<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT TO +
+COMPLETION OR AMENDMENT PURSUANT TO RULE 424 UNDER THE SECURITIES ACT OF +
+1933. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED +
+EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO SECTION 8(A) +
+UNDER THE SECURITIES ACT OF 1933, AS AMENDED. A FINAL PROSPECTUS SUPPLEMENT +
+AND PROSPECTUS WILL BE DELIVERED TO PURCHASERS OF THESE SECURITIES. THIS +
+PRELIMINARY PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING 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 JULY 15, 1998
PROSPECTUS SUPPLEMENT
, 1998
(TO THE PROSPECTUS DATED JUNE 17, 1998)
Filed Pursuant to Rule 424(B)(2)
Registration No. 333-50729
$1,400,000,000
HMH PROPERTIES, INC.
$400,000,000 % SERIES A SENIOR NOTES DUE 2005
$1,000,000,000 % SERIES B SENIOR NOTES DUE 2008
The % Series A Senior Notes due 2005 (the "Series A Notes") and the %
Series B Senior Notes due 2008 (the "Series B Notes" and together with the
Series A Notes, the "Senior Notes") are being offered (the "Offering") by HMH
Properties, Inc., a Delaware corporation (the "Company"). The Company is a
wholly owned subsidiary of Host Marriott Hospitality, Inc., a Delaware
corporation ("Hospitality"), which is a wholly owned subsidiary of Host
Marriott Corporation, a Delaware corporation ("Host Marriott").
The net proceeds to the Company from the Offering together with the net
borrowings under the Credit Facility (as defined), to be entered into
concurrently with the Offering, will be used by the Company to consummate the
Offers (as defined) and Consent Solicitations (as defined) with respect to its
Existing Senior Notes (as defined). See "Use of Proceeds"; "The Offers to
Purchase and Consent Solicitations"; and "Description of Certain Indebtedness."
The Offering and the Offers and the Consent Solicitations are all being
effected as part of the conversion by Host Marriott of its business and
operations to a real estate investment trust. See "The REIT Conversion."
The Series A Notes will mature on July , 2005. The Series B Notes will
mature on July , 2008. Interest on the Series A Notes will be payable semi-
annually in arrears on March 15 and September 15 of each year, commencing on
March 15, 1999. Interest on the Series B Notes will be payable semi-annually in
arrears on June 15 and December 15 of each year, commencing on December 15,
1998. The Series A Notes and the Series B Notes will be redeemable at the
option of the Company, in whole or in part, at any time on or after July ,
2002 and July , 2003, respectively, at the redemption prices for such Senior
Notes set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. In the event of a Change of Control Triggering Event (as
defined), the Company will be required to make an offer to repurchase the
Senior Notes at a price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
See "Description of Senior Notes."
The Senior Notes will be senior, general obligations of the Company secured
on an equal and ratable basis with the Credit Facility, the Existing Senior
Notes, if any remain outstanding after the Offers, and certain future
unsubordinated Indebtedness (as defined) of the Company ranking pari passu with
the Senior Notes by a pledge of the capital stock of all but one of the Initial
Subsidiary Guarantors (as defined) and will rank pari passu in right of payment
with all other existing and future unsubordinated Indebtedness of the Company
(including the Credit Facility and the Existing Senior Notes, if any);
provided, however, that certain Indebtedness of the Company and its
subsidiaries currently is, and Indebtedness incurred by the Company and its
subsidiaries may be, secured by assets of the Company or its subsidiaries,
subject to certain restrictions described herein. The indenture pursuant to
which the Senior Notes will be issued (the "Indenture") will provide that the
pledge of the capital stock of the Subsidiary Guarantors will be released under
certain circumstances. See "Description of Senior Notes." On a pro forma basis,
as of March 27, 1998, after giving effect to the Offering, the consummation of
the Offers and Consent Solicitations and certain other transactions described
herein, the aggregate principal amount of unsubordinated Indebtedness of the
Company outstanding would have been approximately $2,186 million, of which
approximately $414 million would have been secured by assets other than the
capital stock of the Company's subsidiaries. See "Pro Forma Condensed Combined
Consolidated Financial Data of the Company." The Indenture will limit the
ability of the Company and its subsidiaries to incur additional Indebtedness.
The Senior Notes will be guaranteed (the "Guarantees") on a full,
unconditional, joint and several basis by Host Marriott and Hospitality
(together, the "Guarantors") and by certain of the Company's existing and
future subsidiaries (the "Subsidiary Guarantors"). The Guarantees will be
senior, general obligations of the Subsidiary Guarantors and the Guarantors and
will rank pari passu in right of payment with all other existing and future
senior Indebtedness of the Subsidiary Guarantors and the Guarantors; provided
that certain Indebtedness of the Subsidiary Guarantors and the Guarantors and
their subsidiaries is, and Indebtedness incurred by the Subsidiary Guarantors
and the Guarantors and their subsidiaries may be, secured by assets held by
such Subsidiary Guarantors and the Guarantors and their subsidiaries, subject
to certain restrictions described herein. The Indenture will provide that the
Guarantees will be released under certain circumstances. See "Description of
Senior Notes."
SEE "RISK FACTORS" BEGINNING ON PAGE S-18 FOR A DISCUSSION OF CERTAIN FACTORS
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 SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL OR PRICE UNDERWRITING PROCEEDS
PRINCIPAL AMOUNT TO THE DISCOUNTS AND TO THE
AT MATURITY PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Series A Note due
2005................... $ 400,000,000 % % %
Per Series B Note due
2008................... $1,000,000,000 % % %
Total.................. $1,400,000,000 $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $ .
The Senior Notes are offered severally by the Underwriters subject to prior
sale, when, as and if delivered to and accepted by them, and subject to various
conditions. The Underwriters reserve the right to withdraw, amend or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Senior Notes will be made in New York, New York on or about
August , 1998 in book-entry form through the facilities of The Depository
Trust Company ("DTC") against payment therefor in immediately available funds.
Joint Book-Running Managers
DONALDSON, LUFKIN & JENRETTE BT ALEX. BROWN
--------
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
<PAGE>
THE RITZ-CARLTON, ATLANTA WAS THE COMPANY OBTAINED A CONTROLLING
ACQUIRED IN 1996 AND FEATURES 447 INTEREST IN THE 884-ROOM MARRIOTT
ROOMS. DESERT SPRINGS RESORT AND SPA IN
1997.
LOCATED IN THE HEART OF THE 1,498-ROOM SAN THE COMPANY ACQUIRED A
NEW YORK'S FINANCIAL FRANCISCO MARRIOTT IS CONTROLLING INTEREST IN
DISTRICT, THE 820-ROOM PART OF THE COMPANY'S THE ATLANTA MARRIOTT
MARRIOTT WORLD TRADE ORIGINAL PORTFOLIO. MARQUIS IN 1998 WHICH
CENTER WAS ACQUIRED AND FEATURES 1,671 ROOMS.
CONVERTED TO THE
MARRIOTT BRAND IN
DECEMBER 1995.
THE UNDERWRITERS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SENIOR NOTES IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
NOTICE TO UNITED KINGDOM RESIDENTS
THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF SECURITIES IN THE UNITED
KINGDOM. NO ACTION HAS BEEN TAKEN TO PERMIT THE SENIOR NOTES TO BE OFFERED TO
THE PUBLIC IN THE UNITED KINGDOM. THIS DOCUMENT MAY ONLY BE ISSUED OR PASSED
ON OR INTO THE UNITED KINGDOM TO ANY PERSON TO WHOM THE DOCUMENT MAY LAWFULLY
BE ISSUED OR PASSED ON BY REASON OF, OR OF ANY REGULATION MADE UNDER, SECTION
58 FINANCIAL SERVICES ACT 1986. IT IS THE RESPONSIBILITY OF ALL PERSONS UNDER
WHOSE CONTROL OR INTO WHOSE POSSESSION THIS DOCUMENT COMES TO INFORM
THEMSELVES ABOUT AND TO ENSURE OBSERVANCE OF ALL APPLICABLE PROVISIONS OF THE
PUBLIC OFFERS OF SECURITIES REGULATIONS 1995 AND THE FINANCIAL SERVICES ACT
1986 IN RESPECT OF ANYTHING DONE IN RELATION TO THE SENIOR NOTES IN, FROM OR
OTHERWISE INVOLVING, THE UNITED KINGDOM.
----------------
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus, including the
documents incorporated by reference herein and therein, contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Discussions containing such forward-looking statements may be found
in the material set forth under "Prospectus Supplement Summary," "Risk
Factors," "Business and Properties," and "The REIT Conversion" as well as
within the Prospectus Supplement and the accompanying Prospectus generally. In
addition, when used in this Prospectus Supplement and the accompanying
Prospectus, the words "anticipates," "estimates," "plan," "prospect,"
"expects," "intend," "may be," "objective," "predict," "will," "believes" and
similar expressions are intended to identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: substantial leverage of the Company; the REIT
Conversion (as defined) or any transaction constituting a part thereof not
occuring or occuring on terms and conditions substantially different from the
terms and conditions which are described herein; the Company's success in
implementing its business strategies; the terms of the Company's indebtedness;
competition in, and risks of, the lodging industry; general economic and
business conditions; and other factors included or incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus. These forward-
looking statements speak only as of the date of this Prospectus Supplement.
The Company expressly disclaims any obligation or undertaking to disseminate
any updates and revisions to any forward-looking statement contained or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
S-3
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus
Supplement, the accompanying Prospectus or other documents incorporated by
reference into this Prospectus Supplement and the accompanying Prospectus.
Unless the context otherwise requires, the term "Company" refers to HMH
Properties, Inc. ("HMH Properties") and its subsidiaries and HMC Capital
Resources Holdings Corporation ("CRHC"), a direct wholly owned subsidiary of
Host Marriott, and its subsidiaries. Prior to the issuance of the Senior Notes,
CRHC will be merged with and into HMH Properties (the "1998 Merger"). The
following information and the Combined Consolidated Financial Statements
included elsewhere herein are presented as if CRHC was merged into HMH
Properties for all periods presented, as discussed in Note 1 to the Combined
Consolidated Financial Statements. References herein to "Smith Travel Research"
and to "industry data" are to industry data provided by Smith Travel Research,
which data has been customized to reflect the upscale full-service lodging
segment, in which the Company primarily competes. "Upscale full-service segment
of the lodging industry," as used herein, consists of Marriott Hotels, Resorts
and Suites; Crowne Plaza; Doubletree; Hyatt; Hilton; Radisson; Red Lion;
Sheraton; Westin; and Wyndham.
THE COMPANY
The Company, a wholly owned subsidiary of Hospitality, and an indirect wholly
owned subsidiary of Host Marriott, owns, or holds controlling interests in, the
majority of Host Marriott's lodging properties. The assets of the Company
principally consist of 69 full-service hotel properties as of the date hereof.
These properties are generally operated under the Marriott and Ritz-Carlton
brands and managed by Marriott International, Inc. ("Marriott International").
The Marriott and Ritz-Carlton brands are among the most respected and widely
recognized in the lodging industry. Based on industry data, the Company
believes that its hotels as a group consistently outperform the industry
average occupancy rate by a significant margin and averaged 77.8% occupancy for
1997 compared to 71.0% average occupancy for competing full-service hotels in
the upscale full-service segment of the lodging industry (the segment which
management believes is most representative of the Company's full-service
hotels).
The upscale and luxury full-service segments of the lodging industry are
benefiting from a favorable supply and demand relationship in the United
States, especially in the principal sub-markets in which the Company operates.
Management believes that demand increases have resulted primarily from a strong
domestic economic environment and a corresponding increase in business travel.
In spite of increased demand for rooms, the room supply growth rate in the
full-service segment has not increased in kind. Management believes that this
slower increase in the supply growth rate in the full-service segment is
attributable to many factors, including the limited availability of attractive
building sites for full-service hotels, the lack of available financing for new
full-service hotel construction and the availability of existing full-service
properties for sale at a discount to their replacement cost. The relatively
high occupancy rates of the Company's hotels, along with the increased demand
for full-service hotel rooms, have allowed the managers of the Company's hotels
to increase average daily room rates primarily by replacing certain discounted
group business with higher-rated group and transient business and by
selectively raising room rates. As a result, on a comparable basis, room
revenues per available room ("REVPAR") for the Company's full-service hotels
increased approximately 13.1% for 1997 over the prior year. Furthermore,
because the Company's lodging property operations have a high fixed-cost
component, increases in REVPAR generally yield greater percentage increases in
EBITDA (as defined in Note 5 to "Summary Historical and Pro Forma Financial
Data"). Accordingly, the approximately 13.1% increase in the Company's REVPAR
for 1997 over the prior year resulted in an approximately 17.0% increase in
comparable full-service EBITDA. The Company expects this supply/demand
imbalance in the upscale and luxury full-service segments to continue in a
number of sub-markets in which the Company's hotels are located, which should
result in improved REVPAR and EBITDA at its hotel properties in the near term;
however, there can be no assurance that such supply/demand imbalance will
continue or that REVPAR and EBITDA will continue to improve.
S-4
<PAGE>
BUSINESS STRATEGY
The Company's business strategy is to continue to focus on maximizing the
profitability of its existing full-service portfolio and acquiring additional
high-quality, full-service hotel properties, including interests in joint
ventures, partnerships or other entities holding such properties. Although
competition for acquisitions has increased, the Company believes that the
upscale and luxury full-service segments of the market continue to offer
opportunities to acquire assets at attractive multiples of cash flow and at
discounts to replacement value, including under-performing hotels which
management believes can be improved by conversion to the Marriott or Ritz-
Carlton brands. In addition, consistent with Host Marriott's acquisition of the
12 hotels and a mortgage loan secured by a thirteenth hotel controlled by The
Blackstone Group, a Delaware limited partnership, and a series of funds
controlled by Blackstone Real Estate Partners, a Delaware limited partnership
(collectively, the "Blackstone Entities") (the "Blackstone Acquisition"), the
Company intends to undertake a multi-brand strategy by establishing
relationships with other high-quality, well-recognized brands such as Four
Seasons, Hyatt and Swissotel. See "The REIT Conversion--Acquisitions by the
Operating Partnership." This multi-brand strategy will allow the Company to
diversify its existing hotel portfolio (as many markets already have a strong
representation of Marriott brand hotels) and increase the Company's pool of
potential acquisitions. The Company will focus on upscale and luxury full-
service hotels in difficult-to-duplicate locations with high barriers to entry,
such as hotels located in downtown, airport and resort/convention locations,
which are operated by quality managers. The Company believes that the upscale
and luxury full-service segments are promising because:
. The Company believes that there is a limited supply of new upscale and
luxury full-service hotel rooms currently under construction in the sub-
markets in which the Company operates. According to Smith Travel
Research, from 1988 to 1991, upscale full-service room supply for the
Company's competitive set increased an average of approximately 4%
annually, which resulted in an oversupply of rooms in the industry.
However, this growth slowed to an average of approximately 1% from 1991
to 1997. Furthermore, the lead time from conception to completion of a
full-service hotel is generally three to five years or more in the types
of markets in which the Company is principally pursuing acquisitions.
Management believes that this long lead time will contribute to the
continued low growth of room supply relative to the growth of room demand
in the upscale and luxury full-service segments through the year 2000.
. The Company believes that many desirable hotel properties are currently
held by inadvertent owners such as banks, insurance companies and other
financial institutions, both domestic and international, which are
motivated and willing sellers. In recent years, the Company has acquired
a number of properties from inadvertent owners at significant discounts
to replacement cost, including luxury hotels operating under the Ritz-
Carlton brand. While, in the Company's experience to date, these sellers
have been primarily U.S. financial institutions, the Company believes
that numerous international financial institutions are also inadvertent
owners of lodging properties in the U.S. and have only recently begun to
dispose of such properties. The Company expects that there will be
increased opportunities to acquire lodging properties from international
financial institutions and expects to dedicate significant resources to
pursue these opportunities.
. The Company believes that there are numerous opportunities to improve the
performance of acquired hotels by replacing the existing hotel manager
with Marriott International and converting the hotel to the Marriott
brand. Based on data provided by Smith Travel Research, the Company
believes that Marriott-flagged properties have consistently outperformed
the industry. Demonstrating the strength of the Marriott brand name, the
average occupancy rate for the Company's comparable full-service
properties was 78.6% for 1997, compared to an average occupancy rate of
71.0% for competing upscale full-service hotels. In addition, the
Company's comparable properties had a 17% REVPAR premium over its
competitive set in 1997. Accordingly, management anticipates that
additional non-Marriott brand full-service hotels acquired by the Company
in the future and converted to the Marriott brand
S-5
<PAGE>
should achieve higher occupancy rates and average room rates than has
previously been the case for those hotels as the properties begin to
benefit from Marriott's brand name recognition, reservation system and
group sales organization. Twelve of the 56 full-service hotels acquired
by the Company since 1994 were converted to the Marriott brand following
their acquisition.
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 market information provide a competitive advantage with respect to
identifying, evaluating and acquiring hotel assets. The Company intends to
expand its full-service hotel portfolio as cash flow becomes available from
operations or through additional financings as permitted under the terms and
restrictions of the Company's indebtedness. In carrying out this strategy, the
Company evaluates each opportunity on an individual basis and may from time to
time elect to acquire controlling interests in a hotel joint venture, rather
than pursue the outright acquisition of a property, when it believes its
return on investment will be maximized by so doing. The Company may make
acquisitions directly or through its subsidiaries depending on a variety of
factors, including the existence of debt, the form of investment, the
restrictions and requirements of its debt documents and the availability of
funds.
In 1998, the Company acquired controlling interests in (i) the partnership
that owns the 1,671-room Atlanta Marriott Marquis for $239 million, including
the assumption of $164 million of mortgage debt, and (ii) the partnership that
owns the 359-room Albany Marriott, the 350-room San Diego Marriott Mission
Valley and the 320-room Minneapolis Marriott Southwest for $50 million in
aggregate. In addition, the Company acquired the 289-room Park Ridge Marriott
for $24 million.
The Company acquired, or purchased controlling interests in, 12 full-service
properties in 1997, including the acquisition of the 306-room Ritz-Carlton,
Marina del Rey for $57 million and the 300-room Coronado Island Marriott
Resort (formerly the Le Meridien hotel), which was converted to the Marriott
brand, for $54 million and the acquisition of controlling interests in the
404-room Norfolk Marriott Waterside for $33 million, the 884-room Desert
Springs Marriott Resort for $184 million, the 380-room Manhattan Beach
Marriott Hotel (formerly the Manhattan Beach Radisson Plaza Hotel), which was
converted to the Marriott brand, for $29 million and the 299-room Ontario
Airport Marriott for $22 million. The Company acquired a controlling interest
in the Chesapeake Hotels Limited Partnership ("CHLP"), which owns six
additional full-service properties (2,994 rooms), along with $105 million in
CHLP receivables from Host Marriott for approximately $135 million. The
Company already owned the non-recourse second mortgages on the CHLP
properties. The Company also completed the acquisition of the 504-room New
York Marriott Financial Center following the acquisition of the mortgage on
the hotel for $101 million in late 1996.
In 1996, the Company acquired, or purchased controlling interests in, nine
full-service properties with 3,124 rooms for approximately $292 million,
including the acquisition, through foreclosure, of a controlling interest in
the 250-room Newport Beach Marriott Suites and the acquisition of a
controlling interest in a venture that owns the 400-room Pittsburgh Marriott
City Center. In addition, the Company acquired a controlling interest in the
Marriott Suites Limited Partnership which owns four hotels (the 251-room
Marriott Suites Scottsdale, the 254-room Marriott Suites Atlanta Midtown, the
254-room Marriott Suites Downers Grove and the 253-room Marriott Suites Costa
Mesa). The Company acquired seven full-service properties (3,133 rooms) for
approximately $329 million in 1995.
Consistent with its strategy of focusing on the full-service segment of the
lodging industry, the Company has opportunistically sold certain of its
properties. During 1995, the Company sold to and leased back from an unrelated
real estate investment trust (the "Purchaser REIT") 37 of its Courtyard
properties. The Company transferred its rights to receive the deferred
proceeds and obligations to perform under the lease to a subsidiary of Host
Marriott in 1995. Also, in 1995, the Company sold its remaining four Fairfield
Inns for approximately $6 million in cash. In 1996, the Company entered into
an agreement with the Purchaser REIT and sold and leased back 16 Courtyard
properties and 18 Residence Inns for approximately $349 million (10% of which
was
S-6
<PAGE>
deferred). Host Marriott purchased the Company's rights to the deferred
proceeds and obligations under the lease for the 16 Courtyard properties at
their fair market value. With the completion of these transactions, 100% of the
Company's owned properties are in the full-service segment. The Company has
reinvested all of the proceeds in the acquisition of full-service hotel
properties. In May 1998, the Company sold the 191-room Napa Valley Marriott for
approximately $21 million and recorded a pre-tax gain of approximately $10
million. In September 1997, the Company sold the Sheraton Elk Grove Suites for
$16 million (which approximated its carrying value).
The principal executive offices of the Company are located at 10400 Fernwood
Road, Bethesda, Maryland, 20817-1109.
THE REIT CONVERSION
On April 17, 1998, Host Marriott announced its intention to convert its
business operations (including those business operations conducted by and
through the Company) to qualify as a real estate investment trust ("REIT")
effective as of January 1, 1999 and to conduct its operations through the
Operating Partnership (as defined) as an umbrella partnership real estate
investment trust (an "UPREIT" and such conversion and related transactions, the
"REIT Conversion"). As a result of the REIT Conversion, the Operating
Partnership (defined below) will become the successor obligor under the Senior
Notes. See "The REIT Conversion." Consummation of neither the REIT Conversion
nor any part thereof is a condition to the consummation of the Offering and
there can be no assurance that the REIT Conversion will happen.
Host Marriott's reasons for implementing the REIT Conversion include the
following:
. Host Marriott believes the REIT Conversion will improve its financial
flexibility and allow it to continue to strengthen its balance sheet
by reducing its overall debt-to-market capitalization ratio over time.
. As a REIT, Host Marriott believes it will be able to compete more
effectively with other public lodging real estate companies that
already are organized as REITs and improve investor understanding of
its operations, thus making performance comparisons with its peers
more meaningful.
. By becoming a dividend paying company, Host Marriott believes its
shareholder base will expand to include investors attracted by yield
and asset quality.
. Host Marriott believes the adoption of the UPREIT structure will
facilitate the tax-deferred acquisition of other hotels (such as in
the case of the Blackstone Acquisition).
Contribution of Lodging Assets, Including the Assets of the Company, to the
Operating Partnership. As a preliminary step to the REIT Conversion, at various
times during 1998, Host Marriott will contribute its wholly owned full-service
hotel assets, its interests in the Partnerships (defined below) and
substantially all of its other assets (excluding, primarily, its senior living
assets and cash to be distributed to Host Marriott shareholders) to Host
Marriott, L.P., a Delaware limited partnership (the "Operating Partnership"),
in exchange for (i) a number of units of limited partnership interests in the
Operating Partnership ("OP Units") equal to the number of outstanding shares of
common stock of Host Marriott on the date that the REIT Conversion is
consummated (the "Conversion Date"), (ii) preferred partnership interests in
the Operating Partnership corresponding to any shares of Host Marriott
preferred stock outstanding on the Conversion Date and (iii) the assumption by
the Operating Partnership of substantially all liabilities of Host Marriott.
As part of these contributions, it is currently contemplated that the Company
will be merged with and into the Operating Partnership (the "Partnership
Merger") and that the Operating Partnership will be the surviving entity and
the successor obligor under the Senior Notes, the Credit Facility and the
Existing Senior Notes, if any remain outstanding after consummation of the
Offers and Consent Solicitations. Additionally, at or prior to the
S-7
<PAGE>
Conversion Date, most of the wholly owned corporate subsidiaries of the Company
will be merged into newly created limited liability company or limited
partnership subsidiaries of the Operating Partnership.
Following the consummation of these asset contributions, if they occur, the
Operating Partnership and its subsidiaries would directly own all of Host
Marriott's wholly owned hotels, Host Marriott's interests in the Partnerships
and substantially all of Host Marriott's other assets. Host Marriott will not
contribute to the Operating Partnership certain other assets, principally
consisting of 31 senior living communities, the Swissotel Investment (as
defined below) and controlling interests in the Lessees (as defined below).
These assets are owned or will be acquired by HMC Senior Communities, Inc., a
Delaware corporation ("SLC"), currently a wholly owned subsidiary of Host
Marriott. SLC will become a separate publicly traded company as part of the
shareholder distribution described below. See "The REIT Conversion--Host REIT
Merger and Shareholder Distribution."
Acquisitions by the Operating Partnership. Host Marriott and several of its
separate wholly owned subsidiaries (including subsidiaries of the Company) are
the sole general partners of several limited partnerships (together, the
"Partnerships") which, in the aggregate, own or hold a controlling interest in
32 full-service hotels operating under the Marriott and Ritz-Carlton brands.
Host Marriott owns controlling interests in 19 of these properties, which it
consolidates for financial reporting purposes. It is currently contemplated
that on the Conversion Date, certain newly-formed direct and indirect wholly
owned subsidiaries of the Operating Partnership will be merged into those
Partnerships whose partners will have provided necessary approvals to such
mergers (the "REIT Mergers"). In connection with each such REIT Merger, each
limited partner of a Partnership will receive, at such limited partner's
election, either OP Units or an unsecured promissory note. For a complete
description of the consideration for the merger of such Partnerships, see "The
REIT Conversion--Acquisitions by the Operating Partnership." In the event that
the limited partners of any such Partnership do not approve such mergers, such
Partnership will continue as a separate partnership, but the Operating
Partnership will transfer its general or limited partnership interests therein
to a Non-Controlled Subsidiary (as defined below). The Operating Partnership
also is expected to acquire, from unaffiliated partners, partnership interests
in certain other Partnerships in exchange for OP Units. As a result, the
Operating Partnership will own substantially all of the interests in those
Partnerships. Host Marriott is seeking the consent of unaffiliated partners in
certain other Partnerships, where the partners will retain their interests, to
a lease of the hotels owned by such Partnerships to a Lessee (as defined). If
such consent is obtained, then the Operating Partnership will remain a partner
in such Partnerships or transfer its partnership interest therein to a Non-
Controlled Subsidiary. In the event that such consent is not obtained, then the
Operating Partnership may transfer its partnership interests in such
Partnerships to a Non-Controlled Subsidiary.
The Operating Partnership also is expected to acquire on the Conversion Date
from the Blackstone Entities (as defined) ownership of, or a controlling
interest in, twelve hotels and a mortgage loan secured by a thirteenth hotel.
As part of the Blackstone Acquisition, Host Marriott will acquire a 25%
interest in the U.S. Swissotel management company (the "Swissotel Investment")
which will be transferred to SLC in connection with the distribution of SLC
stock to shareholders of Host Marriott. In exchange for these assets, the
Operating Partnership will (i) issue to the Blackstone Entities approximately
43.7 million OP Units, which OP Units shall be convertible into Common Shares
of Host REIT (as defined), (ii) assume or repay approximately $600 million of
debt, (iii) make cash payments totaling approximately $262 million and (iv)
distribute shares of SLC common stock and additional cash to the Blackstone
Entities.
Contribution of Assets to Non-Controlled Subsidiaries. The Operating
Partnership will organize one or more taxable corporations in which the
Operating Partnership will own 95% of the economic interest but no voting stock
(the "Non-Controlled Subsidiaries"). The Non-Controlled Subsidiaries will hold
various assets contributed by Host Marriott and its subsidiaries to the
Operating Partnership, the direct ownership of which by the Operating
Partnership could jeopardize the status of Host REIT as a REIT. These assets
primarily will consist of partnership or other interests in hotels which are
not leased. As a result, the Operating Partnership will
S-8
<PAGE>
have no control over the operation or management of the hotels or other assets
owned by the Non-Controlled Subsidiaries even though it may depend upon the
Non-Controlled Subsidiaries for a significant portion of its revenues. In
exchange for the contribution of these assets to the Non-Controlled
Subsidiaries, the Operating Partnership will receive nonvoting common stock
representing 95% of the total economic interests of the Non-Controlled
Subsidiaries. One or more non-controlled affiliates of Host Marriott will
acquire all of the voting common stock representing the remaining 5% of the
total economic interests, and 100% of the voting control, of each Non-
Controlled Subsidiary.
Lease of Hotels. Upon obtaining requisite shareholder approval, it is
contemplated that Host Marriott will merge with and into Host Marriott Trust, a
Maryland REIT ("Host REIT"). Under current federal income tax law, a REIT
cannot derive income from the operation of hotels but can derive rental income
by leasing hotels; therefore, the Operating Partnership and its subsidiaries
will lease their hotel properties to certain subsidiaries of SLC (each, a
"Lessee"). There will be a separate Lessee for each hotel property or group of
hotel properties that has a separate mortgage financing or that has owners in
addition to the Operating Partnership and its wholly owned subsidiaries. Each
Lessee will be a limited liability company or limited partnership whose purpose
will be limited to acting as Lessee under an applicable lease. The Lessees
under leases of hotels that are managed by subsidiaries of Marriott
International will be owned 99% by a wholly owned subsidiary of SLC and 1% by
Marriott International or its appropriate subsidiary. The LLC operating
agreement or the limited partnership agreement, as applicable, for such Lessees
will provide that the SLC member or general partner of the Lessee will have
full control over the management of the business of the Lessee, except with
respect to certain decisions for which the consent of both members or partners
will be required. The existing hotel management agreements will be assigned to
the Lessees for the term of the applicable leases, although the Operating
Partnership will remain obligated under such management agreements.
Host REIT Merger and Shareholder Distribution. At the time of the merger of
Host Marriott into Host REIT, Host Marriott shareholders will receive, for each
share of Host Marriott common stock, one common share of Host REIT ("Common
Share"), a fraction of a share of common stock of SLC and an amount of cash to
be determined. The aggregate value of the SLC common stock and cash to be
distributed to shareholders of Host Marriott is currently estimated to be
approximately $400 to $550 million. Certain SLC common stock and additional
cash will also be transferred to the Blackstone Entities. The actual amount of
the cash distribution will be based upon the estimated amount of accumulated
earnings and profits of Host Marriott as of the last day of its fiscal year
ending on or immediately following the Conversion Date and will take into
account the Blackstone Entities' participation therein. Following this
transaction, Host REIT will be the general partner of the Operating Partnership
and SLC will be a separate publicly traded company which will principally own
31 senior living communities, the Swissotel Investment and controlling
interests in the Lessees. In order to qualify as a REIT, Host Marriott is
required to distribute its accumulated earnings and profits to its shareholders
not later than December 31, 1999.
Conditions to Consummation of the REIT Conversion. The consummation of the
REIT Conversion is subject to the satisfaction or waiver of a number of
conditions, including (i) successful completion of the Offers and Consent
Solicitations, (ii) Host Marriott shareholder approval of the merger of Host
Marriott with and into Host REIT, (iii) Host Marriott having received all
required third party consents (including consents from various lenders and the
partners in the various Partnerships) to certain of the transactions comprising
the REIT Conversion, (iv) the determination by Host Marriott's board of
directors that Host REIT can elect to be treated as a REIT for federal income
tax purposes effective no later than the first full taxable year commencing
after the Conversion Date and (v) Congress shall not have enacted legislation,
or proposed legislation with a reasonable possibility of being enacted, that
would have the effect of substantially impairing the ability of Host REIT to
qualify as a REIT or the Operating Partnership to qualify as a partnership or
substantially increasing the federal tax liabilities of Host REIT or other
reductions in the expected benefits resulting from the REIT Conversion, which
determination will be made by Host Marriott, in its discretion. Host Marriott's
board of directors, however, retains the right to waive any of these conditions
or to decide not to pursue the REIT Conversion even if such conditions are
satisfied.
S-9
<PAGE>
ORGANIZATIONAL STRUCTURE UPON CLOSING OF THE OFFERING
The following chart sets forth the contemplated organizational structure of
Host Marriott and its subsidiaries, on a pro forma basis as of March 27, 1998,
upon the closing of the Offering after application of the net proceeds to the
Company and the initial borrowing under the Credit Facility, consummation of
the Offers and Consent Solicitations and consummation of the 1998 Merger. See
"Use of Proceeds" and "The Offers to Purchase and Consent Solicitations."
For a presentation of the organizational structure contemplated upon
consummation of the REIT Conversion, see "The REIT Conversion--Final
Organizational Structure."
[FLOW CHART APPEARS HERE]
- --------
(1) Under the terms of the Senior Notes, the obligations of the guarantee of
Host Marriott will be released upon consummation of the REIT Conversion
which includes, among other things, contributions of substantially all of
the hotel assets of Host Marriott to the Operating Partnership.
(2) Represents outstanding senior indebtedness of Host Marriott.
(3) Represents Host Marriott-obligated mandatorily redeemable securities of a
subsidiary trust.
(4) Based on closing price of $18 3/4 on July 14, 1998 and 204.2 million
outstanding common shares.
(5) Under the terms of the Senior Notes, the guarantee of Hospitality will be
released when Hospitality is either merged into the Operating Partnership
or liquidated as part of the REIT Conversion which includes, among other
things, contributions of substantially all of the hotel assets of Host
Marriott to the Operating Partnership.
(6) Assumes 100% participation in each of the Offers. See "The Offers to
Purchase and Consent Solicitations."
(7) The Company expects that at the consummation of the Offering, the
outstanding balance under the $1,250 million Credit Facility will be
approximately $372 million. See "Description of Certain Indebtedness--
Credit Facility."
(8) The Senior Notes initially will be guaranteed by the Initial Subsidiary
Guarantors and, under certain circumstances, other subsidiaries of the
Company, subject to release under certain circumstances. See "Description
of Senior Notes." However, not all subsidiaries of the Company are, or will
be, Subsidiary Guarantors.
S-10
<PAGE>
ORGANIZATIONAL STRUCTURE UPON CONSUMMATION OF THE REIT CONVERSION
The following chart sets forth a summary of the contemplated organizational
structure of Host Marriott and its subsidiaries upon consummation of the REIT
Conversion, on a pro forma basis as of March 27, 1998. See "The REIT
Conversion--Pro Forma Financial Data." For a more detailed organizational
structure of Host Marriott and its subsidiaries upon the consummation of the
REIT Conversion, see "The REIT Conversion--Final Organizational Structure."
[FLOW CHART APPEARS HERE]
- --------
(1) Under the terms of the Senior Notes, the guarantee of Host Marriott will be
released upon consummation of the REIT Conversion, which includes, among
other things, contributions of substantially all of the hotel assets of
Host Marriott to the Operating Partnership. Thus, Host REIT will not be a
guarantor.
(2) Assumes 100% participation in each of the Offers.
(3) Consists of $372 million in draws incurred at the time of the Offering and
an additional amount of approximately $75 million expected to be drawn
under the Credit Facility, as of the Conversion Date. The Operating
Partnership is expected to have an additional $803 million available under
the Credit Facility, as of the Conversion Date, subject to the terms and
conditions thereof.
(4) Represents Operating Partnership-obligated mandatorily redeemable
securities of a subsidiary trust.
(5) The Senior Notes will be guaranteed by the Initial Subsidiary Guarantors
and, under certain circumstances, other subsidiaries of the Operating
Partnership, subject to release under certain circumstances. See
"Description of Senior Notes." However, not all subsidiaries of the
Operating Partnership are, or will be, Subsidiary Guarantors.
