no later than the fifth (5th) day after the end of such
Accounting Period. In addition, there
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<PAGE>
will be an adjustment (if necessary) of these interim distributions as of the
delivery of the Accounting Period Statement with respect to such Accounting
Period. The foregoing shall have no effect on the frequency of the preparation
of Accounting Period Statements, which shall continue to be as set forth in
Section 5.02 of the Management Agreement.
E. Operating Losses (if any) at any of the Hotels shall be funded as set
forth in the Management Agreement for such Hotel.
2.05 Balances
--------
Management Company will maintain an accounting of each Hotel's balance (the
"Balance") in the Concentration Account. The Balance with respect to each Hotel
will be the cumulative total through the date in question of the following: (i)
the Initial Deposit; (ii) all collections of pre-Effective-Date receivables with
respect to such Hotel; (iii) if applicable, any additional deposit pursuant to
Section 2.04 B or Section 2.06 which has been made into the Concentration
Account; (iv) all deposits into the Concentration Account of the cash component
of Gross Revenues (including, without limitation, collections of
post-Effective-Date receivables) derived from the operation of such Hotel; (v)
any interest which has accrued in accordance with Section 2.02 B, other than
interest which has previously been distributed to the Owner of such Hotel under
said Section 2.02 B; less (vi) all withdrawals made by Management Company from
----
the Disbursement Account with respect to such Hotel pursuant to Section 2.03;
and
- 12 -
<PAGE>
(vii) all other withdrawals from the Concentration Account by Management Company
which are authorized by the respective Management Agreement.
2.06 Overdrafts
----------
The Owner of each Hotel agrees that if the Concentration Account ever
becomes overdrawn, each Owner will, within thirty (30) days after the date on
which the Concentration Account became overdrawn, deposit in the Concentration
Account its portion (such allocation, as between the Hotels, to be determined by
Management Company) of the total amount necessary to restore the Concentration
Account to at least the sum of all the Initial Deposits (plus such additional
amount as Management Company reasonably determines is necessary for the
continued proper cash management of the Hotels).
END OF ARTICLE II
- 13 -
<PAGE>
ARTICLE III
DECONSOLIDATION
---------------
3.01 Deconsolidation Events
----------------------
Each of the following shall be a Deconsolidation Event with respect to the
Hotel in question: (i) the Sale of the Hotel; (ii) any funding under a
Financing Transaction with respect to the Hotel; and (iii) at Management
Company's election, a failure to comply with the provisions of Section 2.04 B or
Section 2.06 of this Agreement. Notwithstanding the foregoing, if, in the case
of a Financing Transaction, consent is given to such Hotel remaining as a member
of the Cash Concentration System by the Holder, then such Hotel will remain such
a member after such Deconsolidation Event, until such time as (a) such consent
is withdrawn, or (b) a subsequent Deconsolidation Event occurs with respect to
such Hotel.
3.02 Actions to be Taken Upon Deconsolidation
----------------------------------------
Upon any Deconsolidation with respect to any Hotel, such Hotel shall no
longer have any withdrawal privileges from the Disbursement Account, nor shall
such Hotel otherwise participate as a member of the Cash Concentration System.
In addition, one of the following (whichever is applicable) will be
implemented: (i) the Concentration Bank shall be authorized and instructed to
withdraw from the Concentration Account the amount of any positive Balance with
respect to such Hotel, as of the date of
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<PAGE>
Deconsolidation, and to pay such Balance to the Owner of such Hotel; or (ii) the
Owner of such Hotel shall, as of the date of Deconsolidation, pay into the
Concentration Account the amount of any negative Balance with respect to such
Hotel.
END OF ARTICLE III
- 15 -
<PAGE>
ARTICLE IV
MISCELLANEOUS
-------------
4.01 Conflict with Management Agreement
----------------------------------
Except as specifically set forth in Section 2.04 D regarding the frequency
of interim distributions of Owner's Distribution, nothing in this Agreement is
intended to amend or modify any of the terms and provisions of any of the
Management Agreements. In the event of a conflict (other than the aforesaid
Section 2.04 D) between the terms and conditions of this Agreement and those of
any one or more of the Management Agreements, the terms and conditions of such
Management Agreements shall prevail.