S-11
<PAGE>
THE OFFERS TO PURCHASE AND CONSENT SOLICITATIONS
On June 26, 1998, the Company commenced (i) an offer to purchase for cash any
and all of the Company's (A) 9 1/2% Senior Secured Notes due 2005 (the "9 1/2%
Senior Notes"), (B) 8 7/8% Senior Notes due 2007 (the "8 7/8% Senior Notes")
and (C) 9% Senior Notes due 2007 (the "9% Senior Notes" and, together with the
9 1/2% Senior Notes and the 8 7/8% Senior Notes, the "Existing Senior Notes"),
and (ii) a solicitation of consents (the "Consents") from the registered
holders of each issue of Existing Senior Notes to certain amendments (the
"Proposed Amendments") to the indentures under which such Existing Senior Notes
were issued (also referred to herein as the "Existing Senior Notes Indentures")
to eliminate or modify substantially all of the restrictive covenants and
certain other provisions of each Existing Senior Notes Indenture. The offers to
purchase are also referred to herein as the "Offers" and the solicitation of
consents are also referred to herein as the "Consent Solicitations." The Offers
and Consent Solicitations are being made by the Company pursuant to the Offer
to Purchase and Consent Solicitation, dated June 26, 1998, as amended (the
"Offer to Purchase and Consent Solicitation").
As of July 13, 1998 (the "Consent Date"), the Company had received valid
tenders of, and duly executed Consents to the Proposed Amendments to the
applicable Existing Senior Notes Indenture with respect to, (i) $578,052,000
aggregate principal amount of the 9 1/2% Senior Notes (representing 96.34% of
the outstanding principal amount of 9 1/2% Senior Notes), (ii) $599,475,000
aggregate principal amount of 8 7/8% Senior Notes (representing 99.91% of the
outstanding principal amount of 8 7/8% Senior Notes) and (iii) $349,725,000
aggregate principal amount of 9% Senior Notes (representing 99.92% of the
outstanding 9% Senior Notes). Under the terms of each Offer and Consent
Solicitation, from and after the Consent Date, no Existing Senior Notes
tendered pursuant to an Offer may be withdrawn and no corresponding Consent may
be revoked unless such Offer is terminated without any Existing Senior Notes
being purchased thereunder.
The Company's obligation to consummate the Offers and Consent Solicitations
remains subject to certain conditions described in the Offer to Purchase and
Consent Solicitation, including, among other things, the Company's having
consummated the Offering and made other financing arrangements necessary to
consummate the Offers and the Consent Solicitations. See "Description of
Certain Indebtedness--Credit Facility." The Company may supplement or amend the
terms of any of the Offers and Consent Solicitations. The Company and the
Underwriters expressly disclaim any obligation or undertaking to disseminate to
potential investors in the Senior Notes any updates or revisions to the Offers
or Consent Solicitations.
Each Offer will expire at 9:00 a.m., New York City time, on July 27, 1998,
unless extended by the Company.
CREDIT FACILITY
The net proceeds from the Offering and net borrowings under the Credit
Facility (which together are expected to aggregate approximately $1,717
million) will be used by the Company to purchase all Existing Senior Notes
tendered to the Company pursuant to the Offers, to make Consent Payments (as
defined) to registered holders who tendered their Existing Senior Notes and
delivered their Consents to the Company on or prior to the stated Consent Date
and to pay the Company's expenses relating to the Offers and Consent
Solicitations. The Company is negotiating with a number of financial
institutions, led by Bankers Trust Company, an affiliate of BT Alex. Brown
Incorporated, one of the Underwriters, with respect to a $1,250 million credit
facility to be provided by a syndicate of lenders (the "Credit Facility"). The
Credit Facility is expected to provide the Company with (i) a $350 million term
loan facility (subject to being increased as described in "Description of
Certain Indebtedness--Credit Facility") and (ii) a $900 million revolving
credit facility. Initially, the term loan facility will be funded at the
closing of the Credit Facility (which will be concurrent with the closing of
the Offering) to be used as a portion of the funds necessary to consummate the
Offers and Consent Solicitations. For a summary of the expected terms of the
Credit Facility, see "Description of Certain Indebtedness--Credit Facility."
S-12
<PAGE>
THE OFFERING
ISSUER.......................... HMH Properties, Inc.
SECURITIES OFFERED.............. $400,000,000 of % Series A Senior Notes due
2005 (the "Series A Notes") and
$1,000,000,000 of % Series B Senior Notes
due 2008 (the "Series B Notes"and together
with the Series A Notes, the "Senior Notes").
MATURITY........................ The Series A Notes will mature on July ,
2005 and the Series B Notes will mature on
July , 2008.
INTEREST PAYMENT DATES.......... Interest on the Series A Notes will be
payable semi-annually in arrears on March 15
and September 15 of each year, commencing on
March 15, 1999. Interest on the Series B
Notes will be payable semi-annually in
arrears on June 15 and December 15 of each
year, commencing on December 15, 1998.
RANKING......................... The Senior Notes will be senior, general
obligations of the Company. The Senior Notes
will rank pari passu in right of payment with
all existing and future unsubordinated
Indebtedness of the Company (including the
Credit Facility and the Existing Senior
Notes, if any remain outstanding after the
Offers). As of March 27, 1998, on a pro forma
basis after giving effect to the Offering,
the consummation of the Offers and Consent
Solicitations and certain other transactions
described herein, the aggregate principal
amount of unsubordinated Indebtedness of the
Company would have been approximately $2,186
million of which approximately $414 million
was secured by assets other than the capital
stock of the Company's subsidiaries.
SECURITY........................ The Senior Notes will be secured on an equal
and ratable basis with the Credit Facility,
the Existing Senior Notes, if any remain
outstanding after the Offers, and certain
future unsubordinated Indebtedness of the
Company ranking pari passu with the Senior
Notes by a first priority pledge of all of
the capital stock of all but one of the
Initial Subsidiary Guarantors and by certain
subsidiaries of the Company whose capital
stock is pledged in the future to secure the
Company's obligations under the Credit
Facility, subject to certain exceptions. The
Indenture will provide that the pledge of
such capital stock will be released under
certain circumstances. See "Description of
Senior Notes--Security."
GUARANTEES...................... The Senior Notes will be guaranteed on a
full, unconditional, joint and several basis
by Host Marriott, Hospitality and the
Subsidiary Guarantors. The Guarantees of Host
Marriott and Hospitality will be released
upon consummation of the REIT Conversion. See
"Description of Senior Notes--Guarantees."
S-13
<PAGE>
OPTIONAL REDEMPTION............. The Series A Notes may be redeemed at the
option of the Company, in whole or in part,
on or after July , 2002 at a premium to par
declining to par in 2005, plus accrued and
unpaid interest, if any, through the
redemption date. The Series B Notes may be
redeemed at the option of the Company, in
whole or in part, on or after July , 2003 at
a premium to par declining to par in 2006,
plus accrued and unpaid interest, if any,
through the redemption date. See "Description
of Senior Notes--Optional Redemption."
CERTAIN COVENANTS............... The Indenture will contain covenants that,
among other things, restrict the ability of
the Company and its subsidiaries to (i) incur
additional Indebtedness, (ii) pay dividends
or make other distributions or restricted
payments, (iii) create certain liens and (iv)
enter into certain mergers and
consolidations. The covenants have been
structured to permit the REIT Conversion,
including the Blackstone Acquisition. The
covenants do not require the consummation of
the REIT Conversion and there is no assurance
that the REIT Conversion will happen. The
Indenture will provide that upon consummation
of the REIT Conversion and for so long as the
Company operates as a REIT, the Company will
be subject to a different limitation on the
ability to pay dividends and to make other
distributions and restricted payments than
when the Senior Notes are issued.
Additionally, the Indenture will provide that
upon the Company's attaining, and so long as
the Company maintains, an investment grade
long-term indebtedness rating, certain
restrictive covenants and other provisions
will no longer be operative under the
Indenture. See "Description of Senior Notes--
Certain Covenants."
USE OF PROCEEDS................. The net proceeds to the Company from the
Offering, together with borrowings under the
Credit Facility and available cash from the
Company, will be used by the Company to
consummate the Offers and Consent
Solicitations. See "Use of Proceeds."
RISK FACTORS
Prospective investors in the Senior Notes should carefully consider the
matters set forth herein under "Risk Factors."
S-14
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary combined consolidated financial data of
the Parent Guarantor (as defined herein) and pro forma financial data for the
Company and Host Marriott for the fifty-two week period ended March 27, 1998
(the "LTM"). The unaudited pro forma financial data reflects the transactions
detailed in the "Pro Forma Condensed Combined Consolidated Financial Data of
the Company" and "The REIT Conversion--Pro Forma Financial Data" included
elsewhere herein. The pro forma financial data set forth below may not
necessarily be 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 is derived from and should be
read in conjunction with the Company's audited Combined Consolidated Financial
Statements and Notes thereto, the unaudited First Quarter 1998 Condensed
Combined Consolidated Financial Statements and Notes thereto, the "Selected
Historical Financial Data" and the "Pro Forma Condensed Combined Consolidated
Financial Data of the Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "The REIT Conversion--Pro
Forma Financial Data" included elsewhere herein or incorporated by reference
into this Prospectus Supplement. The data presented below is unaudited.
<TABLE>
<CAPTION>
FIFTY-
TWO WEEKS ENDED MARCH 27, 1998(1)
--------------------------------------
AT CONSUMMATION UPON REIT
OF THE OFFERING CONVERSION
------------------------- ------------
OPERATING
COMPANY PARENT PARTNERSHIP
PRO FORMA(2) GUARANTOR(3) PRO FORMA(4)
------------ ------------ ------------
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $650 $708 $1,101
Operating profit...................... 311 263 566
Minority interest..................... 5 37 11
Corporate expenses.................... 19 31 43
Interest expense...................... 182 174 418
Dividends on Convertible Preferred
Securities of subsidiary trust....... -- 37 37
Interest income....................... 9 24 26
Net income............................ 68 69 79
OTHER OPERATING DATA:
EBITDA(5)............................. $440 $388 $958
Cash interest expense(6).............. 176 164 391
Net cash interest expense(7).......... 168 N/A N/A
Depreciation and amortization......... 128 142 329
Maintenance capital expenditures(8)... 76 74 153
RATIO DATA:
EBITDA to net cash interest
expense(7)........................... 2.6x N/A N/A
EBITDA to cash interest expense....... 2.5 2.4x 2.5x
EBITDA less maintenance capital
expenditures to net cash interest
expense(7)........................... 2.2 N/A N/A
EBITDA less maintenance capital
expenditures to cash interest
expense.............................. 2.1 1.9 2.1
Net debt to EBITDA(9)................. 4.2 4.2 5.0
Ratio of earnings to fixed
charges(10).......................... 1.6 1.2 1.2
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 27, 1998
---------------------------------------
AT CONSUMMATION UPON REIT
OF OFFERING CONVERSION
------------------------- ------------
OPERATING
COMPANY PARENT PARTNERSHIP
PRO FORMA(2) GUARANTOR(3) PRO FORMA(4)
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
marketable securities............... $ 323 $ 303 $ 74
Total assets......................... 3,390 4,427 8,095
Total debt........................... 2,186 1,928(11) 4,901
Shareholder's equity................. 852 1,228 1,903
</TABLE>
S-15
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF THE COMPANY
The following table presents summary combined consolidated historical
financial data of the Company for the fiscal year ended January 2, 1998 and the
twelve weeks ended March 27, 1998 ("First Quarter 1998") and summary combined
consolidated pro forma financial data of the Company for the fiscal year ended
January 2, 1998, the twelve weeks ended March 28, 1997 ("First Quarter 1997"),
First Quarter 1998 and the LTM. The unaudited pro forma financial data reflects
(i) inclusion of the operating results of hotels acquired in 1997 and 1998 and
exclusion of operating results of hotels sold in 1997 and 1998 as if each
acquisition or disposition had occurred at the beginning of the period
indicated and (ii) the consummation of the refinancing of the Existing Senior
Notes. The pro forma financial data set forth below may not necessarily be
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 is derived from and should be read in
conjunction with the Company's audited Combined Consolidated Financial
Statements and Notes thereto, the unaudited First Quarter 1998 Condensed
Combined Consolidated Financial Statements and Notes thereto, the "Selected
Historical Financial Data" "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the "Pro Forma Condensed Combined
Consolidated Financial Data of the Company" included elsewhere herein. The data
presented below is unaudited except for the historical income statement data
for fiscal year 1997 which was derived from the audited financial statements.
The Company's fiscal year ends on the Friday closest to December 31.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(2)
-------------- ----------------------------------
FIFTY-TWO
FISCAL FIRST FISCAL FIRST QUARTER WEEKS ENDED
YEAR QUARTER YEAR -------------- MARCH 27,
1997 1998 1997 1997 1998 1998(1)
------ ------- ------ ------ ------ -----------
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $500 $166 $637 $ 162 $ 175 $650
Operating profit............ 231 86 302 82 91 311
Minority interest........... 1 -- 5 1 1 5
Corporate expenses.......... 18 5 18 4 5 19
Interest expense............ 135 41 182 41 41 182
Interest income............. 28 6 7 3 5 9
Income before extraordinary
items...................... 62 28 61 23 30 68
OTHER OPERATING DATA:
EBITDA(5)................... $347 $116 $428 $ 109 $ 119 $440
Cash interest expense(6).... 176
Net cash interest
expense(7)................. 168
Depreciation and
amortization............... 100 28 129 30 29 128
Maintenance capital
expenditures(8)............ 55 15 75 15 16 76
RATIO DATA:
EBITDA to net cash interest
expense(7)................. 2.6x
EBITDA less maintenance
capital expenditures to net
cash interest expense(7)... 2.2
Net debt to EBITDA(9)....... 4.2
Ratio of earnings to fixed
charges(10)................ 1.7x 2.1x 1.6x 1.9x 2.1x 1.6
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 27, 1998
-------------------------
ACTUAL PRO FORMA(2)
---------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term marketable
securities........................................ $ 351 $ 323
Total assets....................................... 3,333 3,390
Total debt......................................... 1,986 2,186
Shareholder's equity............................... 998 852
</TABLE>
S-16
<PAGE>
HOTEL PERFORMANCE
The following table sets forth key performance statistics of the Company's
properties:
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL YEAR
---------------- ----------------
1998 1997 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
COMPARABLE FULL-SERVICE HOTELS(12)
Number of properties...................... 54 54 38 38
Number of rooms........................... 22,071 22,071 16,825 16,795
Average daily rate........................ $138.08 $126.75 $124.35 $112.26
Occupancy %............................... 77.2% 78.3% 78.6% 77.0%
REVPAR(13)................................ $106.61 $ 99.30 $ 97.75 $ 86.42
REVPAR % change........................... 7.4% -- 13.1% --
TOTAL FULL-SERVICE HOTELS
Number of properties...................... 66 54 65 52
Number of rooms........................... 29,003 22,071 27,332 21,231
Average daily rate(14).................... $137.93 $126.75 $124.21 $111.29
Occupancy % (14).......................... 75.8% 78.3% 77.8% 76.6%
REVPAR(13)(14)............................ $104.50 $ 99.30 $ 96.58 $ 85.28
REVPAR % change........................... 5.2% -- 13.3% 12.4%
</TABLE>
- --------
(1) Amounts presented for the LTM reflect the sum of fiscal year 1997
exclusive of First Quarter 1997 plus First Quarter 1998.
(2) See "Pro Forma Condensed Combined Consolidated Financial Data of the
Company."
(3) Parent Guarantor statements of operations and balance sheet data represent
the historical financial information of Host Marriott with the Company
presented on the equity method of accounting. Parent Guarantor historical
net income includes $74 million, after taxes, related to the equity in
earnings of the Company. Other operating data and ratio data represent
historical consolidated operating and ratio data of Host Marriott less
amounts related to the Company.
(4) See "The REIT Conversion--Pro Forma Financial Data." Amounts reflect the
100% Participation With No Notes Issued Scenario (as defined herein).
(5) EBITDA consists of the sum of consolidated net income, interest expense,
income taxes, depreciation and amortization and certain other non-cash
charges (principally non-cash write-downs of lodging properties and equity
in earnings of affiliates, net of distributions received). The Company
considers EBITDA to be an indicative measure of the Company's operating
performance due to the significance of the Company's long-lived assets
(and the related depreciation thereon). EBITDA can be used to measure the
Company's ability to service debt, fund capital expenditures and expand
its business and is used in the Company's indentures as part of the tests
determining the Company's ability to incur debt and to make certain
restricted payments. However, such information should not be considered as
an alternative to net income, operating profit, cash flows from
operations, or any other operating or liquidity performance measures
prescribed by generally accepted accounting principles ("GAAP"). Cash
expenditures for various long-term assets, interest expense and income
taxes have been, and will be, incurred which are not reflected in the
EBITDA presentation. On a historical basis, cash from operations totaled
$200 million and $60 million for fiscal year 1997 and First Quarter 1998,
respectively. On a historical basis, cash used in investing activities
totaled $642 million and $54 million for fiscal year 1997 and First
Quarter 1998, respectively. On a historical basis, cash used in financing
activities was $17 million for First Quarter 1998 and cash provided by
financing activities was $556 million for fiscal year 1997.
(6) Cash interest expense is calculated as GAAP interest expense less
amortization of deferred costs.
(7) Net cash interest expense represents cash interest expense less interest
income from an assumed investment of the excess available cash subsequent
to the Offering totalling an aggregate of $150 million at a current money
market rate of 5.5% for the LTM. Excluding such interest income amounts,
the ratio of EBITDA to cash interest expense for the LTM on a pro forma
basis would have been 2.5 to 1.0 and the ratio of EBITDA less maintenance
capital expenditures to cash interest expense on a pro forma basis would
have been 2.1 to 1.0.
(8) Maintenance capital expenditures represent disbursements (generally equal
to 5% of gross hotel sales) for renewals and replacements of the hotels'
property and equipment.
(9) Net debt represents total debt less cash, cash equivalents and short-term
marketable securities.
(10) The ratio of earnings to fixed charges is computed by dividing net income
before taxes, interest expense and other fixed charges by total fixed
charges, including interest expense, amortization of debt issuance costs
and the portion of rent expense which represents interest.
(11) Amount reflects the historical debt balance of the Parent Guarantor at
March 27, 1998 and has not been adjusted to reflect the second quarter
1998 repayment of $92 million of unsecured debt of SLC as discussed in
Note E to the Unaudited Pro Forma Balance Sheet. See "The REIT
Conversion--Pro Forma Financial Data."
(12) Consists of 38 properties owned by the Company for the entire 1997 and
1996 fiscal years, respectively, and the 54 properties owned by the
Company for the entire First Quarter 1998 and 1997, respectively. These
properties, for the respective periods, represent the "comparable
properties."
(13) REVPAR represents room revenues generated per available room and excludes
food and beverage and other ancillary revenues generated by the property.
(14) Excludes the 255-room Elk Grove Suites Hotel, which was sold in September
1997.
S-17
<PAGE>
RISK FACTORS
Prospective purchasers of the Senior Notes should carefully consider the
following investment considerations in addition to the other information
contained or incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus, prior to making an investment in the Senior Notes.
EFFECTS OF SUBSTANTIAL LEVERAGE
The Company has Indebtedness that is substantial in relation to its
shareholder's equity. As of March 27, 1998, as adjusted to give effect to the
Offering and the application of the net proceeds therefrom, along with
borrowings under the Credit Facility and cash available to the Company, to
fund the Offers and Consent Solicitations, the total consolidated pro forma
Indebtedness of the Company and its subsidiaries would have been $2,186
million (including approximately $414 million senior, secured Indebtedness of
the Company and its subsidiaries which effectively ranks ahead of the Senior
Notes in right of payment with respect to the assets securing such
Indebtedness) and total shareholder's equity would have been $852 million. The
Company expects to incur substantial additional Indebtedness under the
revolving portion of the Credit Facility under which up to $878 million is
expected to be available to the Company for borrowing, subject to the terms
and conditions thereof, subsequent to the consummation of the Offering.
The Company's level of debt may present risks to the holders of the Senior
Notes, including the risk that the Company might not generate sufficient cash
to service the Senior Notes. In the event that the Company's cash flow and
working capital are not sufficient to fund the Company's expenditures or to
service its Indebtedness, including the Senior Notes, the Company would be
required to raise additional funds through capital contributions, the
refinancing of all or part of its Indebtedness, the incurrence of additional
permitted Indebtedness or the sale of assets. There can be no assurance that
any of these sources of funds would be available, if at all, in amounts
sufficient for the Company to meet its obligations. Moreover, even if the
Company were able to meet its obligations, its leveraged capital structure
could significantly limit its ability to finance its acquisition program and
other capital expenditures to compete effectively or to operate successfully,
especially under adverse economic conditions. The Indenture and the Credit
Facility will contain financial and operating covenants, including, but not
limited to, restrictions on the Company's ability to incur additional
Indebtedness, pay dividends or to make other distributions, create liens, sell
assets, enter into certain transactions with affiliates, and enter into
certain mergers and consolidations. See "Description of Senior Notes." The
Company's ability to comply with the terms of the Indenture (including its
ability to comply with such covenants) and the Credit Facility, to make cash
payments with respect to the Senior Notes and to satisfy its other debt
obligations will depend on the future performance of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Senior
Notes."
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
Marriott International serves as the manager for all but fifteen of the
Company's lodging properties and provides various other services to Host
Marriott and its subsidiaries, including the Company. With respect to these
various contractual arrangements, the potential exists for disagreement 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 agreements 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. Nevertheless, the Company believes that
there is sufficient mutuality of interest between the Company and Marriott
International to result in a mutually productive relationship. In addition,
Host Marriott, the holder indirectly of all the capital stock of the Company,
and Marriott International share two common directors: J.W. Marriott, Jr.
serves as Chairman of the Board of Directors and Chief Executive Officer of
Marriott International and also serves as a director of Host Marriott; Richard
E. Marriott is a director of Marriott International and Chairman of the Board
of Directors of Host Marriott. Messrs. J.W. Marriott, Jr. and Richard E.
Marriott, as well as certain other officers and directors of Marriott
International and Host Marriott, also own shares (and/or options
S-18
<PAGE>
or other rights to acquire shares) in both companies. Appropriate policies and
procedures are followed by the Boards of Directors of Host Marriott and
Marriott International 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 Host Marriott or Marriott International (or
as directors of any of their subsidiaries) on certain matters which present a
material conflict between the companies.
RISKS OF LODGING INDUSTRY
The Company's profitability is subject to general economic conditions, the
management abilities of the managers of the Company's hotels (including
primarily Marriott International), competition, the desirability of particular
locations and other factors relating to the operation of such hotels. The
full-service segment of the lodging industry in which the Company's hotels
primarily operate is highly competitive, and such hotels generally operate in
geographical markets that contain numerous competitors. The success of the
Company's hotels will be dependent, in large part, upon a favorable
supply/demand relationship and their ability to compete in such areas as
access, location, quality of accommodations, room rate structure, the quality
and scope of food and beverage facilities and other services and amenities.
The lodging industry (and thus the Company and its hotels) may be adversely
affected in the future by (i) national and regional economic conditions, (ii)
changes in travel patterns, (iii) taxes and government regulations which
influence or determine wages, prices, interest rates, construction procedures
and costs, (iv) the availability of credit and (v) other factors beyond the
control of the Company.
FRAUDULENT TRANSFER
The Company's obligations under the Senior Notes may be subject to review
under state or federal fraudulent transfer laws in the event of the Company's
bankruptcy or other financial difficulty. Under those laws, if a court in a
lawsuit by an unpaid creditor or representative of creditors of the Company,
such as a trustee in bankruptcy or the Company as debtor in possession, were
to find that when the Company issued the Senior Notes, it (a) received less
than fair consideration or reasonably equivalent value therefor, and (b)
either (i) was or was rendered insolvent, (ii) was engaged in a business or
transaction for which its remaining unencumbered assets constituted
unreasonably small capital, or (iii) intended to incur or believed (or
reasonably should have believed) that it would incur debts beyond its ability
to pay as those debts matured, the court could avoid the Senior Notes and the
Company's obligations thereunder, and direct the return of any amounts paid
thereunder to the Company or to a fund for the benefit of its creditors.
Moreover, regardless of the factors identified in clauses (a) through (b)
above, the court could avoid the Senior Notes and direct such repayment if it
found that the Company issued the Senior Notes with actual intent to hinder,
delay, or defraud its creditors. In addition, a court might avoid the Senior
Notes and direct such repayment if the proceeds of the Senior Notes were used
to repay indebtedness that constituted a fraudulent transfer at the time such
repaid indebtedness was incurred. In this regard, prospective investors should
be aware that the 9 1/2% Senior Notes to be acquired in the applicable Offer
with proceeds of the Senior Notes were originally issued to repay borrowings
of the Company's parent. See "Description of Certain Indebtedness--Existing
Senior Notes." However, the Company does not believe the issuance of the 9
1/2% Senior Notes would be deemed a fraudulent transfer because the Company
believes none of the factors set forth in clause (b) above would apply with
respect to such issuance.
In addition, the obligations of each of Host Marriott, Hospitality and the
Subsidiary Guarantors under their Guarantees of the Senior Notes may be
subject to review under the same laws in the event of a bankruptcy or other
financial difficulty of Host Marriott, Hospitality or a Subsidiary Guarantor.
In that event, if a court were to find that when Host Marriott, Hospitality or
a Subsidiary Guarantor, as the case may be, issued its Guarantee (or, in some
jurisdictions, when it became obligated to make payments thereunder), the
factors in clauses (a) through (b) above applied to Host Marriott,
Hospitality, or a Subsidiary Guarantor, as the case may be (or that such
Guarantee was issued with actual intent to hinder, delay, or defraud
creditors), the court could avoid the Guarantee and direct the repayment of
amounts paid thereunder.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including
S-19
<PAGE>
contingent or unliquidated debts) is greater than all of its property at a
fair valuation or if the present fair salable value of its assets is less than
the amount that will be required to pay its probable liability on its existing
debts as they become absolute and matured.
RISK INVOLVED IN INVESTMENTS THROUGH PARTNERSHIPS OR JOINT VENTURES
Instead of purchasing hotel properties directly, the Company may invest as a
co-venturer. Joint venturers often have shared control over the operation of
the joint venture assets. Therefore, such investments may, under certain
circumstances, involve risks such as the possibility that the co-venturer in
an investment might become bankrupt, or have economic or business interests or
goals that are inconsistent with the business interests or goals of the
Company, or be in a position to take action contrary to the instructions or
the requests of the Company or contrary to the Company's policies or
objectives. Consequently, actions by a co-venturer might result in subjecting
hotel properties owned by the joint venture to additional risk. Although the
Company generally will seek to maintain sufficient control of any joint
venture to permit the Company's objectives to be achieved, it may be unable to
take action without the approval of its joint venture partners or its joint
venture partners could take actions binding on the joint venture without the
Company's consent. Additionally, should a joint venture partner become
bankrupt, the Company could become liable for such partner's share of joint
venture liabilities.
RISKS RELATED TO REIT CONVERSION
The following risk factors are risks particular to the REIT Conversion and
should be considered by prospective investors of the Senior Notes in addition
to the Risk Factors above. There can be no assurance that the REIT Conversion
will occur. See "The REIT Conversion--Conditions to Consummation of the REIT
Conversion."
Realization of Benefits to Holders of Senior Notes of REIT Conversion. In
connection with its implementation of the REIT Conversion, Host Marriott and
its subsidiaries (including the Company and the Operating Partnership) will
enter into a series of transactions necessary in order to convert their
business operations to qualify as a REIT. In addition, Host Marriott has
announced its intention to enter into, or to cause one or more subsidiaries to
enter into, certain material transactions, that will be consummated
substantially contemporaneously with, or following, Host Marriott's election
of REIT status, including the acquisition of certain Partnerships pursuant to
the REIT Mergers, the acquisition of partnership interests in certain other
Partnerships and the consummation of the Blackstone Acquisition. See "The REIT
Conversion." These transactions and other aspects of the REIT Conversion are
subject to satisfaction or waiver of a number of conditions and Host
Marriott's board of directors retains the right (i) to waive any such
condition, (ii) not to pursue final consummation of the REIT Conversion (even
if such conditions are satisfied and even if certain preliminary REIT
Conversion transactions have been consummated), or (iii) to consummate the
REIT Conversion (or any transaction comprising a portion thereof) upon terms
substantially different than are described herein. There can be no assurance
that any waiver of a condition to the REIT Conversion or the consummation of
the REIT Conversion (including upon substantially different terms) will not
have an adverse effect on the Senior Notes or on the Company or the Operating
Partnership. There can be no assurance that the REIT Conversion will result in
the benefits anticipated by Host Marriott or that consummation of the REIT
Conversion will not have a material adverse effect on the Senior Notes or on
the Company or the Operating Partnership. See "The REIT Conversion."
Required Distributions and Payments. In order to qualify as a REIT, Host
REIT will be required each year to distribute to its shareholders at least 95%
of its net taxable income (excluding any net capital gain). See "The REIT
Conversion". Due to certain transactions entered into in prior years, Host
REIT is expected to recognize substantial amounts of "phantom" taxable income
in future years that is not matched by cash flow or EBITDA to the Operating
Partnership or Host REIT. To qualify as a REIT, Host REIT also will have to
distribute to its shareholders not later than the end of its first taxable
year as a REIT an amount equal to the accumulated earnings and profits of Host
Marriott and its subsidiaries as a C corporation (including any increases
thereto resulting from subsequent IRS audits of years prior to Host REIT's
first taxable year as a REIT). In addition, Host REIT will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
S-20
<PAGE>
made by it with respect to the calendar year are less than the sum of (i) 85%
of its ordinary income, (ii) 95% of its capital gain net income for that year,
and (iii) any undistributed taxable income from prior periods. Host Marriott
intends that Host REIT will make distributions to its shareholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise
tax and will rely for this purpose on distributions from the Operating
Partnership (which will be the successor obligor under the Senior Notes).
However, differences in timing between taxable income and cash available for
distribution due to, among other things, the seasonality of the hospitality
industry could require the Operating Partnership to borrow funds on a short-
term basis to enable Host REIT to meet the 95% distribution requirement, avoid
the nondeductible excise tax, and therefore maintain its REIT status. The
Operating Partnership also is required to pay (or reimburse Host REIT for) all
taxes and other liabilities and expenses that Host REIT incurs, including
taxes and liabilities attributable to periods and events prior to the REIT
Conversion and any taxes that Host REIT must pay in the event it were to fail
to qualify as a REIT. In addition, the Operating Partnership's inability to
retain earnings (resulting from Host REIT's 95% and other distribution
requirements) will generally require the Operating Partnership to refinance
debt that matures (such as the Credit Facility, which could mature in three
years, subject to extensions) with additional debt or equity. There can be no
assurance that any of these sources of funds, if available at all, would be
available to meet the Operating Partnership's obligations.
Dependence on Lessees' Hotel Operations. Upon the REIT Conversion,
substantially all of the Company's revenues will consist of lease revenue
under the leases (the "Leases") of its hotels to the Lessees. Each Lessee's
principal assets will be, if any, cash, receivables, inventory, supplies and
prepaid expenses needed in the operation of the hotels, franchise licenses for
the hotels, rights and benefits under the Leases and management contracts
relating to such hotels. Consequently, both the Company and the Lessee are
substantially dependent upon the operations of the hotels. See "--Risks of the
Lodging Industry."
Structural Subordination; Secured Debt. In connection with the REIT
Conversion, the Operating Partnership will acquire from Host Marriott numerous
subsidiaries with existing indebtedness. The Senior Notes will be effectively
subordinated in right of payment to all existing and future indebtedness and
other liabilities of these subsidiaries (except for those subsidiaries that
become Subsidiary Guarantors) to the extent of the assets of such
subsidiaries. In addition, the Senior Notes will not be secured by assets of
the Operating Partnership or its subsidiaries, other than the capital stock of
certain of the Subsidiary Guarantors. See "Description of Senior Notes--
Security." Accordingly, the Senior Notes will be effectively subordinated to
secured indebtedness of the Operating Partnership and its subsidiaries to the
extent of the value of the assets securing such indebtedness. In connection
with the REIT Conversion, the Operating Partnership will assume significant
amounts of certain secured indebtedness of Host Marriott and its subsidiaries.
As of March 27, 1998, on a pro forma basis, the amount of secured Indebtedness
of Host Marriott and its subsidiaries (excluding the Company and its
subsidiaries and SLC and its subsidiaries) was approximately $2,640 million.
Conflicts of Interest. There are a number of conflicts of interest involved
in the REIT Conversion. The terms of the Leases will not be negotiated on an
arms-length basis and, accordingly, may not reflect fair market value or
terms. Management believes, however, that the terms of such agreements will be
fair to the Operating Partnership. The lease payments under the Leases will be
calculated with reference to historical financial data and the projected
operating and financial performance of the hotels underlying the Leases.
Management believes that the terms of the Leases will be typical of provisions
found in other leases entered into in similar transactions.
Lack of Control Over Non-Controlled Subsidiaries. The Non-Controlled
Subsidiaries will hold various assets (not exceeding 20% of the assets of the
Operating Partnership), consisting primarily of interests in hotels which are
not leased, certain furniture, fixtures and equipment used in the hotels and
certain international hotels, which if controlled by the Operating Partnership
could jeopardize the status of Host REIT as a REIT. Although the Operating
Partnership will own 95% of the total economic interests of the Non-Controlled
Subsidiaries, it will have no voting rights. As a result, the Operating
Partnership will have no control over the operation or management of the
hotels or other assets owned by the Non-Controlled Subsidiaries even though it
will depend upon the Non-Controlled Subsidiaries for a significant portion of
its revenues. There can be no assurances that the Non-Controlled Subsidiaries
will be managed properly or that their business strategies will be consistent
with the business strategy of the Operating Partnership.
S-21
<PAGE>
USE OF PROCEEDS
The Company expects the net proceeds to the Company from the Offering (after
deducting the Underwriters' discounts and commission and expenses payable by
the Company) to be approximately $1,367 million. The net proceeds to the
Company from the Offering, together with net borrowings under the Credit
Facility, will be used by the Company to consummate the Offers and Consent
Solicitations. See "The Offers to Purchase and Consent Solicitations" and
"Description of Certain Indebtedness."
The 9 1/2% Senior Notes, to be purchased by the Company pursuant to an
Offer, were issued at par and have a maturity date of May 15, 2005. The 9%
Senior Notes, to be purchased by the Company pursuant to an Offer, were issued
at par and have a final maturity of December 15, 2007. The 8 7/8% Senior
Notes, to be purchased by the Company pursuant to an Offer, were issued at par
and have a final maturity of July 15, 2007. The net proceeds from the Offering
of the 8 7/8% Senior Notes were used to pay the consent fee and other costs
associated with the 1997 Consent Solicitation (as defined) and for the
acquisition of full-service hotel properties. See "Description of Certain
Indebtedness--Existing Senior Notes."
The following table illustrates the sources and uses of funds for the
Offering (in millions):
<TABLE>
<S> <C>
SOURCES OF FUNDS
Issuance of Senior Notes, net..................................... $1,367(1)
Credit Facility, net.............................................. 350(2)
Cash and cash equivalents......................................... 11(3)
------
Total Sources of Funds.......................................... $1,728
======
USES OF FUNDS
Repayment of Existing Senior Notes................................ $1,550(4)
Offer Premium and Transaction Costs............................... 178(5)
------
Total Uses of Funds............................................. $1,728
======
</TABLE>
- --------
(1) Net of expenses relating to the Offering which are estimated to be $33
million.
(2) Amount is net of proceeds of approximately $22 million from borrowings
under the Credit Facility which will be used to retire the Existing Credit
Facility (as defined). See "Description of Certain Indebtedness--Credit
Facility."
(3) Represents cash and cash equivalents available at the closing of the
Offering.
(4) Assumes that 100% of each issue of outstanding Existing Senior Notes are
validly tendered.
(5) Reflects Offer premium, Consent Payments and other transaction costs
related to the Offers and the Consent Solicitations.
S-22
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of March 27, 1998 and (ii) such capitalization as adjusted to give effect
to the Offering and the anticipated borrowings under the Credit Facility and
the application of such proceeds to the consummation of the Offers and the
Consent Solicitations. The capitalization of the Company should be read in
conjunction with the Company's Combined Consolidated Financial Statements and
Notes thereto, the "Pro Forma Condensed Combined Consolidated Financial Data
of the Company" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," each contained elsewhere herein.
<TABLE>
<CAPTION>
AS OF MARCH 27, 1998
-----------------------------
ACTUAL PRO FORMA
------------ -------------
(UNAUDITED, IN MILLIONS)
<S> <C> <C>
Cash, cash equivalents and short-term
marketable securities................ $ 351 $ 323
============ ============
Debt:
Existing Credit Facility............ $ 22(1) $ --
Credit Facility..................... -- 372(1)(2)
Existing Senior Notes
9 1/2% Senior Secured Notes due
2005............................. 600 -- (2)
9% Senior Notes due 2007.......... 350 -- (2)
8 7/8% Senior Notes due 2007...... 600 -- (2)
Senior Notes
% Series A Senior Notes due
2005............................. -- 400
% Series B Senior Notes due
2008............................. -- 1,000
Other debt.......................... 414 414
------------ ------------
Total debt........................ 1,986 2,186
Shareholder's equity.................. 998 852(3)
------------ ------------
Total capitalization.............. $ 2,984 $ 3,038
============ ============
</TABLE>
- --------
(1) Approximately $22 million of borrowings under the Credit Facility will be
used to retire the Existing Credit Facility. See "Description of Certain
Indebtedness--Credit Facility."
(2) Assumes 100% participation in each Offer.
(3) The reduction in shareholder's equity primarily reflects the impact of the
estimated extraordinary loss of $152 million, net of taxes, related to the
write-off of deferred financing fees and the payment of the Offer premium
and the Consent Payments for the Existing Senior Notes.
S-23
<PAGE>
PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL DATA OF THE COMPANY
The unaudited Pro Forma Condensed Combined Consolidated Statements of
Operations of the Company reflect the following transactions for First Quarter
1998, First Quarter 1997 and for the fiscal year ended January 2, 1998, as if
such transactions had been completed at the beginning of each of the periods:
. 1998 acquisition, or purchase of controlling interests in, five full-service
properties
. 1998 purchase of the remaining minority interest in the Norfolk Waterside
Marriott
. 1998 disposition of the Napa Valley Marriott
. 1997 acquisition of, or purchase of controlling interests in, 13 full-
service properties
. 1997 repayment of mortgage debt for the San Francisco Marriott
. Consummation of the Offers and Consent Solicitations, the Offering and the
Credit Facility (collectively, the "Bond Refinancing")
The unaudited Pro Forma Condensed Combined Consolidated Balance Sheet of the
Company as of March 27, 1998 reflects the Bond Refinancing, the acquisition of
the Park Ridge Marriott, the purchase of the remaining minority interest in
the Norfolk Waterside Marriott and the disposition of the Napa Valley
Marriott.
In 1998, the Company acquired, or purchased controlling interests in, five
full-service properties with 2,989 rooms for approximately $313 million,
including the assumption of $164 million in mortgage debt on the Atlanta
Marriott Marquis. During 1997, the Company acquired, or purchased controlling
interests in, thirteen full-service properties with 6,071 rooms for
approximately $615 million, including the completion of the acquisition of the
New York Financial Center Marriott through foreclosure of the mortgage on the
hotel in 1997. Also, during 1997, the Company repaid the $230 million in
mortgage debt on the San Francisco Marriott.
The unaudited Pro Forma Condensed Combined Consolidated Financial Statements
present the financial position and the results of operations of the Company as
if the transactions described above were completed. These presentations do not
purport to represent what the Company's results of operations would actually
have been if the transactions described above were had in fact occurred on
such date or at the beginning of such period or to project the Company's
results of operations for any future date or period.
The unaudited Pro Forma Financial Statements are based upon certain
assumptions, as set forth in the notes to the unaudited Pro Forma Financial
Statements, that the Company believes are reasonable under the circumstances
and should be read in conjunction with the Company's Combined Consolidated
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
herein.
S-24
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 27, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
1998 BOND
HISTORICAL ACQUISITIONS DISPOSITION REFINANCING PRO FORMA
---------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Property and equipment,
net.................... $2,728 $ 25 (B) $ (10)(C) $ -- $2,743
Due from managers....... 77 -- -- -- 77
Investments in affili-
ates................... 18 -- -- -- 18
Other assets............ 159 1 (B) -- (56)(A) 229
43 (A)
82 (A)
Cash, cash equivalents
and short-term
marketable securities.. 351 (27)(B) 20 (C) (21)(A) 323
------ ----- ----- ------- ------
$3,333 $ (1) $ 10 $ 48 $3,390
====== ===== ===== ======= ======
Debt
Senior notes.......... $1,550 $ -- $ -- $(1,550)(A) $1,400
1,400 (A)
Existing Credit
Facility/Credit
Facility............. 22 -- -- 350 (A) 372
Mortgage debt......... 382 -- -- -- 382
Other................. 32 -- -- -- 32
------ ----- ----- ------- ------
1,986 -- -- 200 2,186
Deferred income taxes... 154 -- 4 (C) -- 158
Other liabilities....... 195 (1)(B) -- -- 194
------ ----- ----- ------- ------
Total liabilities..... 2,335 (1) 4 200 2,538
Equity.................. 998 -- 6 (C) (152)(A) 852
------ ----- ----- ------- ------
$3,333 $ (1) $ 10 $ 48 $3,390
====== ===== ===== ======= ======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
S-25
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST QUARTER 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
1998 BOND
HISTORICAL ACQUISITIONS REFINANCING PRO FORMA
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Hotels....................... $164 $ 9 (D) $-- $173
Equity in earnings of affili-
ates........................ 2 -- -- 2
---- --- ---- ----
Total revenues............. 166 9 -- 175
OPERATING COSTS AND EXPENSES
Hotels....................... 80 4 (D) -- 84
---- --- ---- ----
OPERATING PROFIT BEFORE
MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST......... 86 5 -- 91
Minority interest.............. -- (1)(D) -- (1)
Corporate expenses............. (5) -- -- (5)
Interest expense............... (41) (1)(D) 1 (H) (41)
Interest income................ 6 (1)(D) -- 5
---- --- ---- ----
INCOME BEFORE INCOME TAXES..... 46 2 1 49
Provision for income taxes..... (18) (1)(I) -- (19)
---- --- ---- ----
INCOME BEFORE EXTRAORDINARY
ITEM.......................... $ 28 $ 1 $ 1 $ 30
==== === ==== ====
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
S-26
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST QUARTER 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
DEBT
1998 1997 REPAYMENT
HISTORICAL ACQUISITIONS ACQUISITIONS & REFINANCING PRO FORMA
---------- ------------ ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Hotel................. $114 $14 (D) $32 (E) $-- $160
Equity in earnings of
affiliates........... 2 -- -- -- 2
---- --- --- ---- ----
Total revenue....... 116 14 32 -- 162
OPERATING COSTS AND EX-
PENSES
Hotels................ 61 7 (D) 12 (E) -- 80
---- --- --- ---- ----
OPERATING PROFIT BEFORE
MINORITY INTEREST,
CORPORATE EXPENSES AND
INTEREST............... 55 7 20 -- 82
Minority interest....... -- (1)(D) -- -- (1)
Corporate expenses...... (4) -- -- -- (4)
Interest expense........ (28) (3)(D) (2)(E) 5 (G) (41)
(13)(H)
Interest income......... 4 (1)(E) -- 3
---- --- --- ---- ----
INCOME (LOSS) BEFORE
INCOME TAXES........... 27 3 17 (8) 39
Benefit (provision) for
income taxes........... (11) (1)(I) (7)(I) 3 (I) (16)
---- --- --- ---- ----
INCOME BEFORE
EXTRAORDINARY ITEM..... $ 16 $ 2 $10 $ (5) $ 23
==== === === ==== ====
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
S-27
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
DEBT
1998 1997 1998 REPAYMENT PRO
HISTORICAL ACQUISITIONS ACQUISITIONS DISPOSITIONS & REFINANCING FORMA
---------- ------------ ------------ ------------ ------------- -----
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels................ $493 $57 (D) $83 (E) $(3)(F) $-- $630
Equity in earnings of
affiliates........... 6 -- -- -- -- 6
Other................. 1 -- -- -- -- 1
---- --- --- --- ---- ----
Total revenue....... 500 57 83 (3) -- 637
OPERATING COSTS AND
EXPENSES
Hotels................ 269 27 (D) 40 (E) (1)(F) -- 335
---- --- --- --- ---- ----
OPERATING PROFIT BEFORE
MINORITY INTEREST,
CORPORATE EXPENSES AND
INTEREST............... 231 30 43 (2) -- 302
Minority interest....... (1) (4)(D) -- -- -- (5)
Corporate expenses...... (18) -- -- -- -- (18)
Interest expense........ (135) (12)(D) (10)(E) -- 5 (G) (182)
(30)(H)
Interest income......... 28 (12)(D) (9)(E) -- -- 7
---- --- --- --- ---- ----
INCOME (LOSS) BEFORE
INCOME TAXES........... 105 2 24 (2) (25) 104
Benefit (provision) for
income taxes........... (43) (1)(I) (10)(I) 1 (I) 10 (I) (43)
---- --- --- --- ---- ----
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM..... $ 62 $ 1 $14 $(1) $(15) $ 61
==== === === === ==== ====
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
S-28
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL DATA
A.Represents the adjustment to record the Bond Refinancing, assuming 100%
acceptance of the Offers:
--Record the repayment of the $1,550 million in Existing Senior Notes
--Record the issuance of $1,400 million in Senior Notes
--Record the write-off of $56 million in deferred financing fees related
to the Existing Senior Notes and the Existing Credit Facility
--Record the deferred financing fees of $43 million related to Senior
Notes and the Credit Facility
--Record a draw of $350 million on the Credit Facility
--Record the net cash activity of the above items as follows:
<TABLE>
<S> <C>
Repayment of the Existing Senior Notes......................... $(1,550)
Issuance of the Senior Notes................................... 1,400
Draw on the Credit Facility, net............................... 350
Deferred financing fees related to the Senior Notes and Credit
Facility...................................................... (43)
Bond tender and consent fees and other expenses................ (178)
-------
Net cash adjustment.......................................... $ (21)
=======
</TABLE>
--Record the federal and state tax benefit of $82 million related to the
above activity
--Record the estimated extraordinary loss of $152 million, net of taxes,
related to the Bond Refinancing
B.Represents the adjustment to record the 1998 acquisition of the Park Ridge
Marriott and the purchase of the remaining minority interest in the Norfolk
Waterside Marriott:
--Record the property and equipment of $25 million
--Record other assets of $1 million
--Record the use of cash of $27 million
--Record the decrease in other liabilities of $1 million
C.Represents the adjustment to record the May 1998 sale of the Napa Valley
Marriott:
--Record the decrease in property and equipment of $10 million
--Record net cash proceeds of $20 million
--Record the increase in deferred tax liabilities of $4 million
--Record the gain on sale of $6 million, net of taxes, as an increase in
equity
No adjustment has been recorded for the disposition for the First Quarter
1998 and First Quarter 1997 due to its immateriality.
D.Represents the adjustment to record the revenue, operating costs, interest
expense, net increase in minority interest expense and to reduce interest
income for the 1998 acquisition of, or purchase of controlling interests in,
five full-service properties.
E.Represents the adjustment to record the revenue, operating costs, interest
expense and to reduce interest income for the 1997 acquisition of, or purchase
of controlling interests in, thirteen full-service hotel properties.
F.Represents the adjustment to reduce revenues and operating expenses for
the 1998 sale of the Napa Valley Marriott which excludes the gain on the sale
of $6 million, net of taxes.
G.Represents the adjustment to reduce interest expense related to the
repayment of the San Francisco Marriott mortgage debt, excluding the
extraordinary gain of $5 million, net of taxes.
H.Represents the adjustment to record the net impact on interest expense and
related amortization of deferred financing fees as a result of the Bond
Refinancing. The adjustment excludes the estimated extraordinary loss of $152
million, net of taxes, related to the Bond Refinancing resulting from the
write-off of deferred financing fees and the payment of bond tender and
consent fees.
I.Represents the income tax impact of pro forma adjustments at statutory
rates.
S-29
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical combined consolidated
financial statement data derived from the Company's Combined Consolidated
Financial Statements as of and for the five most recent fiscal years ended
January 2, 1998. The Company's Combined Consolidated Financial Statements
present the financial position, results of operations, and cash flows of the
Company giving effect to the 1998 Merger for all periods presented. See Note 1
to the Company's combined consolidated financial statements. The combined
consolidated balance sheet, income statement and other data for First Quarter
1998, First Quarter 1997 and fiscal year 1993 have been derived from unaudited
consolidated financial statements of the Company, which in the opinion of
management includes all material adjustments necessary for that period. The
financial data for fiscal year 1993 includes the operating results of the
hotels recorded by Host Marriott or its affiliates for the periods prior to
the formation of the Company.
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL YEAR
-------------- --------------------------------------------------------
1998 1997 1997 1996(1) 1995 1994 1993
------ ------ --------- ----------- --------- --------- -----------
(UNAUDITED) (IN MILLIONS, EXCEPT FOR RATIO DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues(2)............ $ 166 $ 116 $ 500 $ 359 $ 288 $ 262 $ 468
Operating profit before
corporate expenses,
minority interest and
interest.............. 86 55 231 161 131 121 85
Income before
extraordinary items
and cumulative effect
of accounting
changes(3)............ 28 16 62 27 21 24 1
Net income (loss)...... 28 21 67 27 4 24 (3)
BALANCE SHEET DATA:
Total assets........... $3,333 $2,414 $ 3,052 $ 2,385 $ 2,121 $ 2,046 $2,016
Total debt............. 1,986 1,081 1,825 1,312 1,314 1,015 888
OTHER DATA:
EBITDA (unaudited)(4).. $ 116 $ 79 $ 347 $ 255 $ 217 $ 201 $ 184
Depreciation and amor-
tization.............. 28 23 100 75 71 73 81
Cash provided by oper-
ating activities...... 60 58 200 132 118 117 71
Cash used in investing
activities............ (54) (60) (642) (269) (82) (110) (26)
Cash provided by (used
in) financing activi-
ties.................. (17) (14) 556 155 77 (1) (52)
Ratio of earnings to
fixed charges (unau-
dited)(5)............. 2.1x 1.9x 1.7x 1.3x 1.3x 1.4x 1.1x
</TABLE>
- --------
(1) Fiscal year 1996 includes 53 weeks.
(2) Prior to October 1993, revenues included room sales and food and beverage
sales at hotel properties, as well as sales from senior living
communities. Subsequent to October 1993, revenues include house profit
from the Company's hotel properties, lease rentals from the Company's
senior living communities (in 1994), net gains (losses) on real estate
transactions and equity in earnings of an affiliate. House profit
represents hotel sales, less property-level expenses, excluding
depreciation, management fees, property taxes, ground and equipment rent,
insurance and certain other costs, which are classified as operating
costs and expenses. See Note 1 to the Company's Combined Consolidated
Financial Statements.
(3) Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," was adopted in the first quarter of 1993. In the
second quarter of 1993, the Company changed its accounting method for
assets held for sale. The Company recorded a $24 million credit to
reflect the adoption of SFAS No. 109 and a $28 million charge, net of
taxes of $19 million, to reflect the change in its accounting method for
assets held for sale. In the second quarter of 1995, the Company recorded
an extraordinary loss on the extinguishment of debt of $14 million and $3
million, net of taxes, in connection with the redemption and defeasance
of senior notes and the repayment of the Acquisitions Revolver (as
defined herein). In the First Quarter 1997, the Company recognized an
extraordinary gain of $5 million, net of taxes, in connection with the
redemption and defeasance of the outstanding bonds secured by a first
mortgage on the San Francisco Marriott.
(4) EBITDA consists of the sum of consolidated net income, interest expense,
income taxes, depreciation and amortization and certain other noncash
items (principally non-cash write-downs of lodging properties and equity
in earnings of an affiliate, net of distributions received). The Company
considers EBITDA to be an indicative measure of the Company's operating
performance due to the significance of the Company's long-lived assets
(and related depreciation thereof) and because EBITDA can be used to
measure the Company's ability to service debt, fund capital expenditures
and expand its business and is used in the Company's indentures as part
of the tests to determine the Company's ability to incur debt and make
certain restricted payments. However, such information should not be
considered as an alternative to net income, operating profit, cash flows
from operations, or any other operating or liquidity performance measure
prescribed by GAAP. Cash expenditures for various long-term assets,
interest expense and income taxes have been, and will be, incurred which
are not reflected in the EBITDA presentations.
(5) The ratio of earnings to fixed charges is computed by dividing net income
before taxes, interest expense and other fixed charges by total fixed
charges, including interest expense, amortization of debt issuance costs
and the portion of rent expense that represents interest expense.
S-30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company was formed on October 8, 1993, in connection with Host
Marriott's pro rata distribution of Marriott International, to hold primarily
Host Marriott's lodging properties not financed by mortgage debt. The
following analysis and the related combined consolidated financial statements
included herein are presented as if the Company were a separate subsidiary of
Host Marriott, as well as giving effect to the 1997 Merger (as defined herein)
and the contemplated 1998 Merger, for all periods presented. See Note 1 to the
Combined Consolidated Financial Statements.
Revenues include house profit from the Company's hotel properties, net gains
(losses) on real estate transactions and equity in the earnings of an
affiliate. House profit reflects the net revenues flowing to the Company as
property owner and represents hotel sales less property-level expenses
excluding depreciation, management fees, property taxes, ground and equipment
rent, insurance and certain other costs which are classified as operating
costs and expenses.
The Company's hotel operating costs and expenses are, to a great extent,
fixed. Therefore, the Company derives substantial operating leverage from
increases in revenue. This operating leverage is somewhat diluted, however, by
the impact of base management fees which are calculated as a percentage of
sales, variable lease payments and incentive management fees tied to operating
performance above certain established levels. In recent years, successful
full-service hotel performance has resulted in certain of the Company's
properties reaching levels which allowed the managers of its hotels to share
in the growth of profits in the form of higher management fees. At these
higher operating levels, the Company's and managers' interests are very
closely aligned, which helps to drive further increases in profitability, but
moderates the operating leverage associated with REVPAR increases.
For the periods discussed herein, the Company's properties have experienced
substantial increases in room revenues generated per available room (excluding
food and beverage and other ancillary revenue) ("REVPAR"). REVPAR is a
commonly used indicator of market performance for hotels which represents the
combination of the average daily room rate charged and the average daily
occupancy achieved. The REVPAR increase primarily represents strong percentage
increases in room rates, while occupancies have generally increased slightly
or remained flat for properties that were already operating under the Marriott
brand and increased significantly for those properties converted to the
Marriott brand. Increases in room rates have generally been achieved by the
managers through shifting occupancies away from discounted group business to
higher-rated group and transient business. This has been made possible by
increased travel due to improved economic conditions and by the favorable
supply/demand characteristics existing in the upscale and luxury full-service
segments of the lodging industry. The Company expects this favorable
relationship between supply growth and demand growth to continue in the
upscale and luxury markets in which it operates, which management believes
should result in improved REVPAR and operating profits at its hotel properties
in the near term. However, there can be no assurance that REVPAR will continue
to increase in the future.
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
Revenues. Revenues consist of house profit from the Company's hotel
properties, net gains (losses) on real estate transactions and equity in
earnings of an affiliate. First Quarter 1998 revenues totaled $166 million
which represented a $50 million, or 43%, increase over the First Quarter 1997.
Hotel revenues increased $50 million, or 44%, to $164 million for the First
Quarter 1998 as the Company reported strong growth in REVPAR and the addition
of 17 full-service hotel properties in 1997 and the First Quarter 1998.
Hotel sales (gross hotel sales, including room sales, food and beverage, and
other ancillary sales such as telephone sales) increased $125 million, or 43%,
to $416 million for the First Quarter 1998 reflecting the REVPAR increases for
comparable units and the addition of full-service properties in 1997 and 1998.
Improved
S-31
<PAGE>
results were driven by strong increases in REVPAR of 7.4% to $106.61 for
comparable units for the First Quarter 1998. Results were further enhanced by
a one percentage point increase in the house profit margin for comparable
properties. On a comparable basis, average room rates increased nearly 9%,
while average occupancy decreased one percentage point. Management believes
REVPAR will continue to grow through steady increases in average room rates,
combined with minor changes in occupancy rates. However, there can be no
assurance that REVPAR will continue to increase in the future.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation and amortization, management fees, property taxes,
ground, building and equipment rent, insurance, lease payments and certain
other costs. Operating costs and expenses increased $19 million to $80 million
for the First Quarter 1998 primarily due to the addition of 17 full-service
properties during 1997 and the First Quarter 1998, and management fees and
rentals tied to improved operating results as well as depreciation. As a
percentage of hotel revenues, operating costs and expenses were 49% and 54% of
revenues for First Quarter 1998 and First Quarter 1997, respectively, due to
the significant increase in REVPAR discussed above as well as the increase in
operating leverage as a result of a significant portion of the Company's
operating cost and expenses being fixed.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased by $31 million to $86
million, or 52% of revenues, for the First Quarter 1998 from $55 million, or
47% of revenues, for the First Quarter 1997. Most of the Company's hotels
recorded substantial improvements in operating results. Several hotels,
including the Atlanta Northwest Marriott, the New York World Trade Center
Marriott, the JW Marriott Houston, the Plaza San Antonio Marriott, the San
Antonio Riverwalk Marriott, the Washington Dulles Airport Marriott and the
Toronto Delta Meadowvale posted significant improvements in operating profit
for the First Quarter 1998.
Corporate Expenses. Corporate expenses for the First Quarter 1998 increased
$1 million to $5 million due to an increase in corporate expenses allocated to
the Company by Host Marriott based on the increase in the Company's assets. As
a percentage of revenues, corporate expenses decreased to 3.0% of revenues in
the First Quarter 1998 from 3.4% of revenues in the First Quarter 1997.
Interest Expense. Interest expense increased $13 million to $41 million for
the First Quarter 1998 due primarily to the issuance of $600 million of senior
notes in July 1997.
Income Before Extraordinary Item. Income before extraordinary item for the
First Quarter 1998 was $28 million, or 17% of revenues, compared to $16
million, or 14% of revenues, for the First Quarter 1997.
Extraordinary Gain. In March 1997, the Company purchased 100% of the
outstanding bonds secured by a first mortgage on the San Francisco Marriott.
The Company purchased the bonds for $219 million, which was an $11 million
discount to the face value of $230 million. In connection with the redemption
and defeasance of the bonds, the Company recognized an extraordinary gain of
$5 million, which represented the $11 million discount less the write-off of
unamortized deferred financing fees, net of taxes.
Net Income. The Company's net income for the First Quarter 1998 increased $7
million to $28 million compared to net income of $21 million for the First
Quarter 1997. The increase in net income is primarily due to the increase in
operating profit and the extraordinary gain discussed above, partially offset
by the increase in interest expense.
1997 COMPARED TO 1996
Revenues. Revenues increased $141 million, or 39%, to $500 million in 1997.
The Company's revenue and operating profit were impacted by several items,
including:
. the addition of 27 full-service hotel properties during 1997 and 1996;
. improved lodging results for comparable properties;
S-32
<PAGE>
. the 1996 sale and leaseback of 18 of the Company's Residence Inns;
. the 1996 sale of 16 of the Company's Courtyard properties; and
. the 1996 results including 53 weeks versus 52 weeks in 1997.
Hotel revenues increased $140 million, or 40%, to $493 million in 1997. The
increase in hotel revenue for 1997 reflects the addition of 27 full-service
hotel properties in 1996 and 1997 and overall improved lodging results,
partially offset by the sale of the Courtyard properties in 1996.
Overall 1997 revenue and operating profit for nearly all of the Company's
full-service hotels were improved or comparable to 1996 results. Improved
results were driven by strong increases in REVPAR of nearly 13.1% for
comparable properties. On a comparable basis, average room rates increased
approximately 11%, while average occupancy increased one and one half
percentage points.
Operating Costs and Expenses. Operating costs and expenses for 1997
increased $71 million to $269 million, primarily reflecting the addition of 27
full-service properties in 1997 and 1996, as well as a full year of lease
payments for the Company's Residence Inns. As a percentage of hotel revenues,
hotel operating costs and expenses were 55% and 56% of hotel revenues in 1997
and 1996, respectively, which reflects the operating leverage for the
Company's full-service properties, partially offset by the impact of a full
year of Residence Inn lease payments.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $70
million to $231 million, or 46% of revenues, from $161 million, or 45% of
revenues, in 1996. In nearly all markets, the Company's hotels recorded
improvements in comparable operating results. In particular, the Company's
hotels in the Mid-Atlantic and Pacific coast regions benefited from the
upscale full-service room supply and demand imbalance. Hotels in Denver and
the New York World Trade Center performed well, along with properties in San
Francisco/Silicon Valley and Southern California. In 1997, the Company's
suburban Atlanta properties (three properties totaling 1,022 rooms) generally
reported decreased results due to higher activity in 1996 related to the
Summer Olympics and the impact of the additional supply added to the suburban
areas. However, the Company's downtown Atlanta hotel performed well and was
only marginally impacted by the additional supply.
Corporate Expenses. Corporate expenses remained unchanged at $18 million in
1997. As a percentage of revenues, corporate expenses decreased to 3.6% of
revenues in 1997 from 5.0% of revenues in 1996.
Interest Expense. Interest expense increased $10 million to $135 million
primarily due to $600 million in new senior notes issued in July 1997,
partially offset by the Company's purchase of 100% of the outstanding bonds
secured by a first mortgage on the San Francisco Marriott.
Income Before Extraordinary Item. Income before extraordinary item for 1997
was $62 million, or 12% of revenues, compared to $27 million, or 8% of
revenues, for 1996.
Extraordinary Item. In March 1997, the Company purchased 100% of the
outstanding bonds secured by a first mortgage on the San Francisco Marriott
Hotel. The Company purchased the bonds for $219 million, which was an $11
million discount to the face value of $230 million. In connection with the
redemption and defeasance of the bonds, the Company recognized an
extraordinary gain of $5 million, which represented the $11 million discount
less the write-off of unamortized deferred financing fees, net of taxes.
Net Income. Net income increased $40 million to $67 million for 1997
compared to $27 million for 1996.
1996 COMPARED TO 1995
Revenues. Revenues increased $71 million, or 25%, to $359 million for 1996.
The Company's revenue and operating profit were impacted by several items,
including:
. the addition of 20 full-service hotel properties during 1995 and 1996;
. improved lodging results for comparable properties;
S-33
<PAGE>
. the 1996 sale and leaseback of 18 of the Company's Residence Inns;
. the 1995 and 1996 sale of 53 of the Company's Courtyard properties;
. the 1996 results including 53 weeks versus 52 weeks in 1995;
. the $10 million pre-tax charge in 1995 to write down the carrying value
of certain Courtyard and Residence Inn properties held for sale to their
net realizable value; and
. the 1995 sale of the Company's four remaining Fairfield Inns.
Hotel revenues increased $59 million, or 20%, to $353 million in 1996 as the
Company's full-service hotels and Residence Inn properties reported growth in
REVPAR. Hotel sales increased $175 million, or 22%, to $980 million reflecting
the REVPAR increases for comparable units and the addition of full-service
properties, partially offset by the sale of the Courtyard properties.
Overall 1996 revenue and operating profit for nearly all of the Company's
full-service hotels were improved or comparable to 1995 results. Improved
results were driven by strong increases in REVPAR of 10.4% for comparable
properties. On a comparable basis, average room rates increased 6.5%, while
average occupancy increased nearly three percentage points.
The net loss on property transactions for 1995 includes the pretax charge of
$10 million to write down the carrying value of five individual Courtyard and
Residence Inn properties held for sale to their net realizable value.
Operating Costs and Expenses. Operating costs and expenses for 1996
increased $41 million to $198 million, primarily reflecting the addition of 20
full-service properties during 1995 and 1996, increased management fees and
rentals tied to improved operating results and properties sold and leased
back, partially offset by the sale of certain limited-service properties.
Hotel operating costs and expenses represented 56% of hotel revenues in 1996
and 53% of hotel revenues in 1995, reflecting the shifting emphasis to full-
service hotels and the impact of the lease payments of the Residence Inn
properties.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $30 million to $161
million, or 45% of revenues, from $131 million, or 45% of revenues, in 1995.
Hotel operating profit increased $18 million to $155 million, or 44% of hotel
revenues, from $137 million, or 47% of hotel revenues, in 1995. Nearly all of
the Company's hotels recorded substantial improvements in operating results.
Several hotels, including the San Francisco Marriott, the San Francisco
Airport Marriott, the San Francisco Marriott Fisherman's Wharf, Westfields
Conference Resort, Houston Airport Marriott and the Miami Airport Marriott,
posted particularly significant improvements in operating profit for the year.
Portions of the Miami Airport Marriott were converted to limited-service rooms
in order to increase the overall occupancy and operating results of the
property. Three properties, which were renovated and converted to the Marriott
brand in 1995, the Denver Marriott Tech Center, Marriott's Mountain Resort at
Vail and the Williamsburg Marriott, have also shown significant improvement
over the prior year. The Company's Atlanta properties (1,469 rooms) also
posted outstanding results due, in part, to the 1996 Summer Olympics.
Corporate Expenses. Corporate expenses increased $1 million to $18 million,
primarily due to higher average assets for the Company during the year, which
resulted in an increase in the allocation of corporate expenses to the
Company. As a percentage of revenues, corporate expenses were 5.0% of revenues
for 1996 and 5.9% of revenues for 1995.
Interest Expense. Interest expense increased $25 million to $125 million
primarily due to the increase in the overall level of debt, as well as a
higher average interest rate as a result of the Acquisitions Offering (as
defined herein), a full year of expense related to debt incurred in
conjunction with the acquisition of certain hotel properties in 1995 and the
impact of the Properties Offering (as defined herein).
Income Before Extraordinary Item. Income before extraordinary item was $27
million which represented a $6 million increase from $21 million in 1995. The
increase is due to the change in operating profit and interest
S-34
<PAGE>
expense discussed above, including the $10 million charge in 1995 to write
down the carrying value of certain limited service properties held for sale to
their net realizable value.
Extraordinary Item. In connection with the redemption and defeasance of debt
in the second quarter of 1995 and the repayment of the Acquisitions Revolver
(as defined herein) in December 1995, the Company recognized an extraordinary
loss of $17 million, after taxes, primarily representing premiums paid on the
extinguishment of debt and the write-off of deferred financing fees.
Net Income. Net income was $27 million for 1996, compared to net income of
$4 million for 1995. The increase is primarily due to the increase in
operating profit discussed above and the $17 million extraordinary loss on the
extinguishment of debt in 1995, partially offset by the increase in interest
expense discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of operating
cash flow, debt financing and proceeds from sales of selected properties. The
Company utilizes these sources of capital to acquire new properties, fund
capital additions and improvements and make principal payments on debt. The
Company believes that the financial resources generated from ongoing
operations will be sufficient to enable it to meet its capital expenditure and
debt service needs for the foreseeable future. However, certain events such as
significant acquisitions would require additional financing, such as the
Credit Facility.
Capital Transactions. In May 1995, the Company issued an aggregate of $600
million of 9 1/2% senior secured notes (the "9 1/2% Senior Notes") (the
"Properties Offering"). The 9 1/2% Senior Notes were issued at par and have a
final maturity of May 2005. The net proceeds were used to defease, and
subsequently redeem, all of the senior notes (the "Hospitality Notes") issued
by Host Marriott Hospitality, Inc. and to repay borrowings under the line of
credit with Marriott International. In connection with the redemptions and
defeasance, the Company recognized an extraordinary loss in 1995 of $14
million, net of taxes.
In December 1995, HMC Acquisition Properties, Inc. ("Acquisitions") issued
$350 million of 9% senior notes (the "9% Senior Notes" or the "Acquisition
Notes"), collectively, the "Acquisitions Offering." The Acquisition Notes were
issued at par and have a final maturity of December 2007. A portion of the net
proceeds were utilized to repay in full the outstanding borrowings under the
$230 million revolving line of credit (the "Acquisitions Revolver"), which was
then terminated. In connection with the termination of the Acquisition
Revolver, the Company recognized an extraordinary loss in 1995 of $3 million,
net of taxes.
On July 10, 1997, the Company completed the consent solicitations (the "1997
Consent Solicitations") with holders of the 9 1/2% Notes and the 9% Notes to
amend certain provisions of their senior notes indentures. The 1997 Consent
Solicitations facilitated the merger of Acquisitions with and into HMH
Properties (the "1997 Merger"). The amendments to the indentures also
increased the ability of the Company to acquire, through certain subsidiaries,
additional properties subject to non-recourse indebtedness and controlling
interests in corporations, partnerships and other entities holding attractive
properties and increased the threshold for distributions to affiliates to the
excess of the Company's earnings before interest expense, income taxes,
depreciation and amortization and other non-cash items subsequent to the 1997
Consent Solicitations over 220% of the Company's interest expense.
Concurrent with the 1997 Consent Solicitations and 1997 Merger, the Company
issued $600 million of 8 7/8% senior notes (the "8 7/8% Senior Notes") at par
maturing in July 2007 (the "1997 Offering"). The Company received net proceeds
from the 1997 Offering of approximately $570 million, net of the costs of the
1997 Consent Solicitation and the 1997 Offering, which has been primarily used
to fund acquisitions of, or the purchase of controlling interests in, full-
service hotels and other lodging-related properties, as well as for general
corporate purposes.
The 9 1/2% Senior Notes, the 9% Senior Notes and the 8 7/8% Senior Notes
(collectively, the "Existing Senior Notes") are guaranteed on a joint and
several basis by certain of the Company's subsidiaries and rank pari passu in
right of payment with all other existing and future senior indebtedness of the
Company. The Company is
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required to make semi-annual cash interest payments on the Existing Senior
Notes at their stated interest rate. The Company is not required to make
principal payments until maturity except in the event of (i) certain changes
in control or (ii) certain asset sales in which the proceeds are not
reinvested in other hotel properties within a specified period of time.
Investment in subsidiaries of the Company which did not guarantee the Existing
Senior Notes are currently limited to 20% of the sum of parent and guarantor
subsidiaries' assets plus the investment in non-guarantor subsidiaries.
The Company paid dividends of approximately $13 million, $54 million, $28
million and $36 million in the First Quarter 1997, 1997, 1996 and 1995,
respectively. The Company paid dividends of $3 million during the second
quarter of 1998. Prior to the Properties Offering, all of the Company's net
cash flow was transferred to Hospitality, and therefore, the Company
maintained no cash balances. Subsequent to the Properties Offering, the
Company established and maintains separate cash balances.
In June 1997, HMC Capital Resources Corporation ("Capital Resources"), an
indirect subsidiary of Host Marriott, entered into a revolving line of credit
agreement ("Existing Credit Facility") with a group of commercial banks under
which it may borrow up to $500 million for certain permitted uses. On June 19,
2000, any then outstanding borrowings on the Existing Credit Facility convert
to a term loan arrangement with all unpaid advances due June 19, 2004.
Borrowings under the Existing Credit Facility bear interest at either the
Eurodollar rate plus 1.7%, or the Base Rate (as defined in the agreement) plus
0.7%, at the option of the Company. An annual fee of 0.35% is charged on the
unused portion of the commitment. The Existing Credit Facility was originally
secured by six hotel properties, with a carrying value of approximately $500
million at January 2, 1998, which were contributed to Capital Resources. The
Existing Credit Facility is guaranteed by Host Marriott. As a result of this
transaction, Host Marriott terminated its line of credit with Marriott
International. During the fourth quarter of 1997, the Company borrowed
approximately $22 million under the Existing Credit Facility for the
acquisition of the Ontario Airport Marriott.