4.02 Ownership of Accounts
---------------------
Notwithstanding the fact that only employees of Management Company will be
authorized to make withdrawals from the Concentration Account or the
Disbursement Account, the Balance attributed to each Hotel shall be the property
of the Owner of that Hotel.
4.03 Defaults
--------
Any default by any party pursuant to the terms and provisions of this
Agreement shall be deemed to be a Default under the Management Agreement
applicable to the Hotel in question.
- 16 -
<PAGE>
4.04 New Hotels
----------
Additional hotels (other than those listed on Exhibit "A"), which are
managed by Management Company or one of its Affiliates, and owned by Host
Marriott Corporation or one of its Affiliates, may become members of the Cash
Concentration System, if Management Company and the owners of such hotels so
decide. Each such decision to enter the Cash Concentration System will be
implemented by Management Company and the owner of the hotel in question each
signing a counterpart copy of this Agreement. Each such counterpart shall be
deemed to be incorporated into this Agreement, and the signatories to such
counterpart shall become parties to this Agreement, regardless of whether or not
all parties to this Agreement sign such counterpart.
4.05 Notices
-------
Any notices given by any party to this Agreement to any other party shall
be given in accordance with Section 20.09 of the Management Agreement.
END OF ARTICLE IV
- 17 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year written above.
Attest: HMH PROPERTIES, INC.
By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend
-------------------- ----------------------------
Attest: MARRIOTT CORPORATION
By: /s/ Pamela J. Murch By: /s/ Stephen J. McKenna
-------------------- -----------------------
Attest: MARRIOTT SBM TWO CORPORATION
By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend
-------------------- ----------------------------
Attest: MICHIGAN HOST, INC.
By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend
-------------------- ----------------------------
Attest: CITY CENTER HOTEL LIMITED
PARTNERSHIP
By: MARRIOTT CORPORATION,
General Partner
By: /s/ Pamela J. Murch By: /s/ Stephen J. McKenna
-------------------- -----------------------
(signatures are continued on following page)
- 18 -
<PAGE>
Attest: HOST OF BOSTON, LTD.
By: HOST INTERNATIONAL, INC.,
General Partner
By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend
-------------------- ----------------------------
Attest: HOST OF HOUSTON, LTD.
By: HOST INTERNATIONAL, INC.,
General Partner
By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend
-------------------- ----------------------------
Attest: MARRIOTT HOTEL SERVICES, INC.
By: /s/ Peter J. Swift By: /s/ James Sullivan
------------------- -------------------
- 19 -
<PAGE>
EXHIBIT "A"
-----------
<TABLE>
<CAPTION>
================================================================================
INITIAL DEPOSIT OWNER OF HOTEL
HOTEL (in dollars) (on and after Effective Date)
- --------------------------------------------------------------------------------
<S> <C> <C>
Tampa Airport 100,000 Host of Boston, Ltd.
Houston Airport 100,000 Host of Houston, Ltd.
Denver West 50,000 HMH Properties, Inc.
Newark 50,000 HMH Properties, Inc.
Detroit 100,000 Michigan Host, Inc.
Atlanta Peachtree 50,000 HMH Properties, Inc.
Nashua 75,000 Marriott Corporation
Romulus 100,000 Marriott Corporation
Rocky Hill 150,000 HMH Properties, Inc.
Atlanta Lenox 300,000 Marriott Corporation
Deerfield 75,000 Marriott SBM Two Corporation
Newport Beach 300,000 HMH Properties, Inc.
Dulles 50,000 Marriott Corporation
Kansas City 50,000 HMH Properties, Inc.
Miami 600,000 HMH Properties, Inc.
Bethesda 200,000 HMH Properties, Inc.
Atlanta Perimeter 150,000 HMH Properties, Inc.
Minneapolis 200,000 City Center Hotel Limited Partnership
St. Louis Pavilion 300,000 One Broadway Hotel Venture*
El Paso 100,000 Marriott Corporation
Washingtonian 200,000 HMH Properties, Inc.
TOTAL $3,300,000
================================================================================
</TABLE>
* The Initial Deposit with respect to St. Louis Pavilion is being made by
Marriott Corporation, in its capacity as one of the general partners of One
Broadway Hotel Venture.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
Arthur Andersen & Co.
Washington, D.C.
January 18, 1994