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spin-off of Host
Marriott's senior living business ("Senior Living") and contribution of Host
Marriott's hotels and certain other assets and liabilities, including the
Company, to the Operating Partnership. See "The REIT Conversion." Host
Marriott's contribution of its hotels and certain assets and liabilities to
the Operating Partnership (the "Contribution") in exchange for units of
limited partnership interests in the Operating Partnership will be accounted
for at Host Marriott's historical basis. However, consummation of the REIT
Conversion is subject to significant contingencies that are outside the
control of Host Marriott, including final board approval, consents of
shareholders, partners, bondholders, lenders and ground lessors of Host
Marriott, its affiliates and other third parties. Accordingly, there can be no
assurance that the REIT Conversion will be completed.
On June 26, 1998, the Company commenced the Offers and the Consent
Solicitations with respect to $1,550 million aggregate principal amount of the
Existing Senior Notes. See "The Offers to Purchase and Consent Solicitations."
The Company expects to obtain the proceeds necessary to consummate the Offers
and Consent Solicitations from the net proceeds to the Company from the
Offering, borrowings under the Credit Facility and cash available to the
Company. See "Use of Proceeds." Prior to the consummation of the REIT
Conversion, the assets and liabilities of the Company will be contributed to
the Operating Partnership.
Capital Acquisitions, Additions and Improvements. The Company continues to
focus on maximizing the profitability of its existing full-service portfolio
and acquiring additional high-quality, full-service hotel properties as
conditions, principally the availability of capital, permit. The Company
believes that the upscale and luxury full-service segments of the market offer
opportunities to acquire assets at attractive multiples of cash flow and at
discounts to replacement value, including under-performing hotels which can be
improved by
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conversion to the Marriott or Ritz-Carlton brands. In 1998, the Company
acquired a controlling interest in the 1,671-room Atlanta Marriott Marquis for
$239 million, including the assumption of $164 million of mortgage debt, and
acquired the 289-room Park Ridge Marriott in New Jersey for $24 million.
Additionally, the Company acquired a controlling interest in the partnership
that owns the 359-room Albany Marriott, the 350-room San Diego Marriott
Mission Valley and the 320-room Minneapolis Marriott Southwest.
In 1997, the Company purchased, or acquired controlling interests in, the
306-room Ritz-Carlton, Marina del Rey for $57 million, the 404-room Norfolk
Waterside Marriott for $33 million, the 299-room Ontario Airport Marriott for
$22 million, the 884-room Marriott Desert Spring Resort for $184 million,
including $123 million in assumed debt, the 380-room Manhattan Beach Radisson
Plaza Hotel, which was converted to the Marriott brand, for $29 million and
the 300-room Coronado Island Marriott Resort (formerly the Le Meridien Hotel)
for $54 million. In addition, the Company completed the acquisition of the
504-room New York Marriott Financial Center, after acquiring the mortgage on
the hotel for $101 million in late 1996. The Company also acquired a
controlling interest in Chesapeake Hotels Limited Partnership ("CHLP"), the
owner of six full-service properties (2,994 rooms), along with $105 million in
CHLP receivables from Host Marriott for approximately $135 million. The
Company already owned the non-recourse second mortgages on the CHLP
properties. The acquisition of a controlling interest in CHLP includes the
difference between the cash transferred and Host Marriott's carried-over cost
basis of the properties, net of the related tax effect, which has been charged
to additional paid-in capital.
During 1996, the Company purchased, or acquired controlling interests in, 13
full-service properties totaling 4,136 rooms for approximately $386 million.
The acquisition of the Salt Lake City Marriott in 1996 for $67 million
included the purchase of a 20% general partnership interest from Host
Marriott. The difference between the cash transferred to Host Marriott and the
carried-over cost basis of the 20% interest, net of the related tax effect,
has been charged to additional paid-in capital. The Company also completed
construction and opened the Pentagon City Residence Inn in April 1996. In
addition, during the first quarter of 1996, the Company acquired, for $20
million, a minority interest in a joint venture controlled by Host Marriott
that owns two hotels in Mexico City, Mexico. The Company subsequently sold its
interest to Host Marriott for $20 million in the third quarter of 1996.
During 1995, the Company acquired seven full-service properties totaling
3,133 rooms for approximately $329 million (including $94 million of first
mortgage financing on two of the hotels).
The Company's capital expenditures in 1997, 1996 and 1995 (excluding the
acquisition of properties and including conversion costs) totaled $82 million,
$89 million and $78 million, respectively. The Company incurs capital
expenditures for upgrading acquired hotels to the Company's and the managers'
standards as well as a result of certain improvement projects for non-
conversion hotels. The Company incurred approximately $6 million, $24 million
and $14 million in conversion costs for the converted hotels in 1997, 1996 and
1995, respectively.
Asset Dispositions. The Company historically has sold, and may from time to
time in the future consider selling, certain of its real estate properties at
attractive prices when the proceeds could be redeployed into investments with
more favorable returns. During the second quarter of 1998, the Company sold
the 191-room Napa Valley Marriott for approximately $21 million and recorded a
pre-tax gain of approximately $10 million. The Company sold the 255-room
Sheraton Elk Grove Suites for proceeds of approximately $16 million in
September 1997. During the first and second quarters of 1996, the Company
completed a sale and leaseback with the Purchaser REIT for its 16 remaining
Courtyard properties and 18 of its Residence Inn properties for $349 million
(10% of which was deferred). During the second quarter of 1996, Host Marriott
purchased the Company's rights to the deferred proceeds and obligations under
the lease for the 16 Courtyard properties for $13 million. The Company
retained its rights to the deferred proceeds and obligations under the lease
for the 18 Residence Inns.
During 1995, the Company sold, to and leased back from, the Purchaser REIT
37 of its Courtyard properties for a total of $330 million (10% of which was
deferred). The Company transferred its rights to receive the deferred
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proceeds and obligations to perform under the leases to a subsidiary of
Hospitality during 1995. The Company sold the Springfield Radisson Hotel
(which was acquired in December 1994 as part of a portfolio of seven hotels)
in December 1995 for net cash proceeds of $3 million, which approximated its
carrying value. Also, during 1995, the Company sold its remaining four
Fairfield Inns for net cash proceeds of approximately $6 million.
Cash Flows. The Company's cash flow provided by operations in 1997, 1996 and
1995 totaled $200 million, $132 million and $118 million, respectively. Cash
from operations in the First Quarter 1998 and First Quarter 1997 totaled $60
million and $58 million, respectively. Cash from operations increased
principally due to improved lodging results and the significant acquisitions
of hotels.
The Company's cash used in investing activities in 1997, 1996 and 1995
totaled $642 million, $269 million and $82 million, respectively. Cash used in
investing activities totaled $54 million for the First Quarter 1998 and $60
million for the First Quarter 1997. The Company's cash used in investing
activities consists primarily of acquisitions of hotel properties, capital
expenditures for conversions, improvements and renewals and replacements and
purchases of short-term marketable securities, partially offset by the net
proceeds of sales of certain assets previously discussed and the sales of
short-term marketable securities.
The Company's cash provided by financing activities in 1997, 1996 and 1995
was $556 million, $155 million and $77 million, respectively. Cash provided by
financing activities totaled $17 million for First Quarter 1998 and $14
million for First Quarter 1997. The Company's cash from financing activities
consists primarily of the issuance and repayment of debt as a result of the
Offering, the Properties Offering, the Acquisitions Offering and the
Acquisitions Revolver, dividends and contributed capital. In fiscal year 1995,
the Company made draws on the Acquisitions Revolver of $59 million to fund the
acquisition of full-service properties and made repayments of $226 million.
The Acquisitions Revolver was extinguished in 1995. In 1995, the Company
transferred $151 million of cash to Hospitality, including $100 million from
asset sales proceeds used by Hospitality for redemption of the Hospitality
Notes. As the net proceeds from the Properties Offering were used to repay the
Hospitality Notes and a portion of the outstanding balance on Host Marriott's
former $630 million revolving line of credit with Marriott International (the
"MI Line of Credit"), the Company's historical financial statements present
the pushed down portion of the Hospitality Notes and MI Line of Credit so
repaid. Pursuant to the Hospitality Notes indenture, the Hospitality Notes
were required to be repaid to the extent of 50% to 75% of the net proceeds
from certain asset sales and 100% of net financing proceeds.
The net proceeds from the Properties Offering, along with the net proceeds
from a $400 million concurrent offering by Host Marriott Travel Plazas, Inc.
("HMTP"), were used to defease all of the remaining Hospitality Notes not
redeemed with the asset sales proceeds discussed above and to repay
indebtedness under the MI Line of Credit. In connection with the redemptions
and defeasance of the Hospitality Notes, the Company recognized an
extraordinary loss in the second quarter of 1995 of $14 million, net of taxes
of $8 million, primarily representing premiums of $11 million paid on the
redemptions and the write-off of deferred financing fees and discounts on the
debt.
EBITDA
The Company believes that consolidated earnings before interest expense,
taxes, depreciation, amortization and other non-cash items (principally non-
cash writedowns of lodging properties and equity in earnings of an affiliate,
net of distribution received) ("EBITDA") is a meaningful measure of its
operating performance due to the significance of the Company's long-lived
assets (and the related depreciation thereon). EBITDA can be used to measure
the Company's ability to service debt, fund capital expenditures and expand
its business and is used in its senior notes indentures and the Credit
Facility as part of the tests determining the Company's ability to incur debt
and to make certain restricted payments. EBITDA information should not be
considered as an alternative to net income, operating profit, cash flows from
operations, or any other operating or liquidity performance measure prescribed
by generally accepted accounting principles.
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EBITDA increased $37 million, or 47%, to $116 million in the First Quarter
1998, from $79 million in the First Quarter 1997. EBITDA increased $92
million, or 36%, to $347 million in 1997 from $255 million in 1996. Hotel
EBITDA increased $91 million to $325 million for 1997. The EBITDA increases
reflect comparable full-service hotel EBITDA growth, as well as incremental
EBITDA from acquisitions, partially offset by the sale of limited service
properties in 1996. Full-service hotel EBITDA from comparable hotel properties
increased 10.0% on a REVPAR increase of 7.4% for the First Quarter 1998 and
17.0% on a REVPAR increase of 13.1% for 1997.
The following is a reconciliation of EBITDA to income before extraordinary
item (in millions):
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL YEAR
-------------- ------------
1998 1997 1997 1996
------ ------ ----- -----
<S> <C> <C> <C> <C>
EBITDA....................................... $ 116 $ 79 $ 347 $ 255
Interest expense............................. (41) (28) (135) (125)
Depreciation and amortization................ (28) (23) (100) (75)
Income taxes applicable to operations........ (18) (11) (43) (19)
Gain (loss) on dispositions of assets and
other non-cash charges, net................. (1) (1) (7) (9)
------ ------ ----- -----
Income before extraordinary item............ $ 28 $ 16 $ 62 $ 27
====== ====== ===== =====
</TABLE>
The ratio of EBITDA to cash interest expense (defined as GAAP interest
expense less amortization of deferred financing costs) was 2.9 to 1.0, 2.9 to
1.0, 2.7 to 1.0, 2.1 to 1.0 and 2.2 to 1.0 for the First Quarter 1998, First
Quarter 1997, and fiscal years 1997, 1996 and 1995, respectively. The ratio of
earnings to fixed charges was 2.1 to 1.0, 1.9 to 1.0, 1.7 to 1.0, 1.3 to 1.0
and 1.3 to 1.0 for the First Quarter 1998 and First Quarter 1997, in 1997,
1996 and 1995, respectively.
INFLATION
The Company's lodging properties are impacted by inflation through its
effect on increasing costs and on the managers' ability to increase room
rates. Unlike other real estate operations, hotels have the ability to change
room rates on a daily basis, so the impact of higher inflation generally can
be passed on to customers.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
131 "Disclosures About Segments of an Enterprise and Related Information", and
SFAS No. 129 "Disclosure of Information About Capital Structure" in 1997 and
SFAS No. 130 "Reporting Comprehensive Income" in 1998. The adoption of these
statements did not have a material effect on the Company's consolidated
financial statements.
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BUSINESS AND PROPERTIES
GENERAL
The Company, a wholly owned subsidiary of Hospitality, and an indirect
wholly owned subsidiary of Host Marriott, owns, or holds controlling interests
in, the majority of Host Marriott's lodging properties. The assets of the
Company principally consist of 69 full-service hotel properties as of the date
hereof. These properties are generally operated under the Marriott and Ritz-
Carlton brands and managed by Marriott International, Inc. ("Marriott
International"). The Marriott and Ritz-Carlton brands are among the most
respected and widely recognized in the lodging industry. Based on industry
data, the Company believes that its hotels consistently outperform the
industry average occupancy rate by a significant margin and averaged 77.8%
occupancy for 1997 compared to a 71.0% average occupancy for competing full-
service hotels in the upscale full-service segment of the lodging industry
(the segment which management believes is most representative of the Company's
full-service hotels).
The upscale and luxury full-service segments of the lodging industry are
benefiting from a favorable supply and demand relationship in the United
States, especially in the principal sub-markets in which the Company operates.
Management believes that demand increases have resulted primarily from a
strong domestic economic environment and a corresponding increase in business
travel. In spite of increased demand for rooms, the room supply growth rate in
the full-service segment has not increased in kind. Management believes that
this slower increase in the supply growth rate in the full-service segment is
attributable to many factors, including the limited availability of attractive
building sites for full-service hotels, the lack of available financing for
new full-service hotel construction and the availability of existing full-
service properties for sale at a discount to their replacement cost. The
relatively high occupancy rates of the Company's hotels, along with the
increased demand for full-service hotel rooms, have allowed the managers of
the Company's hotels to increase average daily room rates primarily by
replacing certain discounted group business with higher-rated group and
transient business and by selectively raising room rates. As a result, on a
comparable basis, room revenues per available room ("REVPAR") for the
Company's full-service hotels increased approximately 13.1% for 1997 over the
prior year. Furthermore, because the Company's lodging property operations
have a high fixed-cost component, increases in REVPAR generally yield greater
percentage increases in EBITDA. Accordingly, the approximately 13.1% increase
in the Company's REVPAR for 1997 over the prior year resulted in an
approximately 17.0% increase in comparable full-service EBITDA. The Company
expects this supply/demand imbalance in the upscale and luxury full-service
segments to continue in a number of sub-markets in which the Company's hotels
are located, which should result in improved REVPAR and EBITDA at its hotel
properties in the near term; however, there can be no assurance that such
supply/demand imbalance will continue or that REVPAR and EBITDA will continue
to improve.
BUSINESS STRATEGY
The Company's business strategy is to continue to focus on maximizing the
profitability of its existing full-service portfolio and acquiring additional
high-quality, full-service hotel properties, including interests in joint
ventures, partnerships or other entities holding such properties. Although
competition for acquisitions has increased, the Company believes that the
upscale and luxury full-service segments of the market continue to offer
opportunities to acquire assets at attractive multiples of cash flow and at
discounts to replacement value, including under-performing hotels which
management believes can be improved by conversion to the Marriott or Ritz-
Carlton brands. In addition, consistent with Host Marriott's acquisition of
the 12 hotels and a mortgage loan secured by a thirteenth hotel controlled by
the Blackstone Entities in the Blackstone Acquisition, the Company intends to
undertake a multi-brand strategy by establishing relationships with other
high-quality, well recognized brands such as Four Seasons, Hyatt and
Swissotel. See "The REIT Conversion--Acquisitions by the Operating
Partnership." This multi-brand strategy will allow the Company to diversify
its existing hotel portfolio (as many markets already have a strong
representation of Marriott-brand hotels) and increase the Company's pool of
potential acquisitions. The Company will focus on upscale and luxury full-
service hotels in difficult-to-duplicate locations with high barriers to
entry, such as hotels located in downtown, airport and resort/convention
locations, which are operated by quality managers. The Company believes that
the upscale and luxury full-service segments are promising because:
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. The Company believes that there is a limited supply of new upscale and
luxury full-service hotel rooms currently under construction in the sub-
markets in which the Company operates. According to Smith Travel
Research, from 1988 to 1991, upscale full-service room supply for the
Company's competitive set increased an average of approximately 4%
annually, which resulted in an oversupply of rooms in the industry.
However, this growth slowed to an average of approximately 1% from 1991
to 1997. Furthermore, the lead time from conception to completion of a
full-service hotel is generally three to five years or more in the types
of markets in which the Company is principally pursuing acquisitions.
Management believes that this long lead time will contribute to the
continued low growth of room supply relative to the growth of room
demand in the upscale and luxury full-service segments through the year
2000.
. The Company believes that many desirable hotel properties are currently
held by inadvertent owners such as banks, insurance companies and other
financial institutions, both domestic and international, which are
motivated and willing sellers. In recent years, the Company has acquired
a number of properties from inadvertent owners at significant discounts
to replacement cost, including luxury hotels operating under the Ritz-
Carlton brand. While, in the Company's experience to date, these sellers
have been primarily U.S. financial institutions, the Company believes
that numerous international financial institutions are also inadvertent
owners of lodging properties in the U.S. and have only recently begun to
dispose of such properties. The Company expects that there will be
increased opportunities to acquire lodging properties from international
financial institutions and expects to dedicate significant resources to
pursuing these opportunities.
. The Company believes there are numerous opportunities to improve the
performance of acquired hotels by replacing the existing hotel manager
with Marriott International and converting the hotel to the Marriott
brand. Based on data provided by Smith Travel Research, the Company
believes that Marriott-flagged properties have consistently outperformed
the industry. Demonstrating the strength of the Marriott brand name, the
average occupancy rate for the Company's comparable full-service
properties was 78.6% for 1997, compared to an average occupancy rate of
71.0% for competing upscale full-service hotels. In addition, the
Company's comparable properties had a 17% REVPAR premium over its
competitive set in 1997. Accordingly, management anticipates that
additional non-Marriott branded full-service hotels acquired by the
Company in the future and converted to the Marriott brand should achieve
higher occupancy rates and average room rates than has previously been
the case for those hotels as the hotels begin to benefit from Marriott's
brand name recognition, reservation system and group sales organization.
Twelve of the 56 full-service hotels acquired by the Company since 1994
were converted to the Marriott brand following their acquisition.
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 market information provide a competitive advantage with respect to
identifying, evaluating and acquiring hotel assets. The Company intends to
expand its full-service hotel portfolio as cash flow becomes available from
operations or through additional financings as permitted under the terms and
restrictions of the Company's indebtedness. In carrying out this strategy, the
Company evaluates each opportunity on an individual basis and may from time to
time elect to acquire controlling interests in a hotel joint venture, rather
than pursue the outright acquisition of a property, when it believes its
return on investment will be maximized by so doing. The Company may make
acquisitions directly or through its subsidiaries depending on a variety of
factors, including the existence of debt, the form of investment, the
restrictions and requirements of its debt documents and the availability of
funds.
In 1998, the Company acquired controlling interests in (i) the partnership
that owns the 1,671-room Atlanta Marriott Marquis for $239 million, including
the assumption of $164 million of mortgage debt and (ii) the partnership that
owns the 359-room Albany Marriott, the 350-room San Diego Marriott Mission
Valley and the 320-room Minneapolis Marriott Southwest for $50 million in
aggregate. In addition, the Company acquired the 289-room Park Ridge Marriott
for $24 million.
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<PAGE>
The Company acquired, or purchased controlling interests in, 12 full-service
properties in 1997, including acquiring the 306-room Ritz-Carlton, Marina del
Rey for $57 million and the 300-room Coronado Island Marriott Resort (formerly
the Le Meridien hotel), which was converted to the Marriott brand, for $54
million and the acquisition of controlling interests in the 404-room Norfolk
Marriott Waterside for $33 million, the 884-room Desert Springs Marriott
Resort for $184 million, the 380-room Manhattan Beach Marriott Hotel (formerly
the Manhattan Beach Radisson Plaza Hotel), which was converted to the Marriott
brand, for $29 million and the 299-room Ontario Airport Marriott for $22
million. The Company acquired a controlling interest in six additional full-
service properties (2,994 rooms) in CHLP which owns six additional full-
service properties (2,994 rooms), along with $105 million CHLP receivables,
from Host Marriott for approximately $135 million. The Company already owned
the non-recourse second mortgages on the CHLP properties. The Company also
completed the acquisition of the 504-room New York Marriott Financial Center
following the acquisition of the mortgage on the hotel for $101 million in
late 1996.
In 1996, the Company acquired, or purchased controlling interests in, nine
full-service properties with 3,124 rooms for approximately $292 million,
including the acquisition, through foreclosure, of a controlling interest in
the 250-room Newport Beach Marriott Suites and the acquisition of a
controlling interest in a venture that owns the 400-room Pittsburgh Marriott
City Center. In addition, the Company acquired a controlling interest in the
Marriott Suites Limited Partnership which owns four hotels (the 251-room
Marriott Suites Scottsdale, the 254-room Marriott Suites Atlanta Midtown, the
254-room Marriott Suites Downers Grove and the 253-room Marriott Suites Costa
Mesa). The Company acquired seven full-service properties (3,133 rooms) for
approximately $329 million in 1995.
Consistent with its strategy of focusing on the full-service segment of the
lodging industry, the Company has opportunistically sold certain of its
properties. During 1995, the Company sold to and leased back from the
Purchaser REIT 37 of its Courtyard properties. The Company transferred its
rights to receive the deferred proceeds and obligations to perform under the
lease to a subsidiary of Host Marriott in 1995. Also, in 1995, the Company
sold its remaining four Fairfield Inns for approximately $6 million in cash.
In 1996, the Company entered into an agreement with the Purchaser REIT and
sold and leased back 16 Courtyard properties and 18 Residence Inns for
approximately $349 million (10% of which was deferred). Host Marriott
purchased the Company's rights to the deferred proceeds and obligations under
the lease for the 16 Courtyard properties at their fair market value. With the
completion of these transactions, 100% of the Company's owned properties are
in the full-service segment. The Company has reinvested all of the proceeds in
the acquisition of full-service hotel properties. In May 1998, the Company
sold the 192-room Napa Valley Marriott for approximately $21 million and
recorded a pre-tax gain of approximately $10 million. In September 1997, the
Company sold the Sheraton Elk Grove Suites for $16 million (which approximated
its carrying value).
HOTEL LODGING INDUSTRY
The upscale and luxury full-service segments of the lodging industry
continue to benefit from a favorable cyclical imbalance in the supply/demand
relationship where room demand growth has exceeded supply growth, which has
remained fairly limited. The lodging industry posted strong gains in revenues
and profits in 1997, as demand growth continued to outpace additions to
supply. The Company believes that upscale and luxury full-service hotel room
supply growth in the sub-markets in which the Company operates will remain
limited through the year 2000. Accordingly, the Company believes this
supply/demand imbalance will result in improved room rates which should result
in improved REVPAR and operating profit.
Following a period of significant overbuilding in the mid-to-late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction, excluding casino-related construction, has been modest, largely
offset by the number of rooms taken out of service each year. Due to an
increase in travel and an improving economy, hotel occupancy has grown
steadily over the past several years, and room rates have improved. The
Company believes that room demand for upscale and luxury full-service
properties will continue
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to grow at approximately the rate of inflation for the foreseeable future.
Increased room demand should result in increased hotel occupancy and room
rates. According to Smith Travel Research, upscale full-service occupancy for
the Company and its competitive set grew in 1997 to 72.4%, from 72.1% in 1996,
while room rate growth continued to exceed inflation. Smith Travel Research
data shows that upscale full-service room supply increased an average of
approximately 1% annually from 1991 through 1997. The increase in room demand
and minimal growth in new room supply has also led to increased room rates.
The Company believes that these recent trends will continue with overall
occupancy increasing slightly and room rates increasing at more than one and
one-half times the rate of inflation in 1998.
As a result of the overbuilding in the mid-to-late 1980s, many full-service
hotels built have not performed as originally planned. Cash flow from such
hotels has often not covered debt service requirements, causing lenders (e.g.,
banks, insurance companies, and savings and loans) to foreclose and become
"inadvertent owners" who are motivated to sell these assets. In the Company's
experience to date, these sellers have been primarily U.S. financial
institutions. The Company believes that numerous international financial
institutions are also inadvertent owners of lodging properties and expects
there will be increased opportunities to acquire lodging properties from
international financial institutions. While the interest of inadvertent owners
to sell has created attractive acquisition opportunities with strong current
yields, the limited supply growth and increasing room night demand should
contribute to higher long-term returns on invested capital. Given the
relatively long lead time to develop urban, convention and resort hotels, as
well as the lack of project financing, management believes the growth in room
supply in this segment will be limited through the year 2000.
HOTEL LODGING PROPERTIES
As of the date hereof, the Company's lodging portfolio consists of 69
properties with 30,130 rooms. The Company's hotel lodging properties represent
quality assets in the upscale full-service segment of the lodging industry.
All but two of the Company's hotel properties are operated under the Marriott
or Ritz-Carlton brand names. The two hotels (representing an aggregate of 596
rooms, or less than 2% of the Company's total rooms) do not carry the Marriott
or Ritz-Carlton brand because their size, quality and/or contractual
commitments would not permit such conversion.
One commonly used indicator of market performance for hotels is room revenue
per available room, or REVPAR, which measures daily room revenues generated on
a per room basis. This does not include food and beverage or other ancillary
revenues generated by the property. REVPAR represents the combination of the
average daily room rate charged and the average daily occupancy achieved. The
Company has reported annual increases in REVPAR since 1993.
To maintain the overall quality of the Company's lodging properties, each
property undergoes refurbishment and capital improvements on a regularly
scheduled basis. Typically, refurbishing has been provided at intervals of
five years, based on an annual review of the condition of each property. In
fiscal years 1997, 1996 and 1995, the Company spent $60 million, $44 million
and $27 million, respectively, on capital improvements to existing properties.
As a result of these expenditures, the Company has been able to maintain high
quality rooms at its properties.
The Company's hotels primarily include Marriott and Ritz-Carlton brand
hotels and average approximately 435 rooms. Eight of the Company's hotels have
more than 600 rooms. Hotel facilities typically include meeting and banquet
facilities, a variety of restaurants and lounges, swimming pools, gift shops
and parking facilities. The Company's full-service hotels primarily serve
business and pleasure travelers and group meetings at locations in downtown
and suburban areas, near airports and at resort locations throughout the
United States. The properties are well situated in locations where there are
significant barriers to entry by competitors. Marriott International serves as
manager for 55 of the 69 hotels owned by the Company and all but two are part
of Marriott International's full-service hotel system. The average age of the
properties is approximately 15 years, several of which have had substantial
renovations or major additions.
S-43
<PAGE>
The chart below sets forth performance information for the Company's
comparable full-service hotels.
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL YEAR
---------------- ----------------
1998 1997 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Number of properties..................... 54 54 38 38
Number of rooms.......................... 22,071 22,071 16,825 16,795
Average daily rate....................... $138.08 $126.75 $124.35 $112.26
Occupancy %.............................. 77.2% 78.3% 78.6% 77.0%
REVPAR................................... $106.61 $ 99.30 $ 97.75 $ 86.42
REVPAR % change.......................... 7.4% -- 13.1% --
</TABLE>
The chart below sets forth performance information for the Company's
existing full-service hotels.
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL YEAR
---------------- -------------------------
1998 1997 1997(1) 1996(1) 1995(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of properties............ 66 54 65 52 37
Number of rooms................. 29,003 22,071 27,332 21,231 15,975
Average daily rate.............. $137.93 $126.75 $124.21 $111.29 $102.43
Occupancy %..................... 75.8% 78.3% 77.8% 76.6% 74.1%
REVPAR.......................... $104.50 $ 99.30 $ 96.58 $ 85.28 $ 75.88
REVPAR % change................. 5.2% -- 13.3% 12.4% --
</TABLE>
- --------
(1) Excludes the information related to the 255-room Elk Grove Suites hotel
which was leased to a national hotel chain until September 1997 when it
was sold to the lessee for $16 million.
Revenues in 1997 for nearly all of the Company's full-service hotels were
improved over, or comparable to, 1996 results. This improvement was achieved
through steady increases in customer demand, as well as yield management
techniques applied by the managers to maximize REVPAR on a property-by-
property basis. REVPAR for comparable properties increased 13.1% in 1997 as
average room rates increased approximately 11% and average occupancy increased
one and one half percentage points. Overall, this resulted in strong house
profit margins, which increased over two percentage points, and excellent
growth in sales, which expanded at a rate of approximately 10% for comparable
hotels. For the First Quarter 1998, REVPAR for comparable properties increased
7.4% as average room rates increased 9% and average occupancy decreased one
percentage point. Sales for the First Quarter 1998 expanded at a 9% rate for
comparable properties and the house profit margin increased nearly one
percentage point. The Company believes that its hotels consistently outperform
the industry's average REVPAR growth rates. The relatively high occupancy
rates of the Company's hotels, along with increased demand for full-service
hotel rooms, allowed the managers of the Company's hotels to increase average
room rates by selectively increasing room rates and replacing certain
discounted group business with higher-rated group and transient business. The
Company believes that these favorable REVPAR growth trends should continue due
to the limited new construction of luxury and upscale full-service properties.
A number of the Company's full-service hotel acquisitions were converted to
the Marriott brand upon acquisition. Most recently, the Coronado Island
Marriott Resort and the Manhattan Beach Marriott were converted in the fourth
quarter of 1997. The conversion of these properties to the Marriott brand is
intended to increase occupancy and room rates as a result of Marriott
International's nationwide marketing and reservation systems, its Marriott
Rewards program, as well as customer recognition of the Marriott brand name.
The Marriott brand name has consistently delivered occupancy and REVPAR
premiums over other brands. Based on data provided by Smith Travel Research,
the Company's comparable properties have a seven percentage point occupancy
premium and a 17% REVPAR premium to its competitive set. The Company actively
manages these conversions and, in many cases, has worked closely with the
manager to selectively invest in enhancements to the physical product to make
the property more attractive to guests or more efficient to operate. The
invested capital with respect to these properties is primarily used for the
improvement of common areas, as well as upgrading soft goods (i.e., carpets,
drapes, paint, furniture and additional amenities). The conversion process
S-44
<PAGE>
typically causes periods of disruption to these properties as selected rooms
and common areas are temporarily taken out of service. Historically,
conversion properties have shown improvements as the benefits of Marriott
International's marketing and reservation programs and customer service
initiatives take hold. In addition, these properties have generally been
integrated into Marriott's systems covering purchasing and distribution,
insurance, telecommunications and payroll processing.
The Company's focus is on maximizing profitability throughout the portfolio
by concentrating on key objectives. The Company has assembled a highly skilled
asset management team with extensive experience in hotel management and
operations, including revenue and operations management and capital
expenditure monitoring. The Company's experienced asset management team works
with the hotel managers to achieve these key objectives, which include
reducing property-level overhead by sharing management positions with other
jointly managed hotels in the vicinity, evaluating marginal restaurant
operations and selectively making additional investments where favorable
incremental returns are expected.
The Company and the managers will continue to focus on cost control in an
attempt to ensure that hotel sales increases serve to maximize house and
operating profit. While control of fixed costs serves to improve profit
margins as hotel sales increase, it also results in more properties reaching
financial performance levels that allow the managers to share in growth of
profits in the form of incentive management fees. At these higher operating
levels, the Company's and managers' interests are closely aligned, which helps
to drive further increases in profitability, but moderates operating leverage.
During 1996, the Company completed its divestiture of limited service
properties through the sale and leaseback of its then remaining Courtyard and
Residence Inn properties. A subsidiary of Host Marriott purchased the
Company's rights to the deferred proceeds and obligations under the lease for
the Courtyard properties at their fair market value of approximately $13
million. The 18 Residence Inn properties continue to be reflected in the
Company's revenues and are managed by Marriott International under long-term
management agreements. During 1997, these properties represented approximately
1% of the Company's hotel EBITDA, compared to approximately 5% in 1996, and
the Company expects this percentage to continue to decrease as the Company
continues to acquire full-service properties.
MARKETING
All but fourteen of the Company's hotel properties are managed by Marriott
International as Marriott or Ritz-Carlton brand hotels. Twelve of these
fourteen hotels are operated as a Marriott brand hotel under franchise
agreements with Marriott International. The Company believes that these
Marriott International managed and franchised properties will continue to
enjoy competitive advantages arising from their participation in the Marriott
International hotel system. Management believes that Marriott International's
nationwide marketing programs and reservation systems as well as the advantage
of the strong customer preference for Marriott brands should also help these
properties to maintain or increase their premium over competitors in both
occupancy and room rates. Repeat guest business in the Marriott hotel system
is enhanced by the Marriott Rewards program.
The Marriott reservation system provides Marriott reservation agents with
complete descriptions of the rooms available for sale, and more up-to-date
rate information from the properties. The reservation system also features
improved connectivity to airline reservation systems, providing travel agents
with access to available rooms inventory for all Marriott and Ritz-Carlton
lodging properties. In addition, software at Marriott's centralized
reservations centers enables agents to immediately identify the nearest
Marriott brand property with available rooms when a caller's first choice is
fully occupied.
S-45
<PAGE>
PROPERTIES
The following table sets forth certain information as of the date hereof
relating to each of the Company's hotels. All of the properties are operated
under Marriott or Ritz-Carlton brands by Marriott International, unless
otherwise indicated.
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Arizona
Scottsdale Suites........................................................ 251
California
Coronado Island(5)....................................................... 300
Costa Mesa............................................................... 253
Desert Springs(7)........................................................ 884
Manhattan Beach(6)....................................................... 380
Marina Beach(2).......................................................... 368
The Ritz-Carlton, Marina del Rey......................................... 306
Newport Beach............................................................ 570
Newport Beach Suites..................................................... 250
Ontario Airport(6)....................................................... 299
San Diego Mission Valley(4)(6)........................................... 350
San Francisco Airport.................................................... 684
San Francisco Fisherman's Wharf(4)....................................... 285
San Francisco Moscone Center(2).......................................... 1,498
Colorado
Denver Southeast(2)(7)................................................... 595
Denver Tech.............................................................. 625
Denver West(2)........................................................... 307
Vail Mountain Resort..................................................... 349
Connecticut
Hartford-Rocky Hill(2)................................................... 251
Florida
Fort Lauderdale Marina................................................... 580
Jacksonville(2)(4)....................................................... 256
Miami Airport(2)......................................................... 782
Palm Beach Gardens(4).................................................... 279
Singer Island (Holiday Inn)(3)........................................... 222
Tampa Airport(2)......................................................... 295
Tampa Westshore(1)....................................................... 309
Georgia
Atlanta Marquis(7)....................................................... 1,671
Atlanta Midtown Suites(2)................................................ 254
Atlanta Norcross......................................................... 222
Atlanta Northwest........................................................ 400
Atlanta Perimeter(2)..................................................... 400
The Ritz-Carlton, Atlanta................................................ 447
Illinois
Chicago O'Hare(7)........................................................ 681
Chicago--Deerfield Suites................................................ 248
Chicago--Downers Grove Suites............................................ 254
Chicago--Downtown Courtyard.............................................. 334
Indiana
South Bend(2)............................................................ 300
Maryland
Bethesda(2).............................................................. 407
Gaithersburg--Washingtonian Center....................................... 284
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- ------
<S> <C>
Massachusetts
Boston Newton(7)....................................................... 430
Minnesota
Minneapolis Southwest(4)(6)............................................ 320
Minneapolis Airport.................................................... 479
Missouri
Kansas City Airport(2)................................................. 382
New Jersey
Newark Airport(2)...................................................... 590
Park Ridge............................................................. 289
Saddle Brook(2)(7)..................................................... 221
New York
Albany Marriott(4)(6).................................................. 359
New York Financial Center(8)........................................... 504
New York World Trade Center(2)......................................... 820
North Carolina
Charlotte(4)........................................................... 298
Raleigh Crabtree Valley(1)............................................. 375
Oklahoma
Oklahoma City.......................................................... 354
Oregon
Portland............................................................... 503
Pennsylvania
Pittsburgh City Center(2)(4)........................................... 400
Texas
Dallas/Fort Worth...................................................... 492
Dallas Quorum(2)....................................................... 547
Houston Airport(2)..................................................... 566
J.W. Marriott Houston.................................................. 503
Plaza San Antonio(4)................................................... 252
San Antonio Riverwalk(2)............................................... 500
Utah
Salt Lake City(2)...................................................... 510
Virginia
Key Bridge(2)(7)....................................................... 588
Pentagon City.......................................................... 300
Norfolk Waterside(2)(4)(6)............................................. 404
Westfields Conference Center........................................... 335
Washington--Dulles Suites.............................................. 254
Williamsburg........................................................... 295
Washington, D.C.
Washington Metro Center................................................ 456
Canada
Toronto Delta Meadowvale(3)............................................ 374
------
TOTAL.................................................................. 30,130
======
</TABLE>
- --------
(1) These hotels are owned by an affiliated partnership of the Company. A
subsidiary of the Company provided 100% non-recourse financing totaling
approximately $35 million to the partnership, in which an affiliate of
the Company owns the sole general partner interest, for the acquisition
of these hotels. The Company consolidates these properties in the
accompanying financial statements.
S-46
<PAGE>
(2) The land on which the hotel is built is leased by the Company under a
long-term lease agreement.
(3) Property is not operated as Marriott and is not managed by Marriott
International.
(4) Property is operated as a Marriott franchised property.
(5) Property was acquired and converted to the Marriott brand in 1997.
(6) The Company acquired a controlling interest in the partnership which owns
this property in 1997 or 1998. The property is operated as a Marriott
franchised property.
(7) The Company acquired a controlling interest in the partnership which owns
this property in 1997 or 1998. Host Marriott previously owned a general
partner interest in the partnership.
(8) The Company completed the acquisition of this property in early 1997. The
Company previously had purchased the mortgage loan secured by the hotel
in late 1996.
INVESTMENTS IN AFFILIATED PARTNERSHIPS AND NOTES RECEIVABLE
In connection with the sale of seven hotels to an affiliated partnership in
1984, the Company received as proceeds $168 million in notes receivable that
are secured by non-recourse mortgages on the underlying properties. On
September 10, 1997, Host Marriott successfully completed the purchase of the
limited partnership units in Chesapeake Hotel Limited Partnership ("CHLP").
CHLP owns six hotels, the Key Bridge Marriott, the Chicago Marriott O'Hare,
the Boston Marriott Newton, the Denver Marriott Southeast, the Minneapolis
Airport Marriott and the Saddle Brook Marriott. The Company acquired a
controlling interest in CHLP along with $105 million in certain receivables
from Host Marriott on October 10, 1997 for $135 million and consolidated CHLP
in the fourth quarter.
COMPETITION
The Company's hotels compete with several other major lodging brands.
Competition in the industry is based primarily on the level of service,
quality of accommodations, convenience of locations and room rates. The
following table presents key participants in segments of the lodging industry
in which the Company competes:
<TABLE>
<CAPTION>
SEGMENT REPRESENTATIVE PARTICIPANTS
------- ---------------------------
<S> <C>
Luxury/Full-Service..... Ritz-Carlton; Four Seasons
Upscale/Full-Service.... Marriott Hotels, Resorts and Suites; Crowne Plaza; Doubletree; Hyatt; Hilton;
Radisson; Red Lion; Sheraton; Westin; Wyndham
</TABLE>
EMPLOYEES
The Company has no employees. All of its management services are provided by
employees of Host Marriott.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials ("ACMs"), and third parties may
seek recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or business may be
operated, and these restrictions may require expenditures. In connection with
its current or prior ownership or operation of hotels, the Company may be
potentially liable for any such costs or liabilities. Although the Company is
currently not aware of any material environmental claims pending or threatened
against it, no assurance can be given that a material environmental claim will
not be asserted against the Company.
S-47
<PAGE>
LEGAL PROCEEDINGS
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company. For a summary of claims filed against
Host Marriott, which claims are to be assumed by the Operating Partnership upon
consummation of the REIT Conversion, see "The REIT Conversion--Legal
Proceedings."
S-48
<PAGE>
THE REIT CONVERSION
On April 17, 1998, Host Marriott announced its intention to convert its
business operations (including those business operations conducted by and
through the Company) to qualify as a real estate investment trust ("REIT")
effective as of January 1, 1999 and to conduct its operations through the
Operating Partnership as an umbrella partnership real estate investment trust
(an "UPREIT" and, such conversion and related transactions, the "REIT
Conversion"). Certain of the transactions expected to comprise the REIT
Conversion (including those involving the Company) are described below. These
transactions and other aspects of the REIT Conversion are subject to
satisfaction or waiver of a number of conditions; and Host Marriott's board of
directors retains the right (i) to waive any such condition, (ii) not to
pursue final consummation of the REIT Conversion (even if such conditions are
satisfied and even if certain preliminary REIT Conversion transactions have
been consummated) or (iii) to consummate the REIT Conversion (or any
transaction comprising a portion thereof) upon terms substantially different
than are described herein. As a result of the REIT Conversion, the Operating
Partnership will become the successor obligor under the Senior Notes. The
consummation of the REIT Conversion is not a condition to the consummation of
the Offering.
Host Marriott's reasons for implementing the REIT Conversion include the
following:
. Host Marriott believes the REIT Conversion will improve its financial
flexibility and allow it to continue to strengthen its balance sheet by
reducing its overall debt-to-market capitalization ratio over time.
. As a REIT, Host Marriott believes it will be able to compete more
effectively with other public lodging real estate companies that already
are organized as REITs and improve investor understanding of its
operations, thus making performance comparisons with its peers more
meaningful.
. By becoming a dividend paying company, Host Marriott believes its
shareholder base will expand to include investors attracted by yield and
asset quality.
. Host Marriott believes the adoption of the UPREIT structure will
facilitate the tax-deferred acquisition of other hotels (such as in the
case of the Blackstone Acquisition).
Contribution of Lodging Assets, Including the Assets of the Company, to the
Operating Partnership. As a preliminary step to the REIT Conversion, at
various times during 1998, Host Marriott will contribute its wholly owned
full-service hotel assets, its interests in the Partnerships (defined below)
and substantially all of its other assets (excluding, primarily, its senior
living assets and certain cash to be distributed to Host Marriott
shareholders) to the Operating Partnership in exchange for (i) a number of
units of limited partnership interests in the Operating Partnership ("OP
Units") equal to the number of outstanding shares of common stock of Host
Marriott on the date that the REIT Conversion is consummated (the "Conversion
Date"), (ii) preferred partnership interests in the Operating Partnership
corresponding to any shares of Host Marriott preferred stock outstanding on
the Conversion Date and (iii) the assumption by the Operating Partnership of
substantially all liabilities of Host Marriott.
As part of these contributions, it is currently contemplated that the
Company will be merged with and into the Operating Partnership (the
"Partnership Merger") and that the Operating Partnership will be the surviving
entity and the successor obligor under the Senior Notes, the Credit Facility
and the Existing Senior Notes, if any remain outstanding after consummation of
the Offers and Consent Solicitations. Additionally, at or prior to the
Conversion Date, most of the wholly owned corporate subsidiaries of the
Company will be merged into newly created limited liability company or limited
partnership subsidiaries of the Operating Partnership.
In connection with the REIT Conversion, the Operating Partnership will
assume primary liability for outstanding liabilities of Host Marriott,
including $550 million aggregate principal amount of 6 3/4% Convertible
Subordinated Debentures due 2026 of Host Marriott (the "Subordinated
Debentures") underlying the 11,000,000 outstanding 6 3/4% Convertible
Preferred Securities (liquidation amount $50 per Convertible Preferred
Security) (the "Convertible Preferred Securities") issued by a subsidiary
trust of Host Marriott. As the successor to Host Marriott, Host REIT also will
be liable on the Subordinated Debentures and the Subordinated Debentures will
be convertible into common shares ("Common Shares") of Host REIT. The
Operating Partnership, however, will have primary responsibility for payment
of the Subordinated Debentures, including all costs of conversion. Upon
conversion by a holder of Convertible Preferred Securities, the Operating
Partnership will acquire Common
S-49
<PAGE>
Shares from Host REIT in exchange for an equal number of OP Units and
distribute the Common Shares to the Convertible Preferred Securities holders.
Following the consummation of these asset contributions, the Operating
Partnership and its subsidiaries will directly own all of Host Marriott's
wholly owned hotels, Host Marriott's interests in the Partnerships and
substantially all of Host Marriott's other assets. Host Marriott will not
contribute to the Operating Partnership certain other assets (principally
consisting of 31 retirement communities), the Swissotel Investment (as defined
below) and controlling interests in the Lessees (as defined below). These
assets are owned or will be acquired by HMC Senior Communities, Inc., a
Delaware corporation ("SLC"), currently a wholly owned subsidiary of Host
Marriott. SLC will become a separate publicly traded company as part of the
shareholder distribution described below. See "--Host REIT Merger and
Shareholder Distribution."
Acquisitions by the Operating Partnership. Host Marriott and several of its
separate wholly owned subsidiaries (including subsidiaries of the Company) are
the sole general partners of several limited partnerships (together, the
"Partnerships") which, in the aggregate, own or hold a controlling interest in
32 full-service hotels operating under the Marriott or Ritz-Carlton brands.
Host Marriott owns controlling interest in 19 of these properties, which it
consolidates for financial reporting purposes. It is currently contemplated
that on the Conversion Date, certain newly formed direct and indirect wholly
owned subsidiaries of the Operating Partnership will be merged into those
Partnerships whose partners have provided necessary approvals to such mergers
(the "REIT Mergers"). In connection with each such REIT Merger, each limited
partner of a Partnership will receive a number of OP Units equal in value to
the greatest of the appraised value, continuation value or liquidation value
of such limited partner's interest in such Partnership (such value, the
"Exchange Value"). At the time of the vote of a merger with respect to such a
Partnership, a limited partner of such Partnership may elect to receive
instead of OP Units an unsecured Note due December 15, 2005 issued by the
Operating Partnership (each a "Note") with a principal amount equal to the
greater of (i) the liquidation value or (ii) 60% of the Exchange Value of such
limited partner's interests in such Partnership (such amount, the "Note
Election Amount"). A separate series of Notes will be issued to limited
partners of each such Partnership who elect to receive Notes in exchange for
the OP Units issued to them in a merger. The Notes will be direct, senior
unsecured and unsubordinated obligations of the Operating Partnership and will
rank pari passu with each other and with all other unsecured and
unsubordinated indebtedness of the Operating Partnership, including the Senior
Notes, the Existing Senior Notes, if any remain outstanding, and borrowings
under the Credit Facility. In the event that the limited partners of any such
Partnership do not approve the contemplated REIT Merger, such Partnership will
continue as a separate partnership, but the Operating Partnership will
transfer its general or limited partnership interests in such Partnership to a
Non-Controlled Subsidiary.
The Operating Partnership also is expected to acquire, from unaffiliated
partners, partnership interests in certain other Partnerships in exchange for
OP Units. As a result, the Operating Partnership will own all of the interests
in those Partnerships. Host Marriott is seeking the consent of unaffiliated
partners in certain other Partnerships, where the partners will retain their
interests, to a lease of the hotels owned by such Partnerships to a Lessee (as
defined). If such consent is obtained, then the Operating Partnership will
remain a partner in such Partnerships or transfer its partnership interests
therein to a Non-Controlled Subsidiary. In the event that such consent is not
obtained, then the Operating Partnership may transfer its partnership
interests in such Partnerships to a Non-Controlled Subsidiary.
The Operating Partnership also is expected to acquire on the Conversion Date
from the Blackstone Group, a Delaware limited partnership, and a series of
funds controlled by Blackstone Real Estate Partners, a Delaware limited
partnership, (together the "Blackstone Entities"), ownership of, or a
controlling interest in, twelve hotels and a mortgage loan secured by a
thirteenth hotel. As part of the Blackstone Acquisition, Host Marriott will
acquire a 25% interest in the U.S. Swissotel management company (the
"Swissotel Investment") which will be transferred to SLC in connection with
the distribution of SLC stock to shareholders of Host Marriott. In exchange
for these assets, the Operating Partnership will (i) issue to the Blackstone
Entities approximately 43.7 million OP Units, which OP Units shall be
convertible into Common Shares of Host REIT, (ii) assume or repay
approximately $600 million of debt, (iii) make cash payments totaling
approximately $262 million and (iv) distribute shares of SLC common stock and
additional cash to the Blackstone Entities. Consummation of the
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<PAGE>
Blackstone Acquisition is conditioned upon, among other things, the conversion
of Host Marriott to a REIT by March 31, 1999.
Contribution of Assets to Non-Controlled Subsidiaries. The Operating
Partnership will organize one or more taxable corporations in which the
Operating Partnership will own 95% of the economic interest but no voting
stock (the "Non-Controlled Subsidiaries"). The Non-Controlled Subsidiaries
will hold various assets contributed by Host Marriott and its subsidiaries to
the Operating Partnership, the direct ownership of which by the Operating
Partnership would jeopardize Host REIT's status as a REIT. These assets
primarily will consist of partnership or other interests in hotels which are
not leased. As a result, the Operating Partnership will have no control over
the operation or management of the hotels or other assets owned by the Non-
Controlled Subsidiaries even though it may depend upon the Non-Controlled
Subsidiaries for a significant portion of its revenues. In exchange for the
contribution of these assets to the Non-Controlled Subsidiaries, the Operating
Partnership will receive nonvoting common stock representing 95% of the total
economic interests of the Non-Controlled Subsidiaries. One or more non-
controlled affiliates of Host Marriott will acquire all of the voting common
stock representing the remaining 5% of the total economic interests, and 100%
of the control, of each Non-Controlled Subsidiary.
Lease of Hotels. Upon obtaining requisite shareholder approval, it is
contemplated that Host Marriott will merge with and into Host REIT. Under
current federal income tax law, a REIT cannot derive income from the operation
of hotels but can derive rental income by leasing hotels. Therefore, the
Operating Partnership and its subsidiaries will lease their hotel properties
to certain subsidiaries of SLC (each, a "Lessee"). There will be a separate
Lessee for each hotel property or group of hotel properties that has a
separate mortgage financing or that has owners in addition to the Operating
Partnership and its wholly owned subsidiaries. Each Lessee will be a limited
liability company or limited partnership, whose purpose will be limited to
acting as lessee under an applicable lease. The Lessees under leases of hotels
that are managed by subsidiaries of Marriott International will be owned 99%
by a wholly owned subsidiary of SLC and 1% by Marriott International or its
appropriate subsidiary. The LLC operating agreement or the limited partnership
agreement, as applicable, for such Lessees will provide that the SLC member or
general partner of the Lessee will have full control over the management of
the business of the Lessee, except with respect to certain decisions for which
the consent of both members or partners will be required.
The existing hotel management agreements will be assigned to the Lessees for
the term of the applicable leases, although the Operating Partnership will
remain obligated under the management agreements. Under current law, a REIT
cannot operate hotels without leasing them. Some members of Congress have
proposed legislation that would have the effect of enabling a REIT to operate
hotels directly, provided that it contracts out the management functions to
independent third parties. In the event that, on the Conversion Date,
legislation has been enacted that would have the effect of enabling the
Operating Partnership to operate its hotels without leasing them (or such
legislation has been proposed and has a reasonable likelihood of being
enacted), then Host Marriott, at its discretion, may elect not to enter into
leases of its hotels or not to spin off SLC to its shareholders.
Host REIT Merger and Shareholder Distribution. At the time of the merger of
Host Marriott into Host REIT, Host Marriott shareholders will receive, for
each share of Host Marriott common stock, one Common Share of Host REIT, a
fraction of a share of common stock of SLC and an amount of cash to be
determined. The aggregate value of the SLC common stock and cash to be
distributed to shareholders of Host Marriott is currently estimated to be
approximately $400 to $550 million. Certain SLC common stock and additional
cash will also be transferred to the Blackstone Entities. The actual amount of
the cash distribution will be based upon the estimated amount of accumulated
earnings and profits of Host Marriott as of the last day of its fiscal year
ending on or immediately following the Conversion Date and will take into
account the Blackstone Entities' participation therein. Following this
transaction, Host REIT will be the general partner of the Operating
Partnership and SLC will be a separate publicly traded company which will own
31 senior living communities, the Swissotel Investment and controlling
interests in the Lessees. In order to qualify as a REIT, Host Marriott is
required to distribute its accumulated earnings and profits to its
shareholders not later than December 31, 1999.
Conditions to Consummation of the REIT Conversion. The consummation of the
REIT Conversion is subject to the satisfaction or waiver of a number of
conditions, including (i) successful completion of the Offers and Consent
Solicitations, (ii) Host Marriott shareholder approval of the merger of Host
Marriott with and into
S-51
<PAGE>
Host REIT, (iii) Host Marriott having received all required third party
consents (including consents from various lenders and the partners in the
various Partnerships) to certain of the transactions comprising the REIT
Conversion, (iv) the determination by Host Marriott's board of directors that
Host REIT can elect to be treated as a REIT for federal income tax purposes
effective no later than the first full taxable year commencing after the
Conversion Date, and (v) Congress shall not have enacted legislation, or
proposed legislation with a reasonable possibility of being enacted, that
would have the effect of substantially impairing the ability of Host REIT to
qualify as a REIT or the Operating Partnership to qualify as a partnership or
substantially increasing the federal tax liabilities of Host REIT or other
reductions in the expected benefits resulting from the REIT Conversion, which
determination will be made by Host Marriott, in its discretion. Host
Marriott's board of directors, however, retains the right to waive any of
these conditions or to decide not to pursue the REIT Conversion even if such
conditions are satisfied.
S-52
<PAGE>
FINAL ORGANIZATIONAL STRUCTURE
The following chart sets forth the contemplated organizational structure of
Host REIT, the Operating Partnership and their respective subsidiaries upon the
consummation of all transactions comprising the REIT Conversion on a pro forma
basis as of March 27, 1998.
[FLOW CHART APPEARS HERE]
- --------
(1) Under the terms of the Senior Notes, the obligations of the Parent
Guarantor will be released upon consummation of the REIT Conversion, which
includes, among other things, contributions of substantially all of the
hotel assets of the Parent Guarantor to the Operating Partnership.
(2) Assets of SLC at the consummation of the REIT Conversion will primarily
consist of 31 senior living communities, the Swissotel Investment and
controlling interest in the Lessees.
(3) Assumes 100% participation in each of the Offers. See "The Offer to
Purchase and Consent Solicitations."
(4) Consists of $372 million in draws incurred at the time of the Offering and
an additional amount of approximately $75 million expected to be drawn
under the Credit Facility. The Operating Partnership is expected to have an
additional $803 million in Credit Facility availability.
(5) Represents Operating Partnership-obligated mandatorily redeemable
securities of a subsidiary trust.
(6) The Senior Notes will be guaranteed by the Initial Subsidiary Guarantors
and, under certain circumstances, other subsidiaries of the Operating
Partnership, subject to release under certain circumstances. See
"Description of Senior Notes." However, not all subsidiaries of the
Operating Partnership are, or will be, Subsidiary Guarantors.
S-53
<PAGE>
HOTEL PROPERTIES
The following table sets forth, as of the date hereof, the location and
number of rooms relating to each of Host Marriott's hotels not owned or held
by the Company. All of the properties are operated under Marriott brands by
Marriott International, unless otherwise indicated.
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Alabama
Grand Hotel Resort and Golf Club......................................... 306
Arizona
The Ritz-Carlton, Phoenix(1)............................................. 281
California
Sacramento Airport(3)(4)................................................. 85
San Diego Marriott Hotel and Marina(3)................................... 1,355
San Ramon(3)............................................................. 368
Santa Clara(3)........................................................... 754
Torrance................................................................. 487
Connecticut
Hartford/Farmington(1)(2)................................................ 380
Florida
Harbor Beach Resort(1)................................................... 624
Orlando World Center(1).................................................. 1,503
The Ritz-Carlton, Naples(1).............................................. 463
Georgia
JW Marriott Hotel at Lenox(3)............................................ 371
The Ritz-Carlton, Buckhead(1)............................................ 553
Louisiana
New Orleans(1)........................................................... 1,290
Michigan
Detroit Romulus.......................................................... 245
Minnesota
Minneapolis City Center(3)............................................... 583
Missouri
St. Louis Pavilion(3).................................................... 672
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- ------
<S> <C>
New Hampshire
Nashua................................................................. 251
New Jersey
Hanover(1)............................................................. 353
New York
New York Marriott Marquis(1)(3)........................................ 1,911
Oklahoma
Oklahoma City Waterford(1)(2).......................................... 197
Pennsylvania
Philadelphia (Convention Center)(1)(3)................................. 1,200
Philadelphia Airport(3)................................................ 419
Texas
El Paso(3)............................................................. 296
San Antonio Rivercenter(1)(3).......................................... 999
Virginia
Dulles Airport(3)...................................................... 370
The Ritz-Carlton, Tysons Corner(1)..................................... 397
Canada
Calgary(1)............................................................. 380
Toronto Airport(1)(5).................................................. 423
Toronto Eaton Centre(3)................................................ 459
Mexico
Mexico City Airport(1)(5).............................................. 600
JW Marriott Hotel, Mexico City(1)(5)................................... 314
------
TOTAL.................................................................. 18,889
======
</TABLE>
- --------
(1) Property is held within a partnership and is currently consolidated by
Host Marriott.
(2) Property is operated as a Marriott franchised property.
(3) The land on which the hotel is built is leased under a long-term lease
agreement.
(4) Property is not operated as a Marriott and is not managed by Marriott
International.
(5) Property is expected to be transferred to a Non-Controlled Subsidiary in
conjunction with the REIT Conversion and will no longer be consolidated by
Host Marriott.
The chart below sets forth performance information for Host Marriott's
comparable full-service hotels, which include the Company's properties:
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL YEAR
---------------- ----------------
1998 1997 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
COMPARABLE FULL-SERVICE HOTELS
Number of properties............................ 80 80 54 54
Number of rooms................................. 39,442 39,442 27,074 27,044
Average daily rate.............................. $148.30 $136.56 $134.49 $121.58
Occupancy percentage............................ 78.4% 78.1% 79.4% 78.0%
REVPAR.......................................... $116.20 $106.60 $106.76 $94.84
REVPAR % change................................. 9.0% -- 12.6% --
</TABLE>
The chart below sets forth certain performance information for Host
Marriott's existing full-service hotels, which include the Company's
properties.
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL YEAR
---------------- -------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of properties............................ 96 82 95 79 55
Number of rooms................................. 47,304 40,034 45,718 37,210 25,932
Average daily rate(1)........................... $146.49 $136.34 $133.74 $119.94 $110.80
Occupancy percentage(1)......................... 76.6% 77.8% 78.4% 77.3% 75.5%
REVPAR(1)....................................... $112.25 $106.00 $104.84 $92.71 $83.32
REVPAR % change ................................ 5.9% -- 13.1% 11.3% --
</TABLE>
- --------
(1) Excludes the information related to the 255-room Elk Grove Suites hotel,
which was leased to a national hotel chain through September 1997, and the
85-room Sacramento property, which is operated as an independent hotel.
S-54
<PAGE>
The following properties are currently not consolidated by Host Marriott but
would be acquired by the Operating Partnership pursuant to the REIT Mergers:
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Marriott Diversi-
fied American Ho-
tels, L.P.
Fairview Park..... Virginia 395
Dayton............ Ohio 399
Research Triangle
Park............. North Carolina 224
Detroit Marriott
Southfield....... Michigan 226
Detroit Marriott
Livonia.......... Michigan 224
Fullerton(1)...... California 224
-----
1,692
-----
Chicago Suites,
L.P.
Marriott O'Hare
Suites(1)........ Illinois 256
-----
Potomac Hotel Lim-
ited Partnership
Albuquerque(1).... New Mexico 411
Greensboro-High
Point(1)......... North Carolina 299
Houston Medical
Center(1)........ Texas 386
Miami Biscayne
Bay(1)........... Florida 605
Marriott Mountain
Shadows Resort... Arizona 337
Seattle SeaTac
Airport.......... Washington 459
-----
2,497
-----
TOTAL............. 4,445
=====
</TABLE>
- --------
(1) The land on which the hotel is built is leased under a long-term lease
agreement.
Properties that are included in the Blackstone portfolio are as follows:
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Four Seasons, Atlan-
ta................. Georgia 246
Four Seasons, Phila-
delphia............ Penn. 365
Grand Hyatt, Atlan-
ta................. Georgia 439
Hyatt Regency, Bur-
lingame............ California 793
Hyatt Regency, Cam-
bridge............. Massachusetts 469
Hyatt Regency,
Reston............. Virginia 514
Swissotel, Atlanta.. Georgia 348
Swissotel, Boston... Massachusetts 498
Swissotel, Chicago.. Illinois 630
The Drake
(Swissotel), New
York............... New York 494
The Ritz-Carlton,
Amelia Island...... Florida 449
The Ritz-Carlton,
Boston............. Massachusetts 275
-----
TOTAL.............. 5,520
=====
</TABLE>
LEGAL PROCEEDINGS
Following the REIT Conversion, the Operating Partnership will assume all
liability arising under legal proceedings filed against Host Marriott and its
subsidiaries and will indemnify Host REIT as to all such matters. Host
Marriott and the other defendants intend to defend vigorously against such
claims. Management believes that any liability or loss resulting from such
lawsuits will not, individually or in the aggregate, have a material adverse
effect on the financial position or results of operations of the Operating
Partnership, however, no assurance can be given as to the outcome of any of
the lawsuits. The Atlanta Marriott Marquis lawsuit concerns property owned by
a subsidiary of the Company.
S-55
<PAGE>
Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in
several limited partnerships sponsored by Host Marriott filed a lawsuit,
Robert M. Haas, Sr. and Irwin Randolph Joint Tenants, et al v. Marriott
International, Inc., et al., Case No. CI-04092, in the 57th Judicial District
Court of Bexar County, Texas alleging that the defendants conspired to sell
hotels to the partnerships for inflated prices and that they charged the
partnerships excessive management fees to operate the partnerships' hotels.
The plaintiffs further allege that the defendants committed fraud, breached
fiduciary duties and violated the provisions of various contracts. The
plaintiffs are seeking unspecified damages. Although the partnerships have not
been named as defendants, their partnership agreements include provisions
which require the partnerships to indemnify the general partners against
losses, expenses and fees.
Limited Service Transaction. On February 11, 1998, a group of four
individuals, all of whom are limited partners in partnerships sponsored by
Host Marriott, filed a putative class action lawsuit Ruben, et al. v. Host
Marriott Corporation, et al., Civil Action No. 16186, in Delaware State
Chancery Court, alleging that the proposed merger of the partnerships (the
"Consolidation") into an UPREIT structure constitutes a breach of the
fiduciary duties owed to the limited partners of the partnerships by Host
Marriott and the general partners of the partnerships. In addition, the
plaintiffs allege that the Consolidation breaches various agreements relating
to the partnerships. Although the partnerships have not been named as
defendants, their partnership agreements include provisions which require the
partnerships to indemnify the general partners against losses, expenses and
fees.
Atlanta Marriott Marquis. Certain limited partners of Atlanta Marriott
Marquis Limited Partnership ("AMMLP") filed a putative class action lawsuit
Hiram and Ruth Strum v. Marriott Marquis Corporation, et al., Case No. 97-CV-
3706, in the U.S. District Court for the Northern District of Georgia, against
AMMLP's general partner, its directors and Host Marriott, regarding the merger
of AMMLP into a new partnership (the "AMMLP Merger") as part of refinancing of
the partnership's debt. The plaintiffs allege that the defendants misled the
limited partners in order to induce them to approve the AMMLP Merger, violated
securities regulations and federal roll-up regulations and breached their
fiduciary duties to the partners. Although the partnership has not been named
as a defendant, the partnership agreement includes provisions which require
the partnerships to indemnify the general partners against losses, expenses
and fees.
Courtyard II. A group of partners in Courtyard by Marriott II Limited
Partnership ("CBM II") filed a lawsuit Whitey Ford, et al. v. Host Marriott
Corporation, et al., Case No. 96-CI-08327, in the 285th Judicial District
Court of Bexar County, Texas, and later a putative class action lawsuit
against Host Marriott, Marriott International and others alleging breach of
fiduciary duty, breach of contract, fraud, negligent misrepresentation,
tortious interference, violation of the Texas Free Enterprise and Antitrust
Act of 1983, and conspiracy in connection with the formation, operation, and
management of CBM II and its hotels. The plaintiffs also claim that they were
damaged by CBM II's failure to refinance in 1992 and by the 1993 division of
Marriott Corporation into Host Marriott and Marriott International. Although
the partnership has not been named as a defendant, its partnership agreement
includes a provision which requires the partnership to indemnify the general
partner against losses, expenses and fees.
MHP2. Two groups of limited partners of Marriott Hotel Properties II Limited
Partnership ("MHP2"), are each asserting putative class claims in a lawsuit,
Leonard Rosenblum, as Trustee of the Sylvia Bernice Rosenblum Trust, et al. v.
Marriott MHP Two Corporation, et al., Case No. 96-8377-CIV-HURLEY, and
Mackenzie Patterson Special Fund 2, L.P. et al. v. Marriott MHP Two
Corporation, et al., Case No. 97-8989-CIV-HURLEY respectively, against Host
Marriott and certain of its affiliates alleging that the defendants violated
their fiduciary duties and engaged in fraud and coercion in connection with a
tender offer for MHP2 units.
S-56
<PAGE>
PRO FORMA FINANCIAL DATA
If the REIT Conversion is consummated, the Senior Notes will become the
obligation of the Operating Partnership. Accordingly, the following pro forma
financial data of Host Marriott Hotels (which reflect the historical financial
statements of Host Marriott less its senior living assets, which are
contemplated to be spun off to Host Marriott's shareholders in conjunction
with the REIT Conversion) have been included in this Prospectus Supplement.
Given the structure of Host Marriott's limited partner consent solicitations
and the REIT Mergers, the REIT Conversion may take a variety of different
forms. The variations are dependent in part on the number and identity of the
Partnerships that elect to merge and whether limited partners elect to tender
their partnership interests for OP Units or Notes in connection with the REIT
Conversion. The financial statements of Host Marriott Hotels have been filed
with the Securities and Exchange Commission (the "Commission") as part of a
Current Report on Form 8-K of Host Marriott, dated July 10, 1998.
In light of the number of possible variations, management is not able to
describe all possible combinations of Partnerships that could compose the
Operating Partnership. However, management of Host Marriott has prepared two
separate sets of unaudited pro forma financial statements to show the impact
of the REIT Conversion assuming the following two scenarios:
. All Partnerships participate and no Notes are issued ("100%
Participation with No Notes Issued")
. All Partnerships participate with Notes issued with respect to 100% of
the OP Units allocable to each Partnership ("100% Participation with
Notes Issued")
These presentations do not purport to represent what combination will result
from the REIT Mergers and the REIT Conversion, but instead are designed to
illustrate what the composition would have been under the above scenarios.
Furthermore, the unaudited pro forma financial statements do not purport to
represent what the results of operations would actually have been if the REIT
Mergers and the REIT Conversion had in fact occurred on such date or at the
beginning of such period or to project the results of operations for any
future date or period.
The unaudited pro forma financial statements are based upon available
information and upon certain assumptions, as set forth in the notes to the
unaudited pro forma financial statements, that management believes are
reasonable under the circumstances.
The unaudited pro forma statements of operations of Host Marriott Hotels
reflect the following transactions for the First Quarter 1998, First Quarter
1997 and the fiscal year ended January 2, 1998 as if such transactions had
been completed at the beginning of each period:
Acquisitions, Dispositions and Other Activities
. 1998 Blackstone Acquisition
. 1998 Bond Refinancing
. 1998 acquisition of, or purchase of controlling interests in, eight
full-service properties
. 1998 purchase of minority interests in two full-service hotels
. 1998 disposition of two full-service properties
. 1997 acquisition of, or purchase of controlling interests in, 18 full-
service properties
. 1997 refinancing or repayment of mortgage debt for three full-service
properties
REIT Conversion Activities
. 1998 deconsolidation of the assets and liabilities contributed to the
Non-Controlled Subsidiary, including the sale of certain furniture and
equipment to the Non-Controlled Subsidiary
. 1998 REIT Mergers
. 1998 acquisition of minority interests in five private Partnerships in
exchange for OP Units
S-57
<PAGE>
. 1998 conversion of revenues and certain operating expenses to rental
income
. 1998 capital contribution to SLC through the payoff of $92 million of
mortgage debt
. 1998 adjustment to remove deferred taxes resulting from the change in
tax status related to the REIT Conversion
. 1998 earnings and profits cash distribution
The unaudited pro forma balance sheet as of March 27, 1998 reflects all of
the above 1998 transactions except for the 1998 acquisition of, or purchase of
controlling interests in, five full-service properties which occurred prior to
March 27, 1998 and were already reflected in the historical balance sheet as
of March 27, 1998.
The assumptions regarding the number and identity of participating
Partnerships, the number of OP Units to be issued and price per OP Unit are
outside the control of Host Marriott and have been made for illustrative
purposes only.
S-58
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
MARCH 27, 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------- ---------------------------------------------------
A B C D/E
HOST DEBT
PARENT MARRIOTT BLACKSTONE REPAYMENT
COMPANY HOTELS HOTELS(1) ACQUISITION ACQUISITIONS DISPOSITIONS & REFINANCING
------- ------ --------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $2,728 $2,198 $4,926 $1,667 $ 248 $(78) $ --
Notes and other
receivables,
net............ -- 37 37 63 (8) (2) --
Due from
managers....... 77 56 133 5 -- (2) --
Investments in
affiliates..... 18 (12) 6 -- -- -- --
Other assets.... 159 159 318 -- 1 (1) 43 (D)
(56)(D)
82 (D)
Receivable from
Lessee for
working
capital........ -- -- -- -- -- -- --
Cash, cash
equivalents and
short-term
marketable (21)(D)
securities..... 351 349 700 (262) (246) 171 (92)(E)
------ ------ ------ ------ ----- ---- -------
$3,333 $2,787 $6,120 $1,473 $ (5) $ 88 $ (44)
====== ====== ====== ====== ===== ==== =======
LIABILITIES AND
EQUITY
Debt............ $1,986 $1,638 $3,624 $ 600 $ -- $(35) $(1,550)(D)
1,400 (D)
350 (D)
Accounts payable
and accrued
expenses....... -- 70 70 -- -- -- --
Deferred income
taxes.......... 154 334 488 -- -- 22 --
Other
liabilities.... 195 252 447 -- (5) 70 --
------ ------ ------ ------ ----- ---- -------
Total
liabilities.... 2,335 2,294 4,629 600 (5) 57 200
Convertible
Preferred
Securities..... -- 550 550 -- -- -- --
Equity.......... 998 (57) 941 873 -- 31 (152)(D)
(92)(E)
------ ------ ------ ------ ----- ---- -------
$3,333 $2,787 $6,120 $1,473 $ (5) $ 88 $ (44)
====== ====== ====== ====== ===== ==== =======
<CAPTION>
REIT MERGERS AND REIT CONVERSION ACTIVITIES
---------------------------------------------------------------------------
F G H I J K
NON- EARNINGS LEASE DEFERRED
CONTROLLED REIT PRIVATE & PROFITS CONVER- TAX PRO
SUBSIDIARIES MERGERS PARTNERSHIPS DISTRIBUTION(2) SION ADJUSTMENT FORMA
------------ ------- ------------ --------------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $(345) $566 $ 61 $ -- $ -- $ -- $7,045
Notes and other
receivables,
net............ 61 (6) -- -- -- -- 145
Due from
managers....... (16) 17 -- -- (100) -- 37
Investments in
affiliates..... 344 -- -- -- -- -- 350
Other assets.... (63) 31 (11) -- -- -- 344
Receivable from
Lessee for
working
capital........ -- -- -- -- 100 -- 100
Cash, cash
equivalents and
short-term
marketable
securities..... (18) 3 (11) (150) -- -- 74
------------ ------- ------------ --------------- ------- ---------- ------
$ (37) $611 $ 39 $(150) $ -- $ -- $8,095
============ ======= ============ =============== ======= ========== ======
LIABILITIES AND
EQUITY
Debt............ $ 99 $338 $-- $ 75 $ -- $ -- $4,901
Accounts payable
and accrued
expenses....... (9) 6 -- -- -- -- 67
Deferred income
taxes.......... (41) -- -- -- -- (194) 275
Other
liabilities.... (86) (21) (6) -- -- -- 399
------------ ------- ------------ --------------- ------- ---------- ------
Total
liabilities.... (37) 323 (6) 75 -- (194) 5,642
Convertible
Preferred
Securities..... -- -- -- -- -- -- 550
Equity.......... -- 288 45 (225) -- 194 1,903
------------ ------- ------------ --------------- ------- ---------- ------
$ (37) $611 $ 39 $(150) $ -- $ -- $8,095
============ ======= ============ =============== ======= ========== ======
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
S-59
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
100% PARTICIPATION WITH NO NOTES ISSUED
A. Represents the adjustment to record the Blackstone Acquisition of 12
full-service properties (5,520 rooms) and a mortgage note secured by a
thirteenth full-service property including the issuance of 43.7 million OP
Units:
. Record property and equipment of $1,667 million
. Record mortgage note receivable of $63 million
. Record increase in due from managers of $5 million
. Record the use of cash of $262 million
. Record the assumption of mortgage debt of $600 million
. Record the issuance of 43.7 million OP Units with a value of $873
million
B. Represents the adjustment to record the 1998 acquisition of The Ritz-
Carlton, Phoenix, The Ritz-Carlton, Tysons Corner and the Torrance Marriott,
the acquisition of the remaining debt and equity interests in the Park Ridge
Marriott and the purchase of the remaining minority interests in the Norfolk
Waterside Marriott and the Calgary Marriott:
. Record property and equipment of $248 million
. Record a decrease in notes receivable of $8 million
. Record other assets of $1 million
. Record the use of cash of $246 million
. Record a decrease in other liabilities of $5 million related to the
purchase of minority interests
C. Represents the adjustment to record the sale of the New York Marriott
East Side and the Napa Valley Marriott:
. Record decrease in property and equipment of $78 million
. Record decrease in notes receivable of $2 million
. Record decrease in due from managers of $2 million
. Record decrease in other assets of $1 million
. Record cash of $171 million
. Record repayment of mortgage debt of $35 million
. Record deferred taxes of $22 million
. Record increase in other liabilities of $70 million primarily relating
to minority interest liabilities
. Record gain of $31 million, net of taxes
D. Represents the adjustment to record the Bond Refinancing, assuming 100%
acceptance of the Offers:
. Record the repayment of the $1,550 million in Existing Senior Notes
. Record the issuance of $1,400 million in Senior Notes
. Record the write-off of $56 million in deferred financing fees related
to the Existing Senior Notes and the Existing Credit Facility
. Record the deferred financing fees of $43 million related to the Senior
Notes and the Credit Facility
. Record a draw of $350 million on the Credit Facility
. Record the net cash activity of the above items as follows:
<TABLE>
<S> <C>
Repayment of the Existing Senior Notes......................... $(1,550)
Issuance of the Senior Notes................................... 1,400
Net draw on the Credit Facility................................ 350
Deferred financing fees related to the Senior Notes and Credit
Facility...................................................... (43)
Bond tender and consent fees and other expenses................ (178)
-------
Net cash adjustment.......................................... $ (21)
=======
</TABLE>
S-60
<PAGE>
. Record the federal and state tax benefit of $82 million related to the
above activity
. Record the estimated extraordinary loss of $152 million, net of taxes,
related to the Bond Refinancing
E. Represents the repayment of $92 million of unsecured debt of SLC to
Marriott International resulting in a decrease in equity to the Operating
Partnership and contributed capital to SLC.
F. Represents the adjustment to deconsolidate the assets and liabilities of
the Non-Controlled Subsidiaries and to reflect the sale of certain hotel
furniture and equipment to the Non-Controlled Subsidiary:
. Record decrease in property and equipment of $345 million, including
$200 million of hotel furniture and equipment sold to the Non-Controlled
Subsidiary
. Record receivable from Non-Controlled Subsidiary for the furniture and
equipment loan of $200 million, net of the $134 million mortgage for six
hotels which will be held by the Non-Controlled Subsidiary (previously
eliminated in consolidation) and other notes totaling $5 million
. Record decrease in due from managers of $16 million
. Record investment in subsidiary of $344 million
. Record decrease in other assets of $63 million
. Record decrease in cash of $18 million
. Record increase in debt of $99 million
. Record decrease in accounts payable and accrued expenses of $9 million
. Record decrease in deferred taxes of $41 million
. Record decrease in other liabilities of $86 million
G. Represents the adjustment to record the REIT Mergers:
. Record property and equipment of $566 million
. Record decrease in notes receivable of $6 million
. Record increase in due from managers of $17 million
. Record other assets of $31 million
. Record cash of $3 million
. Record debt of $338 million
. Record accounts payable and accrued expenses of $6 million
. Record decrease in other liabilities of $21 million
. Record the issuance of 14.4 million OP Units totaling approximately $288
million
H. Represents the adjustment to record the purchase of the remaining
minority interests in five private Partnerships:
. Record property and equipment of $61 million
. Record decrease in other assets of $11 million
. Record use of cash of $11 million
. Record decrease in minority interest liabilities of $6 million
. Record the issuance of 2.3 million OP Units totaling approximately $45
million
I. Represents the estimated $225 million cash payment of the Earnings and
Profits Distribution to shareholders of Host Marriott including a draw on the
Credit Facility of $75 million.(/2/)
J. Represents the adjustment to record the transfer of working capital to
SLC related to the leasing of the Operating Partnership's hotels by decreasing
working capital and recording a receivable from the lessee of $100 million.
K. Represents the adjustment to record the effect on deferred taxes for the
change in tax status resulting from the REIT Conversion by decreasing deferred
taxes and increasing equity by $194 million.
S-61
<PAGE>
- --------
(1) Host Marriott Hotels reflects the historical financial statements of Host
Marriott less the senior living communities, which are contemplated to be
spun off to Host Marriott's shareholders in conjunction with the REIT
Conversion.
(2) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profits distribution will be based
upon Host Marriott's accumulated earnings and profits for tax purposes,
which could be affected by a number of factors (including, for example,
actual operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host Marriott).
S-62
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST QUARTER 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------- ------------------------------------------------------------
A B D F
HOST 1998
PARENT MARRIOTT BLACKSTONE ACQUISI- BOND
COMPANY HOTELS HOTELS(1) ACQUISITION TIONS DISPOSITIONS REFINANCING
------- ------ --------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues(3)......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 164 157 321 34 17 (4) --
Equity in
earnings of
affiliates...... 2 (1) 1 -- -- -- --
Other revenues.. -- 3 3 -- -- -- --
----- ----- ----- ----------- ----------- ----------- -----------
Total revenues.. 166 159 325 34 17 (4) --
----- ----- ----- ----------- ----------- ----------- -----------
OPERATING COSTS
AND EXPENSES
Hotels.......... 80 93 173 23 8 (2) --
Other........... -- 5 5 -- -- -- --
----- ----- ----- ----------- ----------- ----------- -----------
Total operating
costs and
expenses........ 80 98 178 23 8 (2) --
----- ----- ----- ----------- ----------- ----------- -----------
OPERATING PROF-
IT............... 86 61 147 11 9 (2) --
Minority inter-
est.............. -- (16) (16) -- (1) (1) --
Corporate ex-
penses........... (5) (6) (11) -- -- -- --
Interest ex-
pense............ (41) (35) (76) (11) (1) -- 1
Dividends on
Convertible
Preferred
Securities....... -- (9) (9) -- -- -- --
Interest income.. 6 8 14 (2) (4) -- --
----- ----- ----- ----------- ----------- ----------- -----------
Income (loss)
before income
taxes............ 46 3 49 (2) 3 (3) 1
Benefit
(provision) for
income taxes..... (18) (3) (21) 1 (1) 1 --
----- ----- ----- ----------- ----------- ----------- -----------
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4)...... $ 28 $ -- $ 28 $ (1) $ 2 $ (2) $ 1
===== ===== ===== =========== =========== =========== ===========
<CAPTION>
REIT MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------------------------------------------
G I J K H/L M
NON- EARNINGS LEASE INCOME
CONTROLLED REIT PRIVATE & PROFITS CONVER- TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(2) SION ADJUSTMENT FORMA
---------- ------- ------------ --------------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues(3)......... $ -- $ -- $ -- $ -- $ 279 $ -- $279
Hotel revenues.. (42) 22 -- -- (348) -- --
Equity in
earnings of
affiliates...... 6 -- -- -- -- -- 7
Other revenues.. (3) -- -- -- -- -- --
---------- ------- ------------ --------------- ------- ---------- ------
Total revenues.. (39) 22 -- -- (69) -- 286
---------- ------- ------------ --------------- ------- ---------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (37) 13 1 -- (58) -- 121
Other........... -- -- -- -- -- -- 5
---------- ------- ------------ --------------- ------- ---------- ------
Total operating
costs and
expenses........ (37) 13 1 -- (58) -- 126
---------- ------- ------------ --------------- ------- ---------- ------
OPERATING PROF-
IT............... (2) 9 (1) -- (11) -- 160
Minority inter-
est.............. 1 13 -- -- -- -- (4)
Corporate ex-
penses........... 1 -- -- -- -- -- (10)
Interest ex-
pense............ (2) (6) -- (1) -- -- (96)
Dividends on
Convertible
Preferred
Securities....... -- -- -- -- -- -- (9)
Interest income.. -- -- -- (1) 3 -- 10
---------- ------- ------------ --------------- ------- ---------- ------
Income (loss)
before income
taxes............ (2) 16 (1) (2) (8) -- 51
Benefit
(provision) for
income taxes..... 2 (6) -- 1 3 17 (3)
---------- ------- ------------ --------------- ------- ---------- ------
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4)...... $ -- $ 10 $ (1) $ (1) $ (5) $ 17 $ 48
========== ======= ============ =============== ======= ========== ======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
S-63
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST QUARTER 1997
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------- --------------------------------------------------------------
A B C D E/F
HOST DEBT
PARENT MARRIOTT BLACKSTONE 1998 1997 REPAYMENT &
COMPANY HOTELS HOTELS(1) ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
------- ------ --------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues(3)..... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 114 134 248 24 21 37 (5) --
Equity in
earnings of
affiliates...... 2 (1) 1 -- -- -- -- --
Other revenues.. -- 3 3 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total revenues.. 116 136 252 24 21 37 (5) --
----- ----- ----- ----- ----- ----- ----- -----
OPERATING COSTS
AND EXPENSES
Hotels.......... 61 90 151 23 11 14 (3) --
Other........... -- 10 10 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating
costs and
expenses........ 61 100 161 23 11 14 (3) --
----- ----- ----- ----- ----- ----- ----- -----
OPERATING
PROFIT........... 55 36 91 1 10 23 (2) --
Minority
interest......... -- (11) (11) -- (1) 2 (1) --
Corporate
expenses......... (4) (5) (9) -- -- -- -- --
Interest
expense.......... (28) (35) (63) (11) (3) (4) 1 (9)
Dividends on
Convertible
Preferred
Securities....... -- (9) (9) -- -- -- -- --
Interest income.. 4 8 12 (2) (3) (3) -- (3)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss)
before income
taxes............ 27 (16) 11 (12) 3 18 (2) (12)
Benefit
(provision) for
income taxes..... (11) 6 (5) 5 (1) (7) -- 5
----- ----- ----- ----- ----- ----- ----- -----
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4)...... $ 16 $ (10) $ 6 $ (7) $ 2 $ 11 $ (2) $ (7)
===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
REIT MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------------------------------------------
G I J K H/L M
NON- EARNINGS LEASE INCOME
CONTROLLED REIT PRIVATE & PROFITS CONVER- TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(2) SION ADJUSTMENT FORMA
---------- ------- ------------ --------------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues(3)..... $ -- $ -- $ -- $ -- $ 250 $ -- $250
Hotel revenues.. (37) 20 -- -- (308) -- --
Equity in
earnings of
affiliates...... 1 -- -- -- -- -- 2
Other revenues.. (3) -- -- -- -- -- --
---------- ------- ------------ --------------- ------- ---------- ------
Total revenues.. (39) 20 -- -- (58) -- 252
---------- ------- ------------ --------------- ------- ---------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (33) 12 1 -- (50) -- 126
Other........... (7) -- -- -- -- -- 3
---------- ------- ------------ --------------- ------- ---------- ------
Total operating
costs and
expenses........ (40) 12 1 -- (50) -- 129
---------- ------- ------------ --------------- ------- ---------- ------
OPERATING
PROFIT........... 1 8 (1) -- (8) -- 123
Minority
interest......... 1 8 -- -- -- -- (2)
Corporate
expenses......... 1 -- -- -- -- -- (8)
Interest
expense.......... (2) (6) -- (1) -- -- (98)
Dividends on
Convertible
Preferred
Securities....... -- -- -- -- -- -- (9)
Interest income.. -- -- -- -- 3 -- 4
---------- ------- ------------ --------------- ------- ---------- ------
Income (loss)
before income
taxes............ 1 10 (1) (1) (5) -- 10
Benefit
(provision) for
income taxes..... (1) (4) -- -- 2 5 (1)
---------- ------- ------------ --------------- ------- ---------- ------
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4)...... $ -- $ 6 $ (1) $ (1) $ (3) $ 5 $ 9
========== ======= ============ =============== ======= ========== ======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
S-64
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------- --------------------------------------------------------------
A B C D E/F
HOST DEBT
PARENT MARRIOTT BLACKSTONE 1998 1997 REPAYMENT &
COMPANY HOTELS HOTELS(1) ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
------- ------ --------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues(3).... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Hotel
revenues....... 493 600 1,093 148 84 89 (23) --
Equity in
earnings of
affiliates..... 6 (1) 5 -- -- -- -- --
Other
revenues....... 1 11 12 -- -- -- --
----- ----- ------ ----- ----- ----- ----- -----
Total
revenues....... 500 610 1,110 148 84 89 (23) --
----- ----- ------ ----- ----- ----- ----- -----
OPERATING COSTS AND
EXPENSES
Hotels......... 269 380 649 106 45 42 (10) --
Other.......... -- 29 29 -- -- -- -- --
----- ----- ------ ----- ----- ----- ----- -----
Total operating
costs and
expenses....... 269 409 678 106 45 42 (10) --
----- ----- ------ ----- ----- ----- ----- -----
OPERATING PROFIT.. 231 201 432 42 39 47 (13) --
Minority
interest........ (1) (31) (32) -- (4) 5 (1) --
Corporate
expenses........ (18) (27) (45) -- -- -- -- --
Interest
expense......... (135) (152) (287) (48) (12) (12) 3 (25)
Dividends on Convertible
Preferred
Securities...... -- (37) (37) -- -- -- -- --
Interest
income.......... 28 24 52 (7) (19) (18) -- (3)
----- ----- ------ ----- ----- ----- ----- -----
Income (loss) before income
taxes........... 105 (22) 83 (13) 4 22 (11) (28)
Benefit
(provision) for
income taxes.... (43) 7 (36) 5 (2) (9) 4 11
----- ----- ------ ----- ----- ----- ----- -----
Income (loss)
before
extraordinary items and
REIT Conversion
expenses(4)..... $ 62 $ (15) $ 47 $ (8) $ 2 $ 13 $ (7) $ (17)
===== ===== ====== ===== ===== ===== ===== =====
<CAPTION>
REIT MERGERS AND REIT CONVERSION ACTIVITIES
---------------------------------------------------------------------------
G I J K H/L M
NON- EARNINGS LEASE INCOME
CONTROLLED REIT PRIVATE & PROFITS CONVER- TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(2) SION ADJUSTMENT FORMA
---------- ------- ------------ --------------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues(3).... $ -- $ -- $ -- $ -- $ 1,047 $ -- $1,047
Hotel
revenues....... (170) 74 -- -- (1,295) -- --
Equity in
earnings of
affiliates..... 16 -- -- -- -- -- 21
Other
revenues....... (13) -- -- -- -- -- (1)
---------- ------- ------------ --------------- -------- ---------- -------
Total
revenues....... (167) 74 -- -- (248) -- 1,067
---------- ------- ------------ --------------- -------- ---------- -------
OPERATING COSTS AND
EXPENSES
Hotels......... (145) 51 2 -- (212) -- 528
Other.......... (19) -- -- -- -- -- 10
---------- ------- ------------ --------------- -------- ---------- -------
Total operating
costs and
expenses....... (164) 51 2 -- (212) -- 538
---------- ------- ------------ --------------- -------- ---------- -------
OPERATING PROFIT.. (3) 23 (2) -- (36) -- 529
Minority
interest........ 5 17 1 -- -- -- (9)
Corporate
expenses........ 4 -- -- -- -- -- (41)
Interest
expense......... (8) (25) -- (6) -- -- (420)
Dividends on Convertible
Preferred
Securities...... -- -- -- -- -- -- (37)
Interest
income.......... -- 1 -- -- 14 -- 20
---------- ------- ------------ --------------- -------- ---------- -------
Income (loss) before income
taxes........... (2) 16 (1) (6) (22) -- 42
Benefit
(provision) for
income taxes.... 2 (6) -- 2 9 18 (2)
---------- ------- ------------ --------------- -------- ---------- -------
Income (loss)
before
extraordinary items and
REIT Conversion
expenses(4)..... $ -- $ 10 $ (1) $ (4) $ (13) $ 18 $ 40
========== ======= ============ =============== ======== ========== =======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
S-65
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
ASSUMING 100% PARTICIPATION WITH NO NOTES ISSUED
A. Represents the adjustment to record the revenues, operating expenses,
interest expense, income taxes and to reduce interest income associated with
the acquisition of the equity and debt interests for the Blackstone
Acquisition.
B. Represents the adjustment to record the revenues, operating expenses,
minority interest, interest expense, income taxes and to reduce interest
income associated with the 1998 acquisition of, or purchase of controlling
interests in, eight full-service properties.
C. Represents the adjustment to record the revenues, operating expenses,
minority interest, interest expense, income taxes and to reduce interest
income associated with the 1997 acquisition of, or purchase of controlling
interests in, 18 full-service properties.
D. Represents the adjustment to revenues, operating expenses, minority
interest, interest expense and income taxes for the 1998 sale of the New York
Marriott East Side and the Napa Valley Marriott, which excludes the gain on
the sales of $31 million, net of taxes.
E. Represents the adjustment to reduce the interest expense associated with
the refinancing or payoff of mortgage debt for three full-service properties
(Marriott's Orlando World Center, the Philadelphia Marriott and the San
Francisco Marriott).
F. Represents the adjustment to record interest expense and related
amortization of deferred financing fees and reduce interest income as a result
of the Bond Refinancing. The adjustment excludes the estimated extraordinary
loss of $152 million, net of taxes, related to the Bond Refinancing resulting
from the write-off of deferred financing fees and the payment of bond tender
and consent fees.
G. Represents the adjustment for revenues, operating expenses, minority
interest, interest expense, corporate expenses and income taxes to
deconsolidate the Non-Controlled Subsidiary and reflect the Operating
Partnership's share of income as equity in earnings of affiliate.
H. Represents the adjustment to reduce depreciation expense related to
certain furniture and equipment sold to the Non-Controlled Subsidiary, record
interest income earned on the 7%, $200 million in notes from the Non-
Controlled Subsidiary and reduce the lease payment to the Operating
Partnership from the Lessee.
I. Represents the adjustment to record the revenues, operating expenses,
minority interest, interest expense, interest income and income taxes
associated with the REIT Mergers, including three partnerships not previously
consolidated by the Operating Partnership.
J. Represents the adjustment to record additional depreciation expense and
the decrease in minority interest expense related to the purchase of the
remaining minority interests in the Private Partnerships.
K. Represents the adjustment to record interest expense for the estimated
$75 million draw on the Credit Facility for the cash payment of the Earnings
and Profits Distribution to shareholders of Host Marriott.(/2/)
L. Represents the adjustment to remove hotel revenues and management fees
and record rental revenues associated with the leasing of certain hotel
properties to SLC and other lessees.(/3/)
M. Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
- --------
(1) Host Marriott Hotels reflects the historical financial statements of Host
Marriott less the senior living communities, which are contemplated to be
spun off to Host Marriott's shareholders in conjunction with the REIT
Conversion.
(2) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profits distribution will be based
upon Host Marriott's accumulated earnings and profits for tax purposes,
which could be affected by a number of factors (including, for example,
actual operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host Marriott).
(3) Lease amounts reflect estimates as the leases are currently subject to
negotiation. The lease amounts included may not reflect the final terms of
the leases.
(4) The amount of REIT Conversion expenses to be incurred is not known at this
time.
S-66
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
MARCH 27, 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------- ---------------------------------------------------
A B C D/E
HOST DEBT
PARENT MARRIOTT BLACKSTONE 1998 REPAYMENT
COMPANY HOTELS HOTELS(1) ACQUISITION ACQUISITIONS DISPOSITIONS & REFINANCING
------- ------ --------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $2,728 $2,198 $4,926 $1,667 $ 248 $(78) $ --
Notes and other
receivables,
net............ -- 37 37 63 (8) (2) --
Due from
managers....... 77 56 133 5 -- (2) --
Investments in
affiliates..... 18 (12) 6 -- -- -- --
Other assets.... 159 159 318 -- 1 (1) 43 (D)
(56)(D)
82 (D)
Receivable from
Lessee for
working
capital........ -- -- -- -- -- -- --
Cash, cash
equivalents and
short-term
marketable
securities..... 351 349 700 (262) (246) 171 (21)(D)
(92)(E)
------ ------ ------ ------ ----- ---- -------
$3,333 $2,787 $6,120 $1,473 $ (5) $ 88 $ (44)
====== ====== ====== ====== ===== ==== =======
LIABILITIES AND EQUITY
Debt............ $1,986 $1,638 $3,624 $ 600 $ -- $(35) $(1,550)(D)
1,400 (D)
350 (D)
Accounts payable
and accrued
expenses....... -- 70 70 -- -- -- --
Deferred income
taxes.......... 154 334 488 -- -- 22 --
Other
liabilities.... 195 252 447 -- (5) 70 --
------ ------ ------ ------ ----- ---- -------
Total
liabilities.... 2,335 2,294 4,629 600 (5) 57 200
Convertible
Preferred
Securities..... -- 550 550 -- -- -- --
Equity.......... 998 (57) 941 873 -- 31 (152)(D)
(92)(E)
------ ------ ------ ------ ----- ---- -------
$3,333 $2,787 $6,120 $1,473 $ (5) $ 88 $ (44)
====== ====== ====== ====== ===== ==== =======
<CAPTION>
REIT MERGERS AND REIT CONVERSION ACTIVITIES
----------------------------------------------------------------------
F G H I J K
EARNINGS
NON- & PROFITS LEASE DEFERRED
CONTROLLED REIT PRIVATE DISTRIBU- CONVER- TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS TION(2) SION ADJUSTMENT FORMA
---------- ------- ------------ --------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $(345) $515 $ 61 $ -- $ -- $-- $6,994
Notes and other
receivables,
net............ 61 (6) -- -- -- -- 145
Due from
managers....... (16) 17 -- -- (100) -- 37
Investments in
affiliates..... 344 -- -- -- -- -- 350
Other assets.... (63) 31 (11) -- -- -- 344
Receivable from
Lessee for
working
capital........ -- -- -- -- 100 -- 100
Cash, cash
equivalents and
short-term
marketable
securities..... (18) 3 (11) (150) -- -- 74
------ ------ ------ ------ ----- ---- -------
$ (37) $560 $ 39 $(150) $ -- $-- $8,044
====== ====== ====== ====== ===== ==== =======
LIABILITIES AND EQUITY
Debt............ $ 99 $575 $-- $ 75 $ -- $-- $5,138
Accounts payable
and accrued
expenses....... (9) 6 -- -- -- -- 67
Deferred income
taxes.......... (41) -- -- -- -- (194) 275
Other
liabilities.... (86) (21) (6) -- -- -- 399
------ ------ ------ ------ ----- ---- -------
Total
liabilities.... (37) 560 (6) 75 -- (194) 5,879
Convertible
Preferred
Securities..... -- -- -- -- -- 550
Equity.......... -- -- 45 (225) -- 194 1,615
------ ------ ------ ------ ----- ---- -------
$ (37) $560 $ 39 $(150) $ -- $-- $8,044
====== ====== ====== ====== ===== ==== =======
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
S-67
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
100% PARTICIPATION WITH NOTES ISSUED
A. Represents the adjustment to record the Blackstone Acquisition of 12
full-service properties (5,520 rooms) and a mortgage note secured by a
thirteenth full-service property including the issuance of 43.7 million OP
Units:
. Record property and equipment of $1,667 million
. Record mortgage note receivable of $63 million
. Record increase in due from managers of $5 million
. Record the use of cash of $262 million
. Record the assumption of mortgage debt of $600 million
. Record the issuance of 43.7 million OP Units with a value of $873 million
B. Represents the adjustment to record the 1998 acquisition of The Ritz-
Carlton, Phoenix, The Ritz-Carlton, Tysons Corner, the Torrance Marriott, the
acquisition of the remaining debt and equity interests in the Park Ridge
Marriott and the purchase of the remaining minority interests in the Norfolk
Waterside Marriott and the Calgary Marriott:
. Record property and equipment of $248 million
. Record a decrease in notes receivable of $8 million
. Record other assets of $1 million
. Record the use of cash of $246 million
. Record a decrease in other liabilities of $5 million related to the
purchase of minority interests
C. Represents the adjustment to record the sale of the New York Marriott
East Side and the Napa Valley Marriott:
. Record decrease in property and equipment of $78 million
. Record decrease in notes receivable of $2 million
. Record decrease in due from managers of $2 million
. Record decrease in other assets of $1 million
. Record cash of $171 million
. Record repayment of mortgage debt of $35 million
. Record deferred taxes of $22 million
. Record increase in other liabilities of $70 million primarily relating to
minority interest liabilities
. Record gain of $31 million, net of taxes
D. Represents the adjustment to record the Bond Refinancing assuming 100%
acceptance of the Offers:
. Record the repayment of the $1,550 million in Existing Senior Notes
. Record the issuance of $1,400 million in Senior Notes
. Record the write-off of $56 million in deferred financing fees related to
the Existing Senior Notes and the Existing Credit Facility
. Record the deferred financing fees of $43 million related to the Senior
Notes and the Credit Facility
. Record a draw of $350 million on the Credit Facility
. Record the net cash activity of the above items as follows:
<TABLE>
<S> <C>
Repayment of the Existing Senior Notes.......................... $(1,550)
Issuance of the Senior Notes.................................... 1,400
Net draw on the Credit Facility................................. 350
Deferred financing fees related to the Senior Notes and Credit
Facility....................................................... (43)
Bond tender and consent fees and other offering expenses........ (178)
-------
Net cash adjustment........................................... $ (21)
=======
</TABLE>
. Record the federal and state tax benefit of $82 million related to above
activity
. Record the estimated extraordinary loss of $152 million, net of taxes,
related to the Bond Refinancing
S-68
<PAGE>
E. Represents the repayment of $92 million of unsecured debt of SLC to
Marriott International resulting in a decrease in equity to the Operating
Partnership and contributed capital to SLC.
F. Represents the adjustment to deconsolidate the assets and liabilities of
the Non-Controlled Subsidiary and to reflect the sale of certain hotel
furniture and equipment to the Non-Controlled Subsidiary:
. Record decrease in property and equipment of $345 million, including $200
million of hotel furniture and equipment sold to the Non-Controlled
Subsidiary
. Record receivable from Non-Controlled Subsidiary for the furniture and
equipment loan of $200 million, net of the $134 million mortgage for six
hotels which will be held by the Non-Controlled Subsidiary (previously
eliminated in consolidation) and other notes totaling $5 million
. Record decrease in due from managers of $16 million
. Record investment in subsidiary of $344 million
. Record decrease in other assets of $63 million
. Record decrease in cash of $18 million
. Record increase in debt of $99 million
. Record decrease in accounts payable and accrued expenses of $9 million
. Record decrease in deferred taxes of $41 million
. Record decrease in other liabilities of $86 million
G. Represents the adjustment to record the REIT Mergers and issuance of
Notes at the Note Election Amount (the greater of Liquidation Value or 60% of
Exchange Value) to the Limited Partners:
. Record property and equipment of $515 million
. Record decrease in notes receivable of $6 million
. Record increase in due from managers of $17 million
. Record other assets of $31 million
. Record cash of $3 million
. Record debt of $575 million including $236 million of Notes to the
Limited Partners at the Note Election Amount
. Record accounts payable and accrued expenses of $6 million
. Record decrease in other liabilities of $21 million
H. Represents the adjustment to record the purchase of the remaining
minority interests in five Private Partnerships:
. Record property and equipment of $61 million
. Record decrease in other assets of $11 million
. Record use of cash of $11 million
. Record decrease in minority interest liabilities of $6 million
. Record the issuance of 2.3 million OP Units totaling approximately $45
million
I. Represents the estimated $225 million cash payment of the Earnings and
Profits Distribution to shareholders of Host Marriott including a draw on the
Credit Facility of $75 million.(/2/)
J. Represents the adjustment to record the transfer of working capital to
SLC related to the leasing of the Operating Partnership's hotels by decreasing
working capital and recording a receivable from the lessee of $100 million.
K. Represents the adjustment to record the effect on deferred taxes for the
change in tax status resulting from the REIT Conversion by decreasing deferred
taxes and increasing equity by $194 million.
- --------
(1) Host Marriott Hotels reflects the historical financial statements of Host
Marriott less the senior living communities, which are contemplated to be
spun off to Host Marriott's shareholders in conjunction with the REIT
Conversion.
(2) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profits distribution will be based
upon Host Marriott's accumulated earnings and profits for tax purposes,
which could be affected by a number of factors (including, for example,
actual operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host Marriott).
S-69
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST QUARTER 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------ -------------------------------------------------
A B D F
HOST
PARENT MARRIOTT BLACKSTONE 1998 BOND
COMPANY HOTELS HOTELS(1) ACQUISITION ACQUISITIONS DISPOSITIONS REFINANCING
------- ------ --------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues(3)........ $-- $-- $-- $-- $-- $-- $--
Hotel revenues.. 164 157 321 34 17 (4) --
Equity in
earnings of
affiliates..... 2 (1) 1 -- -- -- --
Other revenues.. -- 3 3 -- -- -- --
---- ---- ---- ---- ---- ---- ----
Total revenues.. 166 159 325 34 17 (4) --
---- ---- ---- ---- ---- ---- ----
OPERATING COSTS
AND EXPENSES
Hotels.......... 80 93 173 23 8 (2) --
Other........... -- 5 5 -- -- -- --
---- ---- ---- ---- ---- ---- ----
Total operating
costs and
expenses....... 80 98 178 23 8 (2) --
---- ---- ---- ---- ---- ---- ----
OPERATING PROF-
IT............. 86 61 147 11 9 (2) --
Minority inter-
est............ -- (16) (16) -- (1) (1) --
Corporate ex-
penses......... (5) (6) (11) -- -- -- --
Interest ex-
pense.......... (41) (35) (76) (11) (1) -- 1
Dividends on
Convertible
Preferred
Securities..... -- (9) (9) -- -- -- --
Interest in-
come........... 6 8 14 (2) (4) -- --
---- ---- ---- ---- ---- ---- ----
Income (loss)
before income
taxes.......... 46 3 49 (2) 3 (3) 1
Benefit (provi-
sion) for in-
come taxes..... (18) (3) (21) 1 (1) 1 --
---- ---- ---- ---- ---- ---- ----
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4).... $ 28 $-- $ 28 $ (1) $ 2 $ (2) $ 1
==== ==== ==== ==== ==== ==== ====
<CAPTION>
REIT MERGERS AND REIT CONVERSION ACTIVITIES
--------------------------------------------------------------------------
G I J K H/L M
REIT
MERGERS
NON- AND EARNINGS LEASE INCOME
CONTROLLED NOTES PRIVATE & PROFITS CONVER- TAX PRO
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(2) SION ADJUSTMENT FORMA
---------- -------- ------------ --------------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues(3)........ $-- $-- $-- $-- $ 279 $-- $279
Hotel revenues.. (42) 22 -- -- (348) -- --
Equity in
earnings of
affiliates..... 6 -- -- -- -- -- 7
Other revenues.. (3) -- -- -- -- -- --
---------- -------- ------------ --------------- ------- ---------- ------
Total revenues.. (39) 22 -- -- (69) -- 286
---------- -------- ------------ --------------- ------- ---------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (37) 13 1 -- (58) -- 121
Other........... -- -- -- -- -- -- 5
---------- -------- ------------ --------------- ------- ---------- ------
Total operating
costs and
expenses....... (37) 13 1 -- (58) -- 126
---------- -------- ------------ --------------- ------- ---------- ------
OPERATING PROF-
IT............. (2) 9 (1) -- (11) -- 160
Minority inter-
est............ 1 13 -- -- -- -- (4)
Corporate ex-
penses......... 1 -- -- -- -- -- (10)
Interest ex-
pense.......... (2) (10) -- (1) -- -- (100)
Dividends on
Convertible
Preferred
Securities..... -- -- -- -- -- (9)
Interest in-
come........... -- -- -- (1) 3 -- 10
---------- -------- ------------ --------------- ------- ---------- ------
Income (loss)
before income
taxes.......... (2) 12 (1) (2) (8) -- 47
Benefit (provi-
sion) for in-
come taxes..... 2 (5) -- 1 3 17 (2)
---------- -------- ------------ --------------- ------- ---------- ------
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4).... $-- $ 7 $ (1) $ (1) $ (5) $ 17 $ 45
========== ======== ============ =============== ======= ========== ======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
S-70
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST QUARTER 1997
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------ --------------------------------------------------------------
A B C D E/F
HOST DEBT
PARENT MARRIOTT BLACKSTONE 1998 1997 REPAYMENT &
COMPANY HOTELS HOTELS(1) ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
------- ------ --------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues(3).... $-- $-- $-- $-- $-- $-- $-- $--
Hotel revenues.. 114 134 248 24 21 37 (5) --
Equity in
earnings of
affiliates..... 2 (1) 1 -- -- -- -- --
Other revenues.. -- 3 3 -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total revenues.. 116 136 252 24 21 37 (5) --
---- ---- ---- ---- ---- ---- ---- ----
OPERATING COSTS
AND EXPENSES
Hotels.......... 61 90 151 23 11 14 (3) --
Other........... -- 10 10 -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total operating
costs and
expenses....... 61 100 161 23 11 14 (3) --
---- ---- ---- ---- ---- ---- ---- ----
OPERATING
PROFIT.......... 55 36 91 1 10 23 (2) --
Minority
interest........ -- (11) (11) -- (1) 2 (1) --
Corporate
expenses........ (4) (5) (9) -- -- -- -- --
Interest
expense......... (28) (35) (63) (11) (3) (4) 1 (9)
Dividends on
Convertible
Preferred
Securities...... -- (9) (9) -- -- -- -- --
Interest income.. 4 8 12 (2) (3) (3) -- (3)
---- ---- ---- ---- ---- ---- ---- ----
Income (loss)
before income
taxes........... 27 (16) 11 (12) 3 18 (2) (12)
Benefit
(provision) for
income taxes.... (11) 6 (5) 5 (1) (7) -- 5
---- ---- ---- ---- ---- ---- ---- ----
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4)..... $ 16 $(10) $ 6 $ (7) $ 2 $ 11 $ (2) $ (7)
==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
REIT MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------------------------------------------------
G I J K H/L M
REIT
NON- MERGERS EARNINGS LEASE INCOME
CONTROLLED AND NOTES PRIVATE & PROFITS CONVER- TAX PRO
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(2) SION ADJUSTMENT FORMA
---------- --------- ------------ --------------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues(3).... $-- $-- $-- $-- $ 250 $-- $ 250
Hotel revenues.. (37) 20 -- -- (308) -- --
Equity in
earnings of
affiliates..... 1 -- -- -- -- -- 2
Other revenues.. (3) -- -- -- -- -- --
---------- --------- ------------ --------------- ------- ---------- ------
Total revenues.. (39) 20 -- -- (58) -- 252
---------- --------- ------------ --------------- ------- ---------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (33) 12 1 -- (50) -- 126
Other........... (7) -- -- -- -- -- 3
---------- --------- ------------ --------------- ------- ---------- ------
Total operating
costs and
expenses....... (40) 12 1 -- (50) -- 129
---------- --------- ------------ --------------- ------- ---------- ------
OPERATING
PROFIT.......... 1 8 (1) -- (8) -- 123
Minority
interest........ 1 8 -- -- -- -- (2)
Corporate
expenses........ 1 -- -- -- -- -- (8)
Interest
expense......... (2) (10) -- (1) -- -- (102)
Dividends on
Convertible
Preferred
Securities...... -- -- -- -- (9)
Interest income.. -- -- -- -- 3 -- 4
---------- --------- ------------ --------------- ------- ---------- ------
Income (loss)
before income
taxes........... 1 6 (1) (1) (5) -- 6
Benefit
(provision) for
income taxes.... (1) (2) -- -- 2 4 --
---------- --------- ------------ --------------- ------- ---------- ------
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4)..... $-- $ 4 $ (1) $ (1) $ (3) $ 4 $ 6
========== ========= ============ =============== ======= ========== ======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
S-71
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------ --------------------------------------------------------------
A B C D E/F
HOST DEBT
PARENT MARRIOTT BLACKSTONE 1998 1997 REPAYMENT &
COMPANY HOTELS HOTELS(1) ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
------- ------ --------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues(3).... $ -- $-- $ -- $-- $-- $-- $-- $--
Hotel revenues.. 493 600 1,093 148 84 89 (23) --
Equity in
earnings of
affiliates..... 6 (1) 5 -- -- -- -- --
Other revenues.. 1 11 12 -- -- -- --
----- ---- ------ ---- ---- ---- ---- ----
Total revenues.. 500 610 1,110 148 84 89 (23) --
----- ---- ------ ---- ---- ---- ---- ----
OPERATING COSTS
AND EXPENSES
Hotels.......... 269 380 649 106 45 42 (10) --
Other........... -- 29 29 -- -- -- -- --
----- ---- ------ ---- ---- ---- ---- ----
Total operating
costs and
expenses....... 269 409 678 106 45 42 (10) --
----- ---- ------ ---- ---- ---- ---- ----
OPERATING
PROFIT.......... 231 201 432 42 39 47 (13) --
Minority
interest........ (1) (31) (32) -- (4) 5 (1) --
Corporate
expenses........ (18) (27) (45) -- -- -- -- --
Interest
expense......... (135) (152) (287) (48) (12) (12) 3 (25)
Dividends on
Convertible
Preferred
Securities...... -- (37) (37) -- -- -- -- --
Interest income.. 28 24 52 (7) (19) (18) -- (3)
----- ---- ------ ---- ---- ---- ---- ----
Income (loss)
before income
taxes........... 105 (22) 83 (13) 4 22 (11) (28)
Benefit
(provision) for
income taxes.... (43) 7 (36) 5 (2) (9) 4 11
----- ---- ------ ---- ---- ---- ---- ----
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4)..... $ 62 $(15) $ 47 $ (8) $ 2 $ 13 $ (7) $(17)
===== ==== ====== ==== ==== ==== ==== ====
<CAPTION>
REIT MERGERS AND REIT CONVERSION ACTIVITIES
---------------------------------------------------------------------------------
G I J K H/L M
REIT
NON- MERGERS EARNINGS LEASE INCOME
CONTROLLED AND NOTES PRIVATE & PROFITS CONVER- TAX PRO
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(2) SION ADJUSTMENT FORMA
---------- --------- ------------ --------------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues(3).... $ -- $-- $-- $-- $ 1,047 $-- $1,047
Hotel revenues.. (170) 74 -- -- (1,295) -- --
Equity in
earnings of
affiliates..... 16 -- -- -- -- -- 21
Other revenues.. (13) -- -- -- -- -- (1)
---------- --------- ------------ --------------- -------- ---------- -------
Total revenues.. (167) 74 -- -- (248) -- 1,067
---------- --------- ------------ --------------- -------- ---------- -------
OPERATING COSTS
AND EXPENSES
Hotels.......... (145) 49 2 -- (212) -- 526
Other........... (19) -- -- -- -- -- 10
---------- --------- ------------ --------------- -------- ---------- -------
Total operating
costs and
expenses....... (164) 49 2 -- (212) -- 536
---------- --------- ------------ --------------- -------- ---------- -------
OPERATING
PROFIT.......... (3) 25 (2) -- (36) -- 531
Minority
interest........ 5 17 1 -- -- -- (9)
Corporate
expenses........ 4 -- -- -- -- -- (41)
Interest
expense......... (8) (42) -- (6) -- -- (437)
Dividends on
Convertible
Preferred
Securities...... -- -- -- -- -- -- (37)
Interest income.. -- 1 -- -- 14 -- 20
---------- --------- ------------ --------------- -------- ---------- -------
Income (loss)
before income
taxes........... (2) 1 (1) (6) (22) -- 27
Benefit
(provision) for
income taxes.... 2 -- -- 2 9 13 (1)
---------- --------- ------------ --------------- -------- ---------- -------
Income (loss)
before
extraordinary
items and REIT
Conversion
expenses(4)..... $ -- $ 1 $ (1) $ (4) $ (13) $ 13 $ 26
========== ========= ============ =============== ======== ========== =======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
S-72
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
ASSUMING 100% PARTICIPATION WITH NOTES ISSUED
A. Represents the adjustment to record the revenues, operating expenses,
interest expense, income taxes and to reduce interest income associated with
the acquisition of the equity and debt interests for the Blackstone
Acquisition.
B. Represents the adjustment to record the revenues, operating expenses,
minority interest, interest expense, income taxes and to reduce interest
income associated with the 1998 acquisition of, or purchase of controlling
interests in, eight full-service properties.
C. Represents the adjustment to record the revenues, operating expenses,
minority interest, interest expense, income taxes and to reduce interest
income associated with the 1997 acquisition of, or purchase of controlling
interests in, 18 full-service properties.
D. Represents the adjustment to revenues, operating expenses, minority
interest, interest expense and income taxes for the 1998 sale of the New York
Marriott East Side and the Napa Valley Marriott, which excludes the gain on
the sales of $31 million, net of taxes.
E. Represents the adjustment to reduce the interest expense associated with
the refinancing or payoff of mortgage debt for three full-service properties
(Marriott's Orlando World Center, the Philadelphia Marriott and the San
Francisco Marriott).
F. Represents the adjustment to record interest expense and related
amortization of deferred financing fees and reduce interest income as a result
of the Bond Refinancing. The adjustment excludes the estimated extraordinary
loss of $152 million, net of taxes, related to the Bond Refinancing resulting
from the write-off of deferred financing fees and the payment of bond tender
and consent fees.
G. Represents the adjustment for revenues, operating expenses, minority
interest, interest expense, corporate expenses and income taxes to
deconsolidate the Non-Controlled Subsidiary and reflect the Operating
Partnership's share of income as equity in earnings of affiliate.
H. Represents the adjustment to reduce depreciation expense related to
certain furniture and equipment sold to the Non-Controlled Subsidiary, record
interest income earned on the 7%, $200 million in notes from the Non-
Controlled Subsidiary and reduce the lease payment to the Operating
Partnership from the Lessee.
I. Represents the adjustment to record the revenues, operating expenses,
minority interest, interest expense, interest income and income taxes
associated with the REIT Mergers, including three partnerships not previously
consolidated by the Operating Partnership. Interest expense reflects interest
on various mortgage notes and the estimated $236 million in 7% Notes issued in
lieu of OP Units.
J. Represents the adjustment to record additional depreciation expense and
the decrease in minority interest expense related to the purchase of the
remaining minority interests in the Private Partnerships.
K. Represents the adjustment to record interest expense for the estimated
$75 million draw on the Credit Facility for the cash payment of the Earnings
and Profits Distribution to shareholders of Host Marriott.(/2/)
L. Represents the adjustment to remove hotel revenues and management fees
and record rental revenues associated with the leasing of certain hotel
properties to SLC and other lessees.(/3/)
M. Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
- --------
(1) Host Marriott Hotels reflects the historical financial statements of Host
Marriott less the senior living communities which are contemplated to be
spun off to Host Marriott's shareholders in conjunction with the REIT
Conversion.
(2) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profits distribution will be based
upon Host Marriott's accumulated earnings and profits for tax purposes,
which could be affected by a number of factors (including, for example,
actual operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host Marriott).
(3) Lease amounts reflect estimates as the leases are currently subject to
negotiation. The lease amounts included may not reflect the final terms of
the leases.
(4) The amount of REIT Conversion expenses to be incurred is not known at this
time.
S-73
<PAGE>
THE OFFERS TO PURCHASE AND CONSENT SOLICITATIONS
On June 26, 1998, the Company commenced (i) an offer to purchase for cash
any and all of the Company's (A) 9 1/2% Senior Secured Notes due 2005 (the "9
1/2% Senior Notes"), (B) 8 7/8% Senior Notes due 2007 (the "8 7/8% Senior
Notes") and (C) the 9% Senior Notes due 2007 (the "9% Senior Notes" and,
together with the 9 1/2% Senior Notes and the 8 7/8% Senior Notes, the
"Existing Senior Notes"), and (ii) a solicitation of consents (the "Consents")
from the registered holders of each series of Existing Senior Notes to certain
amendments (the "Proposed Amendments") to the Indentures under which such
Existing Senior Notes were issued (referred to herein as the "Existing Senior
Notes Indentures") to eliminate or modify substantially all of the restrictive
covenants and certain other provisions of each Existing Senior Notes
Indenture. The offers to purchase are also referred to herein as the "Offers"
and the solicitation of consents are also referred to herein as the "Consent
Solicitations." The Offers and Consent Solicitations are being made pursuant
to the Offer to Purchase and Consent Solicitation dated June 26, 1998 (the
"Offer to Purchase and Consent Solicitation"), as amended.
Under the terms of each Offer, the amount payable by the Company for
tendered Existing Senior Notes (the "Offer Consideration") is being calculated
in a manner to result in a yield to the earliest redemption date of the
applicable issue of Existing Senior Notes equal to a fixed spread of 47 basis
points over the yield of a reference U.S. Government security with a maturity
close in proximity to the applicable redemption date, less the Consent Payment
(as defined below). Based on the foregoing and assuming a settlement date of
August 3, 1998, the Offer Consideration to be paid for each $1,000 principal
amount of 9 1/2% Senior Notes, 8 7/8% Senior Notes and 9% Senior Notes
tendered would be $1,072.21, $1,117.24 and $1,086.31, respectively. It is a
condition of each Offer and Consent Solicitation that a registered holder
seeking to tender his or her Existing Senior Notes in the Offer also provide
their Consent to the Proposed Amendments with respect to the applicable
Existing Senior Notes Indenture. Additionally, a registered holder seeking to
provide his Consent to the Proposed Amendments to an Existing Senior Notes
Indenture must also tender his or her Existing Senior Notes issued pursuant to
such Existing Senior Notes Indenture. In order to encourage registered holders
to give their Consent to the Proposed Amendments as soon as practicable, the
Company offered to pay each registered holder who validly tendered his or her
Existing Senior Notes and delivered his or her Consent to the Proposed
Amendments prior to July 13, 1998 an amount in cash equal to $20 for each
$1,000 in principal amount of Existing Senior Notes to which the Consent
relates (the "Consent Payment").
As of July 13, 1998 (the "Consent Date"), the Company had received valid
tenders of, and duly executed Consents to the Proposed Amendments to the
applicable Existing Senior Notes Indenture with respect to, (i) $578,052,000
aggregate principal amount of the 9 1/2% Senior Notes (representing 96.34% of
the outstanding principal amount of 9 1/2% Senior Notes), (ii) $599,475,000
aggregate principal amount of 8 7/8% Senior Notes (representing 99.91% of the
outstanding principal amount of 8 7/8% Senior Notes) and (iii) $349,725,000
aggregate principal amount of 9% Senior Notes (representing 99.92% of the
outstanding 9% Senior Notes). Under the terms of each Offer and Consent
Solicitation, from and after the Consent Date, no Existing Senior Notes
tendered pursuant to an Offer may be withdrawn and the corresponding Consent
may not be revoked unless such Offer is terminated without any Existing Senior
Notes being purchased thereunder.
The Company's obligation to consummate the Offers and Consent Solicitations
remains subject to certain conditions described in the Offer to Purchase and
Consent Solicitation, including, among other things, the Company's having
consummated the Offering and made other financing arrangements necessary to
consummate the Offers and the Consent Solicitations. See "Description of
Certain Indebtedness--Credit Facility." Each Offer and Consent Solicitation is
being made by the Company only pursuant to the Offer to Purchase and Consent
Solicitation. The Company may supplement or amend the terms of any of the
Offers and Consent Solicitations. The Company and the Underwriters expressly
disclaim any obligation or undertaking to disseminate to potential investors
of Senior Notes any update or revisions to the Offers or Consent
Solicitations.
Each Offer is expected to expire at 9:00 a.m., New York City time, on July
27, 1998, unless extended by the Company.
S-74
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
It is expected that at the consummation of the Offering, on a pro forma
basis as of March 27, 1998, after giving effect to the Offering, the aggregate
principal amount of unsubordinated Indebtedness of the Company would have been
approximately $2,186 million, of which approximately $414 million would have
been secured by assets held by the Company or its subsidiaries. Certain of the
material Indebtedness of the Company and its subsidiaries is described below.
Credit Facility. The Company is negotiating with a number of financial
institutions led by Bankers Trust Company, an affiliate of one of the
Underwriters with respect to a $1,250 million credit facility to be provided
by a syndicate of lenders (the "Lenders"). The Credit Facility is expected to
provide the Company with (i) a $350 million term loan facility (subject to
increases as provided in the succeeding paragraph) and (ii) a $900 million
revolving credit facility. The Credit Facility will have an initial term of
three years with two one-year options to extend. The proceeds of the Credit
Facility will be used (i) to fund the Offers and Consent Solicitations, (ii)
to acquire full-service hotels and other real estate assets including, under
certain circumstances, senior living properties, (iii) under certain
circumstances, to develop new full-service hotels and (iv) for general working
capital purposes.
The term loan facility will be funded on the closing date of the Credit
Facility (which will be concurrent with the closing of the Offering). In
addition, the $350 million term loan facility may be increased by $250 million
and will be available, subject to terms and conditions thereof, pursuant to a
single drawing made on or prior to the second anniversary of the closing of
the Credit Facility from those Lenders that have agreed to provide the same.
The Lenders will advance funds under the revolving credit facility as
requested by the Company with minimum borrowing amounts and frequency
limitations to be agreed upon, subject to customary conditions including, but
not limited to, (i) no existing or resulting default or event of default under
the Credit Facility and (ii) continued accuracy of representations and
warranties in all material aspects.
The monthly per annum interest rate applicable to the Credit Facility and
the unused commitment fee applicable to the revolving portion of the Credit
Facility will be calculated based on a spread over LIBOR based on the
quarterly recalculation of a leverage ratio set forth in the Credit Facility.
The Credit Facility will provide that in the event that the Company achieves
one of several investment grade long-term unsecured indebtedness rating, the
spread over LIBOR applicable to the Credit Facility will be fixed based on the
particular rating achieved. If the Company elects to exercise its one-year
extensions, the Company will be required to amortize approximately 22.5% per
annum of the principal amount outstanding under the Credit Facility.
The Company's obligations under the Credit Facility will be guaranteed,
subject to certain conditions, on a senior basis by Host Marriott, Hospitality
and certain of the Company's existing and future subsidiaries. Borrowings
under the Credit Facility will rank pari passu with the Senior Notes, any
Existing Senior Notes (if any remain outstanding) and all other existing and
future senior Indebtedness of the Company. The Credit Facility will be
secured, on an equal and ratable basis, with the Senior Notes and the Existing
Senior Notes (if any remain outstanding), by a pledge of the capital stock of
certain subsidiaries of the Company.
The Credit Facility will include financial and other covenants that require
the maintenance of certain ratios with respect to, among other things, maximum
leverage, limitations on indebtedness, minimum net worth and interest and
fixed charge coverage. The Credit Facility will also include restrictive and
other covenants with respect to the Company and the Subsidiary Guarantors.
Existing Senior Notes. In May 1995, the Company issued $600 million
aggregate principal amount of 9 1/2% Senior Notes pursuant to an indenture
dated May 25, 1995 (the "9 1/2% Senior Note Indenture"). In July 1997, the
Company merged with HMC Acquisitions, Inc. ("Acquisitions") an indirect wholly
owned subsidiary of Host Marriott, and assumed $350 million aggregate
principal amount of the 9% Senior Notes issued by Acquisitions pursuant to an
indenture dated December 20, 1995 (the "9% Senior Notes Indenture"). In July
1997, the Company consummated a consent solicitation with respect to the 9
1/2% Senior Notes Indenture to facilitate (i) the merger of Acquisitions into
the Company and (ii) the ability of the Company to acquire
S-75
<PAGE>
(A) through certain designated subsidiaries, properties subject to non-
recourse indebtedness and (B) a less than a majority equity interest in
corporations, partnerships and certain other entities holding hotel and senior
living properties that were controlled by the Company. At such time,
Acquisitions also consummated a similar consent solicitation with respect to
the 9% Senior Notes. The consent solicitations with respect to the 9% Senior
Notes and the 9 1/2% Senior Notes are sometimes referred to herein as the
"1997 Consent Solicitations." Additionally, in July 1997, the Company issued
$600 million aggregate principal amount of 8 7/8% Senior Notes pursuant to an
indenture dated July 15, 1997 (the "8 7/8% Senior Notes Indenture").
Pursuant to the Offers and Consent Solicitations, the Company has offered to
purchase any and all of each issue of Existing Senior Notes. See "The Offers
to Purchase and Consent Solicitations." In the event that the Company
consummates the Offers and Consent Solicitations, substantially all of the
restrictive and other covenants to which the Company is subject as well as
certain other provisions of the Existing Senior Notes Indentures will be
deleted or substantially modified.
The 9 1/2% Senior Notes to be purchased by the Company pursuant to an Offer
were issued at par and have a maturity date of May 15, 2005. The net proceeds
of the 9 1/2% Senior Notes (together with the net proceeds of senior notes of
another Host Marriott subsidiary) were used to defease and subsequently redeem
all of the senior notes of Hospitality and to repay borrowings under Host
Marriott's line of credit with Marriott International. The 9% Senior Notes to
be purchased by the Company pursuant to an Offer were issued at par and have a
final maturity of December 15, 2007. A portion of the net proceeds of the
offering of 9% Senior Notes were utilized to repay in full the outstanding
borrowings under a $230 million revolving line of credit, which was then
terminated. The 8 7/8% Senior Notes to be purchased by the Company pursuant to
an Offer were issued at par and have a final maturity of July 15, 2007. The
net proceeds from the Offering of the 8 7/8% Senior Notes were used to pay the
consent fees and other costs associated with the 1997 Consent Solicitation (as
defined) and for the acquisition of full-service hotel properties.
Mortgage and Other Indebtedness. On a pro forma basis as of March 27, 1998,
the Company has approximately $414 million of mortgage and other debt secured
by assets other than the capital stock of the Company's subsidiaries. The
average maturity of such debt is 9.4 years with an average interest rate of
7.6%. The debt is collateralized by approximately $606 million of real estate
assets.
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RELATIONSHIP WITH HOST MARRIOTT
The Company operates as a unit of Host Marriott, utilizing Host Marriott's
employees, centralized systems for cash management, insurance and
administrative services. Host Marriott contracts with Marriott International
for certain of these services. In addition, Host Marriott provides certain
corporate, general and administrative services to the Company. Certain of
these expenses have been allocated to the Company primarily based on the
Company's utilization of specific functions.
The Company has no employees. Host Marriott provides the services of certain
employees (including the Company's executive officers) to the Company. The
Company anticipates that each of its executive officers will generally devote
a sufficient portion of his or her time to the business of the Company.
However, such executive officers also will devote a significant portion of his
or her time to the business of Host Marriott and its other subsidiaries.
Implementation of the Company's future business strategy to acquire full-
service hotels primarily in the U.S. will be dependent upon officers of the
Company who may have similar obligations to Host Marriott or its affiliates.
Prior to the consummation of the REIT Conversion, there can be no assurance
that the Company will be provided the opportunity to purchase or acquire an
economically desirable full-service hotel which also may be available to Host
Marriott or one of its other subsidiaries.
For further information regarding the Company's relationship with Host
Marriott after the REIT Conversion, see "The REIT Conversion."
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
Marriott International (or one of its subsidiaries) serves as the manager
for all but fourteen of the Company's full-service hotels and for the 18
Residence Inns leased by the Company. Marriott International also provides
various other services to Host Marriott and its subsidiaries, including the
Company.
Management Agreements. The Company is a party to management agreements with
Marriott International (or one of its subsidiaries) with respect to 55 of its
69 full service hotels (the "Management Agreements") which generally provide
for Marriott International (or the appropriate subsidiary) to manage the
hotels for an initial term of 15 to 30 years with renewal terms of up to an
additional 16 to 30 years. The Management Agreements generally provide for
payment of base management fees equal to two to four percent of sales and
incentive management fees generally equal to 40% to 50% of hotel operating
profits over a priority return to the Company, with total incentive management
fees not to exceed 20% of operating profits. For full-service hotels acquired
after September 1995, the incentive management fee is generally equal to 20%
of operating profits. The Company may terminate certain Management Agreements
if specified performance thresholds are not met, subject to the right of
Marriott International to cure. In the event of early termination of any
Management Agreement, Marriott International will receive additional fees
based on the unexpired term and expected future base and incentive management
fees. No Management Agreement with respect to a single lodging facility is
cross-collateralized with or cross-defaulted to any other Management Agreement
and a single Management Agreement may be cancelled under certain conditions
without triggering a cancellation of any other Management Agreement. Under
each Management Agreement for full-service hotels, Marriott International
collects all revenue generated at a particular lodging property. Marriott
International holds such amounts on behalf of the Company in segregated
accounts and forwards to the Company every two weeks all amounts in excess of
certain expenses and management fees (as described more fully below). Because
amounts collected by Marriott International are held on the Company's behalf,
the Company does not depend upon the creditworthiness of Marriott
International for receipt of such payments.
Pursuant to the terms of the Management Agreements, Marriott International
is required to furnish the hotels with certain services ("Chain Services")
which are generally provided on a central or regional basis to all hotels
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in the Marriott International hotel system. Chain Services include central
training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, all the Company's properties participate in the
Marriott Rewards frequent guest program. The cost of this program is charged
to all hotels in the respective hotel system.
The Company is obligated to provide the manager with sufficient funds to
cover the cost of certain nonroutine repairs and maintenance to the hotels
which are normally capitalized and replacements and renewals to the hotels'
property and improvements. Under certain circumstances, the Company will be
required to establish escrow accounts for such purposes under terms outlined
in the Management Agreements. The Company is also required to provide Marriott
International with funding for working capital to meet the operating needs of
the hotels. Marriott International converts cash advanced by the Company into
other forms of working capital consisting primarily of operating cash,
inventories and trade receivables. Under the terms of the Management
Agreements, Marriott International maintains possession of and sole control
over the components of working capital and accordingly, the Company reports
the total amounts so advanced to Marriott International as a component of
other assets. Upon termination of the Management Agreements, the working
capital will be returned to the Company.
Franchise Agreements. The Company has entered into franchise agreements with
Marriott International for seven hotels. Pursuant to these franchise
agreements, the Company generally pays a franchise fee based on a percentage
of room sales and food and beverage sales as well as certain other fees for
advertising and reservations. Franchise fees for room sales vary from four to
six percent of room sales, while fees for food and beverage sales vary from
two to three percent of sales. The initial terms of the franchise agreements
are from 20 to 25 years.
Residence Inns. The agreements pursuant to which Marriott International
operates the 18 Residence Inns subject to the sale leaseback transaction with
Purchaser REIT (the "Residence Inn Agreements"), each provide for a system fee
equal to four percent of annual gross revenue, and a base fee equal to two
percent of annual gross revenues. In addition, the agreements provide for an
incentive management fee equal to 50% of "Available Cash Flow" for each fiscal
year (provided that the cumulative incentive management fee may not on any
date exceed 20% of the cumulative Operating Profit (as defined in the
Residence Inn Agreements) 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 (as defined in the Residence Inn Agreements). 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 can elect to avoid such termination by making cure
payments to the extent necessary to allow the specified Operating Profit
thresholds to be satisfied).
Policies and Procedures for Addressing Conflicts. The on-going relationships
between Marriott International and Host Marriott may present certain conflict
situations for J.W. Marriott, Jr. who serves as Chairman of the Board of
Directors and Chief Executive Officer of Marriott International and also
serves as a director of Host Marriott, and for Richard E. Marriott, who serves
as a director of Marriott International, and as the Chairman of the Board of
Directors of Host Marriott. Messrs. Richard E. Marriott and J.W. Marriott,
Jr., as well as other executive officers and directors of Host Marriott and
Marriott International, also own (or have options or other rights to acquire)
a significant number of shares of common stock in both Host Marriott and
Marriott International. Host Marriott 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 Richard E. Marriott and J.W.
Marriott, Jr. (or such other executive officers and directors having a
significant ownership interest in the
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companies) in conflict situations, including matters relating to contractual
relationships or litigation between Marriott International and Host Marriott.
Such procedures include requiring Richard E. Marriott and J.W. Marriott, Jr.
(or such other executive officers or directors having a significant ownership
interest in the companies) to abstain from making management decisions in
their capacities as officers of Marriott International and Host Marriott
respectively, and to abstain from voting as directors of each 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 Richard E. Marriott
and J.W. Marriott, Jr. (or such other executive officers and directors having
a significant ownership interest in the companies) in the matter 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 Host Marriott to monitor
this issue in consultation with the Board of Directors. See "Risk Factors--
Relationship with Marriott International."
Relationship After the REIT Conversion. Subsidiaries of Marriott
International will serve as managers for a majority of the Operating
Partnership's hotels which will be leased to the Lessees pursuant to the
management agreements in effect at the time of the REIT Conversion. Marriott
International and its subsidiaries are also expected to provide various other
services to Host REIT and its affiliates. With respect to these contractual
arrangements, the potential exists for disagreement as to contract compliance.
Additionally, the possible desire of Host REIT and the Operating Partnership
to finance, refinance or effect a sale of any of the hotels managed by
subsidiaries of Marriott International may, depending upon the structure of
such transactions, result in a need to modify the management agreements with
respect to such hotel. Any such modification proposed by Host REIT or the
Operating Partnership may not be acceptable to Marriott International or the
applicable Lessee, and the lack of consent from either Marriott International
or the applicable Lessee that has assumed the management agreement could
adversely affect the Operating Partnership'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
Operating Partnership, Host REIT or the Lessees. Nevertheless, the Operating
Partnership believes that there is sufficient mutuality of interest between
the Operating Partnership, the Lessees and Marriott International to result in
a mutually productive relationship.
Under each management agreement related to a Marriott International-managed
hotel, the Marriott International subsidiary serving as the manager will
provide complete management services to the applicable Lessees in connection
with its management of such Lessee's hotels following the REIT Conversion. In
most cases, these relationships are identical to those that currently exist
between the applicable manager and Host Marriott, the Company or one of Host
Marriott's other subsidiaries, or the applicable Partnership, and that would
exist between the Operating Partnership's subsidiaries and the manager in the
event the leases expire or otherwise terminate while the management agreements
remain in effect.
The Lessees under leases of hotels that are managed by subsidiaries of
Marriott International will be owned 99% by a wholly owned subsidiary of SLC
and 1% by Marriott International or its appropriate subsidiary. The operating
agreement for such lessees will provide that the SLC member of the Lessee will
have full control over the management of the business of the Lessee, except
with respect to certain decisions for which the consent of both members will
be required. These decisions include (i) terminating any management agreement
for the hotels leased by the Lessee, except by reason of a default by the
manager or pursuant to an express termination right in the management
agreement; (ii) asserting that the manager is not an independent contractor or
is not entitled to injunctive relief preventing termination (except for
terminations described in clause (i)); (iii) dissolving, liquidating,
consolidating, merging or selling all or substantially all of the assets of
the Lessee; (iv) engaging in any other business or acquiring any assets or
incurring any liabilities not reasonably related to the conduct of the
Lessee's business; or (v) instituting voluntary bankruptcy proceedings or
consenting to involuntary bankruptcy proceedings. Upon any termination of the
applicable management agreement, these special voting rights of the manager
will cease and the SLC member will be required to purchase the manager's
interest in the Lessee at its fair market value.
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<PAGE>
DESCRIPTION OF SENIOR NOTES
Set forth below is a summary of certain provisions of the Senior Notes. The
Senior Notes will be issued pursuant to an indenture (as amended or
supplemented from time to time, the "Indenture") to be dated as of July ,
1998, by and among the Company, the Guarantors, the Subsidiary Guarantors and
Marine Midland Bank, as trustee (the "Trustee"). The terms of the Indenture
are also governed by certain provisions contained in the Trust Indenture Act
of 1939, as amended. The following summaries of certain provisions of the
Indenture are summaries only, do not purport to be complete and are qualified
in their entirety by reference to all of the provisions of the Indenture.
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to them in the Indenture. Wherever particular provisions of
the Indenture are referred to in this summary, such provisions are
incorporated by reference as a part of the statements made and such statements
are qualified in their entirety by such reference.
GENERAL
The Senior Notes will be senior, general obligations of the Company, secured
initially by a pledge of all the Capital Stock of all but one of the Initial
Subsidiary Guarantors owned (directly or indirectly) by the Company, which
pledge will be shared equally and ratably with the Credit Facility, the
Existing Senior Notes (if any remain outstanding after the Offers) and certain
future Indebtedness of the Company ranking pari passu with the Senior Notes.
The Senior Notes will rank pari passu with all other existing and future
unsubordinated Indebtedness of the Company and will rank senior to all
subordinated obligations of the Company. The Senior Notes will be jointly and
severally guaranteed on a senior basis by the Guarantors, the Initial
Subsidiary Guarantors, and subject to certain exceptions, each of the
Company's future Restricted Subsidiaries that subsequently guarantees
Indebtedness of the Company. The Guarantee of the Guarantors and of the
Subsidiary Guarantors with respect to the Senior Notes, and the pledges of
Capital Stock, are subject to release upon satisfaction of certain conditions,
and the Guarantee of the Guarantors with respect to the Senior Notes will be
released upon consummation of the REIT Conversion, at which time the assets of
the Guarantors shall consist of Qualified Assets. See "--Guarantees" and "--
Security."
The Series A Notes will bear interest at % per annum, will be limited to
$400,000,000 aggregate principal amount and will mature on July , 2005. The
Series B Notes will bear interest at % per annum, will be limited to
$1,000,000,000 aggregate principal amount and will mature on July , 2008. The
Senior Notes will bear interest from the date of issuance or from the most
recent Interest Payment Date to which interest has been paid or provided for
with respect to such series of Senior Notes, payable semi-annually on March 15
and September 15 of each year, commencing March 15, 1999, with respect to the
Series A Notes and June 15 and December 15, commencing December 15, 1998 with
respect to the Series B Notes, in each case to the Persons in whose names such
Senior Notes are registered at the close of business on the March 1st or the
September 1 immediately preceding such Interest Payment Date with respect to
the Series A Notes and the June 1st or the December 1st immediately preceding
such Interest Payment Date with respect to the Series B Notes. Interest will
be calculated on the basis of a 360-day year consisting of twelve 30-day
months. The Senior Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof.
Principal of, premium, if any, and interest on the Senior Notes will be
payable at the office or agency of the Company maintained for such purpose, in
the Borough of Manhattan, The City of New York. Except as provided below, at
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Senior Notes at the addresses set forth upon the registry
books of the Company; provided, however, Holders of Certificated Notes will be
entitled to receive interest payments (other than at maturity) by wire
transfer of immediately available funds, if appropriate wire transfer
instructions have been received in writing by the Trustee not less than 15
days prior to the applicable Interest Payment Date. Such wire instructions,
upon receipt by the Trustee, shall remain in effect until revoked by such
Holder. No service charge will be made for any registration of transfer or
exchange of Senior Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. Until otherwise designated by the Company,
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<PAGE>
the Company's office or agency will be the corporate trust office of the
Trustee presently located at 140 Broadway, New York, New York 10005-1180.
GUARANTEES
The Senior Notes will be fully and unconditionally guaranteed as to
principal, premium, if any, and interest, jointly and severally, by each of
the Guarantors and the Subsidiary Guarantors. If the Company defaults in the
payment of the principal of, premium, if any, or interest on, the Senior Notes
when and as the same shall become due, whether upon maturity, acceleration,
call for redemption, Change of Control Offer, Offer to Purchase or otherwise,
without the necessity of action by the Trustee or any Holder, the Guarantors
and the Subsidiary Guarantors shall be required, jointly and severally,
promptly to make such payment in full. The Indenture will provide that the
Guarantors and the Subsidiary Guarantors will be released from their
obligations as guarantors under the Senior Notes under certain circumstances.
The obligations of each Subsidiary Guarantor and Guarantor will be limited in
a manner intended to avoid such obligations being construed as fraudulent
conveyances under applicable law.
Each current and future Restricted Subsidiary of the Company that
subsequently guarantees any Indebtedness (the "Guaranteed Indebtedness") of
the Company (each a "Future Subsidiary Guarantor") will be required to
Guarantee the Senior Notes. If the Guaranteed Indebtedness is (A) pari passu
in right of payment with the Senior Notes, then the Guarantee of such
Guaranteed Indebtedness shall be pari passu in right of payment with, or
subordinated in right of payment to, the Subsidiary Guarantee or (B)
subordinated in right of payment to the Senior Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated in right of payment to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness
is subordinated in right of payment to the Senior Notes.
The Indenture will provide that each of the Guarantors shall be
automatically and unconditionally released from its obligations as a guarantor
under the Senior Notes at such time as all or substantially all of the assets
of such Guarantor shall, directly or indirectly, consist of Qualified Assets.
Pursuant to these provisions, the Guarantees of the Guarantors with respect to
the Senior Notes will automatically be released upon consummation of the REIT
Conversion. Thereafter, the Guarantors will conduct their business such that
upon the consummation of any transaction by them, all or substantially all of
their assets will be Qualified Assets. Subject to compliance with the
preceding paragraph, the Indenture will also provide that any Subsidiary
Guarantee by a Restricted Subsidiary shall be automatically and
unconditionally released upon (i) the sale or other disposition of Capital
Stock of a Subsidiary Guarantor, if, as a result of such sale or disposition,
such Subsidiary Guarantor ceases to be a Subsidiary of the Company, (ii) the
consolidation or merger of any such Subsidiary Guarantor with any Person other
than the Company or a Subsidiary of the Company, if, as a result of such
consolidation or merger, such Subsidiary Guarantor ceases to be Subsidiary of
the Company, (iii) a Legal Defeasance or Covenant Defeasance, or (iv) the
unconditional and complete release of such Subsidiary Guarantor from its
Guarantee of all Guaranteed Indebtedness.
SECURITY
The obligations of the Company to pay the principal of, premium, if any, and
interest on the Senior Notes will be secured by a pledge of the Capital Stock
of each Initial Subsidiary Guarantor (which will not include Marriott
Financial Services, Inc.), which pledge will be shared equally and ratably
with the Credit Facility, the Existing Senior Notes (if any remain outstanding
after the Offers) and certain future Indebtedness of the Company ranking pari
passu in right of payment with the Senior Notes. The Indenture also provides
that the Capital Stock of each Restricted Subsidiary that is subsequently
pledged to secure the Credit Facility will also be pledged to secure the
Senior Notes on an equal and ratable basis with respect to Liens securing the
Credit Facility and any other pari passu Indebtedness secured by such Capital
Stock, provided, however, that any shares of the Capital Stock of any
Restricted Subsidiary will not be and will not be required to be pledged to
secure the Senior Notes if the pledge of or grant of a security interest in
such shares is prohibited by law.
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Upon the complete and unconditional release of the pledge of any such
Capital Stock in favor of the Credit Facility, the pledge of such Capital
Stock as collateral securing of the Senior Notes shall be released; provided
that should the obligations of the Company under the Credit Facility
subsequently be secured by a pledge of such Capital Stock at any time, the
Company shall cause such Capital Stock to be pledged ratably and with at least
the same priority in favor of the Trustee for the benefit of Holders of the
Senior Notes.
RANKING
The Senior Notes will be senior, general obligations of the Company, ranking
pari passu in right of payment with any other outstanding or future
unsubordinated Indebtedness of the Company, including, without limitation, the
obligations of the Company under the Credit Facility and the Existing Senior
Notes (if any remain outstanding after the Offers). The Senior Notes will rank
senior to all subordinated obligations of the Company. The Guarantees of the
Senior Notes by the Guarantors will be senior, general obligations of Host and
any other Parent of the Company, and the Guarantees of the Subsidiary
Guarantors ("Subsidiary Guarantees") will be senior, general obligations of
the Subsidiary Guarantors. The Guarantees of the Senior Notes by the
Guarantors will be pari passu in right of payment with all unsubordinated,
unsecured Indebtedness of the Guarantors and senior to all subordinated
Indebtedness of the Guarantors. Each of the Subsidiary Guarantees of the
Senior Notes will rank pari passu with all current and future unsubordinated
Indebtedness, and senior to all current and future subordinated Indebtedness,
of the Subsidiary Guarantors. Holders of the Senior Notes will be direct
creditors of each of the Guarantors and the Subsidiary Guarantors by virtue of
such Guarantees of the Senior Notes. As of March 27, 1998, after giving effect
to the 1998 Merger, the Offering and the application of the proceeds
therefrom, the total Indebtedness of the Company would have been approximately
$2,186 million on a pro forma basis (including approximately $414 million in
senior, secured Indebtedness, which effectively ranks ahead of the Senior
Notes in right of payment with respect to the assets securing such
Indebtedness).
OPTIONAL REDEMPTION
The Company will not have the right to redeem any Senior Notes prior to July
, 2002. The Senior Notes will be redeemable at the option of the Company, in
whole or in part, at any time, and from time to time, on and after July ,
2002 with respect to the Series A Notes and July , 2003 with respect to the
Series B Notes, upon not less than 30 days' nor more than 60 days' notice to
each Holder of Senior Notes, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the 12-month
period commencing July with respect to the Series A Notes and July with
respect to the Series B Notes of the years indicated below, in each case
(subject to the right of Holders of record on a Record Date that is on or
prior to such Redemption Date to receive interest due on the corresponding
Interest Payment Date) together with accrued and unpaid interest thereon to
the Redemption Date:
<TABLE>
<CAPTION>
SERIES A SERIES B
YEAR NOTES NOTES
---- -------- --------
<S> <C> <C>
2002................................................... %
2003................................................... % %
2004................................................... % %
2005................................................... 100.000% %
2006 and thereafter.................................... 100.000%
</TABLE>
In the case of a partial redemption, the Trustee shall select the Senior
Notes or portions thereof for redemption on a pro rata basis, by lot or in
such other manner it deems appropriate and fair. The Senior Notes may be
redeemed in part in multiples of $1,000 only.
The Senior Notes will not have the benefit of any sinking fund.
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Notice of any redemption will be sent, by first class mail, at least 30
days, but not more than 60 days, prior to the date fixed for redemption to the
Holder of each Senior Note to be redeemed to such Holder's last address as
then shown upon the registry books of the Registrar. Any notice which relates
to a Senior Note to be redeemed in part only must state the portion of the
principal amount equal to the unredeemed portion thereof and must state that
on and after the date of redemption, upon surrender of such Senior Note, a new
Senior Note or Senior Notes in a principal amount equal to the unredeemed
portion thereof will be issued. On and after the date of redemption, interest
will cease to accrue on the Senior Notes or portions thereof called for
redemption, unless the Company defaults in the payment thereof.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other
capitalized term used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness or Disqualified Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary of the
Company or assumed in connection with an Asset Acquisition and not incurred in
connection with or in contemplation or anticipation of such event, provided
that Indebtedness of such Person which is redeemed, defeased (including the
deposit of funds in a valid trust for the exclusive benefit of holders and the
trustee thereof, sufficient to repay such Indebtedness in accordance with its
terms), retired or otherwise repaid at the time of or immediately upon
consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Total Assets" means, for any Person, the Total Assets for such
Person and its Restricted Subsidiaries as of any Transaction Date, as adjusted
to reflect the application of the proceeds of the Incurrence of Indebtedness
and issuance of Disqualified Stock on the Transaction Date.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by
contract, or otherwise; provided that a beneficial owner of 10% or more of the
total voting power normally entitled to vote in the election of directors,
managers or trustees, as applicable, shall for such purposes be deemed to
constitute control; provided, further, that (i) the right to designate a
member of the Board of a Person or a Parent of that Person will not, by
itself, be deemed to constitute control and (ii) Marriott International and
its Subsidiaries shall not be deemed to be Affiliates of the Company or its
Parent or Restricted Subsidiaries.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged or consolidated into
or with the Company or any of its Restricted Subsidiaries or (ii) an
acquisition by the Company or any of its Restricted Subsidiaries from any
other Person that constitutes all or substantially all of a division or line
of business, or one or more real estate properties, of such Person.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or
a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary (including by issuance of such Capital Stock), (ii) all or
substantially all of the property and assets of an operating unit or business
of the Company or any of its Restricted Subsidiaries, or (iii) any other
property and assets of the Company or any of its Restricted Subsidiaries
outside the ordinary course of business of the Company or such Restricted
Subsidiary and, in each case, that is not governed by the covenant of the
Indenture entitled "Consolidation, Merger and Sale of Assets"; provided that
"Asset Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales, transfers or other
dispositions of assets with a fair market value not in excess of $10 million
in
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any transaction or series of related transactions, (c) leases of real estate
assets, (d) Permitted Investments (other than Investments in Cash Equivalents)
or Restricted Investments made in accordance with the "Limitation on
Restricted Payments" covenant, (e) any transaction comprising part of the REIT
Conversion, and (f) any transactions that, pursuant to the "Limitation of
Asset Sales" covenant, are defined not to be an "Asset Sale."
"Average Life" means at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years (calculated to the nearest one-twelfth) from such date of
determination to the date of each successive scheduled principal (or
redemption) payment of such debt security and (b) the amount of such principal
(or redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"Blackstone Acquisition" means the acquisition by the Operating Partnership
from The Blackstone Group, a Delaware limited partnership, and a series of
funds controlled by Blackstone Real Estate Partners, a Delaware limited
partnership, of certain hotel properties, mortgage loans and other assets
together with the assumption of related Indebtedness.
"Board" means (i) with respect to any corporation, the board of directors of
such corporation or any committee of the board of directors of such
corporation authorized, with respect to any particular matter, to exercise the
power of the board of directors of such corporation, (ii) with respect to any
partnership, any partner (including, without limitation, in the case of any
partner that is a corporation, the board of directors of such corporation or
any authorized committee thereof) with the authority to cause the partnership
to act with respect to the matter at issue, (iii) in the case of a trust, any
trustee or board of trustees with the authority to cause the trust to act with
respect to the matter at issue, (iv) in the case of a limited liability
company (a "LLC"), the managing member, management committee or other Person
or group with the authority to cause the LLC to act with respect to the matter
at issue, and (v) with respect to any other entity, the Person or group
exercising functions similar to a board of directors of a corporation.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Contribution" means any contribution to the equity of the Company
for which no consideration is given, or if given, consists only of the
issuance of Qualified Capital Stock (or, if other consideration is given only
the value of the contribution in excess of such other consideration).
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, or other equivalents (however designated, whether
voting or non-voting), including partnership interests, whether general or
limited, in the equity of such Person, whether outstanding on the Closing Date
or issued thereafter, including, without limitation, all Common Stock,
Preferred Stock and Units.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease as reflected on the balance sheet
of such Person in accordance with GAAP.
"Cash Equivalent" means (i) securities issued or directly and fully
guaranteed or insured by the United State of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America are pledged in support thereof), or (ii) time deposits,
bankers acceptances and certificates of deposit and commercial paper issued by
the Parent of any domestic commercial bank of recognized standing having
capital and surplus in excess of $500 million and commercial paper issued by
others rated at least A-2 or
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the equivalent thereof by S&P or at least P-2 or the equivalent thereof by
Moody's, (iii) marketable direct obligations issued by the District of
Columbia or any state of the United States of America or any political
subdivision or public instrumentality thereof bearing (at the time of
investment therein) one of the two highest ratings obtainable from either S&P
or Moody's and (iv) liquid investments in money market funds substantially all
of the assets of which are securities of the type described in clauses (i)
through (iii) inclusive; provided that the securities described in clauses (i)
through (iii) inclusive have a maturity of one year or less after the date of
acquisition.
"Change of Control" means (i) any sale, transfer or other conveyance,
whether direct or indirect, of all or substantially all of the assets of the
Company or Host or Host REIT (for so long as Host or Host REIT is a Parent of
the Company immediately prior to such transaction or series of related
transactions), on a consolidated basis, in one transaction or a series of
related transactions, if, immediately after giving effect to such transaction,
any "person" or "group" (as such terms are used for purposes of Sections 13(d)
and 14(d) of the Exchange Act, whether or not applicable) other than an
Excluded Person is or becomes the "beneficial owner," directly or indirectly,
of more than 50% of the total voting power in the aggregate normally entitled
to vote in the election of directors, managers, or trustees, as applicable, of
the transferee, (ii) any "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable) other than an Excluded Person is or becomes the "beneficial
owner," directly or indirectly, of more than 50% of the total voting power in
the aggregate of all classes of Capital Stock of the Company (or Host or Host
REIT for so long as Host or Host REIT is a Parent of the Company immediately
prior to such transaction or series of related transactions) then outstanding
normally entitled to vote in elections of directors, managers or trustees, as
applicable, (iii) during any period of l2 consecutive months after the Issue
Date (for so long as Host or Host REIT is a Parent of the Company immediately
prior to such transaction or series of related transactions). Persons who at
the beginning of such 12-month period constituted the Board of Host or Host
REIT (together with any new Persons whose election was approved by a vote of a
majority of the Persons then still comprising the Board who were either
members of the Board at the beginning of such period or whose election,
designation or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Host or Host REIT, as
applicable, then in office, or (iv) (a) prior to the consummation of the REIT
Conversion, the Company is no longer consolidated with Host for Federal income
tax reporting purposes or (b) on or after the REIT Conversion, Host REIT
ceases to be a general partner of the Operating Partnership or ceases to
control the Company; provided, however, that neither (x) the pro rata
distribution by Host to its shareholders of shares of the Company or shares of
any of Host's or Host REIT's other Subsidiaries, nor (y) the REIT Conversion
(or any element thereof) shall, in and of itself, constitute a Change of
Control for purposes of this paragraph.
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Closing Date" means the date on which the Senior Notes are originally
issued under the Indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting), which have no preference on liquidation or with respect
to distributions over any other class of Capital Stock, including partnership
interests, whether general or limited, of such Person's equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of common stock.
"Company" means HMH Properties and its successors and assigns, including,
without limitation, the Operating Partnership upon the consummation of the
Merger.
"Consolidated" or "consolidated" means, with respect to any Person, the
consolidation of the accounts of the Restricted Subsidiaries (including those
of the Non-Consolidated Restricted Entities) of such Person (to the extent of
such Person's proportionate interest therein) with those of such Person;
provided that (i)
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"consolidation" will not include consolidation of the accounts of any other
Person other than a Restricted Subsidiary of such Person with such Person and
(ii) "consolidation" will include consolidation of the accounts of any Non-
Consolidated Restricted Entities, whether or not such consolidation would be
required or permitted under GAAP. The terms "consolidated" and "consolidating"
have correlative meanings to the foregoing.
"Consolidated Coverage Ratio" of any Person on any Transaction Date means
the ratio, on a pro forma basis, of (a) the aggregate amount of Consolidated
EBITDA of such Person attributable to continuing operations and businesses
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of) for the Reference Period to (b) the aggregate
Consolidated Interest Expense of such Person (exclusive of amounts
attributable to operations and businesses permanently discontinued or disposed
of, but only to the extent that the obligations giving rise to such
Consolidated Interest Expense would no longer be obligations contributing to
such Person's Consolidated Interest Expense subsequent to the Transaction
Date) during the Reference Period; provided that for purposes of such
calculation, (i) acquisitions of operations, businesses or other income-
producing assets (including any reinvestment of disposition proceeds in
income-producing assets held as of and not disposed on the Transaction Date)
which occurred during the Reference Period or subsequent to the Reference
Period and on or prior to the Transaction Date shall be assumed to have
occurred on the first day of the Reference Period, (ii) transactions giving
rise to the need to calculate the Consolidated Coverage Ratio shall be assumed
to have occurred on the first day of the Reference Period, (iii) the
incurrence of any Indebtedness or issuance of any Disqualified Stock during
the Reference Period or subsequent to the Reference Period and on or prior to
the Transaction Date (and the application of the proceeds therefrom to the
extent used to refinance or retire other Indebtedness or invested in income-
producing assets held as of and not disposed on the Transaction Date) shall be
assumed to have occurred on the first day of such Reference Period, and (iv)
the Consolidated Interest Expense of such Person attributable to interest on
any Indebtedness or dividends on any Disqualified Stock bearing a floating
interest (or dividend) rate shall be computed on a pro forma basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless
such Person or any of its Subsidiaries is a party to an Interest Swap or
Hedging Obligation (which shall remain in effect for the 12-month period
immediately following the Transaction Date) that has the effect of fixing the
interest rate on the date of computation, in which case such rate (whether
higher or lower) shall be used.
"Consolidated EBITDA" means, for any Person and for any period, the
Consolidated Net Income of such Person for such period adjusted to add thereto
(to the extent deducted from net revenues in determining Consolidated Net
Income), without duplication, (A) the sum of (i) Consolidated Interest
Expense, (ii) provisions for taxes based on income, (iii) depreciation and
amortization expense (to the extent of the proportionate interest of the
referent Person in such Subsidiary), (iv) any other noncash items reducing the
Consolidated Net Income of such Person for such period (to the extent of such
Person's proportionate interest therein), (v) any dividends or distributions
during such period to such Person or a Consolidated Subsidiary (to the extent
of such Person's proportionate interest therein) of such Person from any other
Person which is not a Restricted Subsidiary of such Person or which is
accounted for by such Person by the equity method of accounting (other than a
Non-Consolidated Restricted Entity), to the extent that (a) such dividends or
distributions are not included in the Consolidated Net Income of such Person
for such period and (b) (1) the sum of such dividends and distributions, plus
the aggregate amount of dividends or distributions from such other Person
since the Issue Date that have been included in Consolidated EBITDA pursuant
to this clause (v), do not exceed (2) the cumulative net income of such other
Person attributable to the equity interests of the Person (or Restricted
Subsidiary of the Person) whose Consolidated EBITDA is being determined, (vi)
any cash receipts of such Person or a Consolidated Subsidiary of such Person
(to the extent of such Person's proportionate interest therein) during such
period that represent items included in Consolidated Net Income of such Person
for a prior period which were excluded from Consolidated EBITDA of such Person
for such prior period by virtue of clause (B) of this definition, and (vii)
any nonrecurring expenses incurred in connection with the REIT Conversion,
minus (B) the sum of (I) all non-cash items increasing the Consolidated Net
Income of such Person (to the extent of such Person's proportionate interest
therein) for such period and (II) any cash expenditures of such Person (to the
extent of such Person's proportionate interest therein) during such period to
the extent such cash expenditures (a) did not
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reduce the Consolidated Net Income of such Person for such period and (b) were
applied against reserves or accruals that constituted noncash items reducing
the Consolidated Net Income of such Person (to the extent of such Person's
proportionate interest therein) when reserved or accrued; all as determined on
a consolidated basis for such Person and its Consolidated Subsidiaries (it
being understood that the accounts of such Person's Consolidated Subsidiaries
shall be consolidated only to the extent of such Person's proportionate
interest therein).
"Consolidated Interest Expense" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case on a
consolidated basis) of (a) interest expensed or capitalized, paid, accrued, or
scheduled to be paid or accrued (including, in accordance with the following
sentence, interest attributable to Capitalized Lease Obligations but excluding
the amortization of fees or expenses incurred in order to consummate the sale
of the Senior Notes as described herein or to establish the Credit Facility)
of such Person and its Consolidated Subsidiaries during such period, including
(i) original issue discount and noncash interest payments or accruals on any
Indebtedness, (ii) the interest portion of all deferred payment obligations,
and (iii) all commissions, discounts and other fees and charges owed with
respect to bankers' acceptances and letters of credit financings and Interest
Swap and Hedging Obligations, in each case to the extent attributable to such
period, and (b) dividends accrued or payable by such Person or any of its
Consolidated Subsidiaries in respect of Disqualified Stock (other than by
Restricted Subsidiaries of such Person to such Person or, to the extent of
such Person's proportionate interest therein, such Person's Restricted
Subsidiaries); provided, however, that any such interest, dividends or other
payments or accruals (referenced in clauses (a) or (b)) of a Consolidated
Subsidiary that is not Wholly Owned shall be included only to the extent of
the proportionate interest of the referent Person in such Consolidated
Subsidiary. For purposes of this definition, (x) interest on a Capitalized
Lease Obligation shall be deemed to accrue at an interest rate reasonably
determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such Person or
a Restricted Subsidiary of such Person of an obligation of another Person
shall be deemed to be the interest expense attributable to the Indebtedness
guaranteed.
"Consolidated Net Income" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries for
such period, determined on a consolidated basis (it being understood that the
net income of Consolidated Subsidiaries shall be consolidated with that of a
Person only to the extent of the proportionate interest of such Person in such
Consolidated Subsidiaries); provided that (i) net income (or loss) of any
other Person which is not a Restricted Subsidiary of the Person, or that is
accounted for by such specified Person by the equity method of accounting
(other than a Non-Consolidated Restricted Entity), shall be included only to
the extent of the amount of dividends or distributions paid to the specified
Person or a Restricted Subsidiary of such Person, (ii) the net income (or
loss) of any other Person acquired by such specified Person or a Restricted
Subsidiary of such Person in a pooling of interests transaction for any period
prior to the date of such acquisition shall be excluded, (iii) all gains and
losses which are either extraordinary (as determined in accordance with GAAP)
or are either unusual or nonrecurring (including any gain from the sale or
other disposition of assets or from the issuance or sale of any Capital Stock)
shall be excluded, and (iv) the net income, if positive, of any of such
Person's Consolidated Subsidiaries other than Consolidated Subsidiaries that
are not Subsidiary Guarantors to the extent that the declaration or payment of
dividends or similar distributions is not at the time permitted by operation
of the terms of its charter or bylaws or any other agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable
to such Consolidated Subsidiary shall be excluded; provided, however, in the
case of exclusions from Consolidated Net Income set forth in clauses (ii),
(iii) and (iv), such amounts shall be excluded only to the extent included in
computing such net income (or loss) on a consolidated basis and without
duplication.
"Consolidated Subsidiary" means, for any Person, each Restricted Subsidiary
of such Person (including each Non-Consolidated Restricted Entity).
"Conversion Date" means the effective date of the Host REIT Merger.
"Credit Facility" means the credit facility established pursuant to the
Credit Agreement, dated as of July , 1998 among the Company, Host, the
lenders party thereto, Bankers Trust Company, as Arranger and Administrative
Agent, and Wells Fargo Bank, N.A., The Bank of Nova Scotia and Credit Lyonnais
New York
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Branch, as Co-Arrangers, together with all other agreements, instruments and
documents executed or delivered pursuant thereto or in connection therewith,
in each case as such agreements, instruments or documents may be amended,
supplemented, extended, renewed, replaced or otherwise modified or
restructured from time to time (including by way of adding Subsidiaries of the
Company as additional borrowers or guarantors thereof), whether by the same or
any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means except as set forth below, with respect to any
Person, Capital Stock of that Person that by its terms or otherwise is (i)
required to be redeemed on or prior to the Stated Maturity of the Senior Notes
for cash or property other than Qualified Capital Stock, (ii) redeemable for
cash or property other than Qualified Capital Stock at the option of the
holder of such class or series of Capital Stock at any time prior to the
Stated Maturity of the Senior Notes or (iii) convertible into or exchangeable
mandatorily or at the option of the holder for Capital Stock referred to in
clause (i) or (ii) above or Indebtedness of the Company or a Restricted
Subsidiary having a scheduled maturity prior to the Stated Maturity of the
Senior Notes; provided that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Senior Notes shall not constitute Disqualified Stock if
the "asset sale" or "change of control" provisions applicable to such Capital
Stock are no more favorable to the holders of such Capital Stock than the
provisions contained in "Limitation on Asset Sales" and "Repurchase of Senior
Notes at the Option of Holders upon a Change of Control Triggering Event"
covenants described below and such Capital Stock specifically provides that
such Person will not repurchase or redeem any such stock pursuant to such
provision prior to the Company's repurchase of such Senior Notes as are
required to be repurchased pursuant to the "Limitation on Asset Sales" and
"Repurchase of Senior Notes at the Option of Holders upon a Change of Control
Triggering Event" covenants described below. With respect to Capital Stock of
a Restricted Subsidiary, only the amount thereof issued to Persons (other than
the Company or any of its Restricted Subsidiaries) in excess of such Persons'
Pro Rata Share of such Capital Stock shall be deemed to be Disqualified Stock
for purposes of determining the amount of Disqualified Stock of the Company
and its Restricted Subsidiaries.
Notwithstanding anything to the contrary contained in this definition, (a)
the QUIPs are not Disqualified Stock, (b) any Capital Stock issued by the
Partnership to Host REIT shall not be deemed to be Disqualified Stock solely
by reason of a right by Host REIT to require the Company to make a payment to
it sufficient to enable Host REIT to satisfy its concurrent obligation with
respect to Capital Stock of Host REIT, which Capital Stock would not
constitute Disqualified Stock, and (c) no Capital Stock shall be deemed to be
Disqualified Stock as the result of the right of the holder thereof to request
redemption thereof if the issuer of such Capital Stock (or the Parent of such
issuer) has the right to satisfy such redemption obligations by the issuance
of Qualified Capital Stock to such holder.
"E&P Distribution" means (a) one or more distributions to the shareholders
of Host and/or Host REIT of (i) shares of SLC and (ii) cash, securities or
other property, with a cumulative aggregate value equal to the amount
estimated in good faith by Host or Host REIT from time to time as being
necessary to assure that Host and Host REIT have distributed the accumulated
earnings and profits (as referenced in Section 857(a)(2)(B) of the Code) of
Host as of the last day of the first taxable year for which Host REIT's
election to be taxed as a REIT is effective and (b) the distributions from the
Operating Partnership to (i) Host REIT necessary to enable Host REIT to make
the distributions described in clause (a) and (ii) holders of Units (other
than Host REIT) required as a result of or a condition to such distributions
made pursuant to clause (b)(i).
"Excluded Person" means, in the case of the Company, Host or any Wholly
Owned Subsidiary of Host or Host REIT.
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"Exempted Affiliate Transaction" means (i) employee compensation
arrangements approved by a majority of independent (as to such transactions)
members of the Board of the Company, (ii) payments of reasonable fees and
expenses to the members of the Board, (iii) transactions solely between the
Company and any of its Subsidiaries or solely among Subsidiaries of the
Company, (iv) Permitted Tax Payments, (v) Permitted Sharing Arrangements, (vi)
Procurement Contracts, (vii) Operating Agreements, (viii) Restricted Payments
permitted under the "Limitation on Restricted Payments" covenant, and (ix) any
and all elements of the REIT Conversion.
"Existing Senior Notes" means amounts outstanding from time to time under
(i) the 9 1/2% Senior Secured Notes due 2005 of HMH Properties, (ii) the 8
7/8% Senior Notes due 2007 of HMH Properties, and (iii) the 9% Senior Notes
due 2007 of HMH Properties, in each case not in excess of amounts outstanding
immediately following the Issue Date, as retired, from time to time.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined
(i) in good faith by the Board of the Company or the applicable Subsidiary
involved in such transaction, or (ii) by an appraisal or valuation firm of
national or regional standing selected by the Company or such Subsidiary, with
experience in the appraisal or valuation of properties or assets of the type
for with fair market value is being determined.
"Fifty Percent Venture" means a Person (i) in which the Company owns
(directly or indirectly) at least 50% of the aggregate economic interests;
(ii) in which the Company or a Restricted Subsidiary participates in control
as a general partner, a managing member or through similar means, and (iii)
which is not consolidated for financial reporting purposes with the Company
under GAAP.
"FF&E" means furniture, fixtures and equipment, and other tangible personal
property other than real property.
"Funds From Operations" for any period means the Consolidated Net Income of
the Company and its Restricted Subsidiaries for such period excluding gains or
losses from debt restructurings and sales of property, plus depreciation of
real estate assets and amortization related to real estate assets and other
non-cash charges related to real estate assets, after adjustments for
unconsolidated partnerships and joint ventures plus minority interests, if
applicable.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as approved by a significant
segment of the accounting profession in the United States of America.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or
by agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Guarantors" means Host and each other Parent of the Company.
"HMH Properties" means HMH Properties, Inc., a Delaware corporation.
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"Hospitality" means Host Marriott Hospitality, Inc., a Delaware corporation
and the direct Parent of the Company at Issue Date.
"Host" means Host Marriott Corporation, a Delaware corporation and the
indirect Parent of the Company at the Issue Date, and its successors and
assigns.
"Host REIT" means Host Marriott Trust, a Maryland real estate investment
trust, which will be the sole general partner of the Operating Partnership
following the REIT Conversion and the successor to Host, and its successors
and assigns.
"Host REIT Merger" means the merger of Host with and into Host REIT, with
Host REIT surviving the merger.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to (including
as a result of an acquisition), or become responsible for, the payment of,
contingently or otherwise, such Indebtedness (including Acquired
Indebtedness); provided that neither the accrual of interest nor the accretion
of original issue discount shall be considered an Incurrence of Indebtedness.
"Indebtedness" of any Person means, without duplication, (i) all liabilities
and obligations, contingent or otherwise, of such Person, (a) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of
the assets of such Person or only to a portion thereof), (b) evidenced by
bonds, notes, debentures or similar instruments, (c) representing the balance
deferred and unpaid of the purchase price of any property or services, except
those incurred in the ordinary course of its business that would constitute
ordinarily a trade payable to trade creditors, (d) evidenced by bankers'
acceptances, (e) for the payment of money relating to a Capitalized Lease
Obligation, or (f) evidenced by a letter of credit or a reimbursement
obligation of such Person with respect to any letter of credit; (ii) all net
obligations of such Person under Interest Swap and Hedging Obligations; and
(iii) all liabilities and obligations of others of the kind described in the
preceding clause (i) or (ii) that such Person has guaranteed or that is
otherwise its legal liability or which are secured by any assets or property
of such Person.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swaps, caps, collars and similar arrangements
providing protection against fluctuations in interest rates. For purposes of
the Indenture, the amount of such obligations shall be the amount determined
in respect thereof as of the end of the then most recently ended fiscal
quarter of such Person, based on the assumption that such obligation had
terminated at the end of such fiscal quarter, and in making such
determination, if any agreement relating to such obligation provides for the
netting of amounts payable by and to such Person thereunder or if any such
agreement provides for the simultaneous payment of amounts by and to such
Person, then in each such case, the amount of such obligations shall be the
net amount so determined, plus any premium due upon default by such Person.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including without limitation by way of Guarantee or
similar arrangement, but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the consolidated balance sheet of the Company and its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property (tangible or intangible) to others or any payment for property
or services solely for the account or use of others, or otherwise), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include the designation
of a Restricted Subsidiary to be an Unrestricted Subsidiary or a Non-
Consolidated Entity. For purposes of the definition of "Unrestricted
Subsidiary" and the "Limitation on Restricted Payments" covenant described
below, (a) "Investment" shall include the proportionate share of the Company
and its Restricted Subsidiaries in the fair market value of the assets (net of
liabilities (other than liabilities to the Company or any of its Restricted
Subsidiaries)) of any Restricted Subsidiary at the time such Restricted
Subsidiary is designated an Unrestricted Subsidiary or Non-Consolidated
Entity, (b) the proportionate share of the Company and its Restricted
Subsidiaries in the fair market value of the assets (net of liabilities (other
than liabilities to the Company or any
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of its Restricted Subsidiaries)) of any Unrestricted Subsidiary or Non-
Consolidated Entity at the time that such Unrestricted Subsidiary or Non-
Consolidated Entity is designated a Restricted Subsidiary shall be considered
a reduction in outstanding Investments and (c) any property transferred to or
from an Unrestricted Subsidiary or Non-Consolidated Entity shall be valued at
its fair market value at the time of such transfer.
"Investment Grade" means a rating of the Senior Notes by both S&P and
Moody's, each such rating being in one of such agency's four highest generic
rating categories that signifies investment grade (i.e., currently BBB- (or
the equivalent) or higher by S&P and Baa3 (or the equivalent) or higher by
Moody's); provided in each case such ratings are publicly available; provided,
further, that in the event Moody's or S&P is no longer in existence for
purposes of determining whether the Senior Notes are rated "Investment Grade,"
such organization may be replaced by a nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act)
designated by the Company, notice of which shall be given to the Trustee.
"Issue Date" means the date of first issuance of the Senior Notes under the
Indenture.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien,
privilege, hypothecation, other encumbrance or charge of any kind (including,
without limitation, any conditional sale or other title retention agreement or
lease in the nature thereof or any agreement to give any security interest)
upon or with respect to any property of any kind now owned or hereinafter
acquired.
"Limited Partner Note" means an unsecured note of the Operating Partnership
which a limited partner of a Public Partnership can elect to receive at the
time of the Partnership Mergers instead of or in exchange for Units.
"Merger" means the merger of HMH Properties with and into the Operating
Partnership with the Operating Partnership as the surviving entity.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (i) with respect to any Asset Sale other than the
sale of Capital Stock of a Restricted Subsidiary, the proceeds of such Asset
Sale in the form of cash or Cash Equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or Cash
Equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any of its Restricted Subsidiaries) and proceeds
from the conversion of other property received when converted to cash or Cash
Equivalents, net of (a) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to
such Asset Sale, (b) provisions for all Taxes (including Taxes of Host REIT)
actually paid or payable as a result of such Asset Sale by the Company and its
Restricted Subsidiaries, taken as a whole, (c) payments made to repay
Indebtedness (other than Indebtedness subordinated in right of payment to the
Senior Notes or a Subsidiary Guarantee) or any other obligations outstanding
at the time of such Asset Sale that either (I) is secured by a Lien on the
property or assets sold or (II) is required to be paid as a result of such
sale, (d) amounts reserved by the Company and its Restricted Subsidiaries
against any liabilities associated with such Asset Sale, including without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined on a
consolidated basis in conformity with GAAP and (e) unless Taxes thereon are
paid by Host REIT as set forth in clause (b) above, amounts required to be
distributed as a result of the realization of gains from Asset Sales in order
to maintain or preserve Host REIT's status as a REIT (provided, however, that
with respect to an Asset Sale by any Person other than the Company or a Wholly
Owned Subsidiary, Net Cash Proceeds shall be the above amount multiplied by
the Company's (direct or indirect) percentage ownership interest in such
Person) and (ii) with respect to any issuance or sale of Capital Stock of a
Restricted Subsidiary, the proceeds of such issuance or sale in the form of
cash or Cash Equivalents, including payments in respect of deferred payment
obligations (to the extent corresponding to the principal, but not interest,
component thereof) when received in the form of cash or Cash Equivalents
(except to the extent such obligations are financed or sold with recourse to
the Company or any of its Restricted Subsidiaries) and proceeds from the
conversion of other property received when converted to cash or Cash
Equivalents, net of attorney's fees, accountants's fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of tax
paid or payable as a result thereof.
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"Net Investments" means, with respect to any referenced category or group of
Investments, (x) the aggregate amount of such Investments made by the Company
and its Restricted Subsidiaries (to the extent of the Company's proportionate
interest in such Restricted Subsidiaries) on or subsequent to the Issue Date,
minus (y) the aggregate amount of any dividends, distributions, sales proceeds
or other amounts received by the Company and its Restricted Subsidiaries (to
the extent of the Company's proportionate interest in such Restricted
Subsidiaries) in respect of such Investments on or subsequent to the Issue
Date; and, in the event that any such Investments are made, or amounts are
received, in property other than cash, such amounts shall be the fair market
value of such property.
"Non-Conforming Assets" means various assets (principally comprising
partnership or other interests in hotels which are not leased, certain
international hotels in which Host or its Subsidiaries own interests, and
certain FF&E relating to hotels owned by the Operating Partnership and its
Subsidiaries) which assets, if owned by the Operating Partnership, could
jeopardize Host REIT's status as a REIT.
"Non-Consolidated Entity" means a Non-Controlled Entity or a Fifty Percent
Venture which is neither a Non-Consolidated Restricted Entity nor an
Unrestricted Subsidiary.
"Non-Consolidated Restricted Entity" means a Non-Controlled Entity or a
Fifty Percent Venture which has been designated by the Company (by notice to
the Trustee) as a Restricted Subsidiary and which designation has not been
revoked (by notice to the Trustee). Revocation of a previous designation of a
Non-Controlled Entity or a Fifty Percent Venture as a Non-Consolidated
Restricted Entity shall be deemed to be a designation of such entity to be a
Non-Consolidated Entity.
"Non-Controlled Entity" means a taxable corporation in which the Operating
Partnership owns (directly or indirectly) 90% or more of the economic interest
but no more than 9.9% of the Voting Stock and whose assets consist primarily
of Non-Conforming Assets.
"Offering" means the offering of the Senior Notes for sale by the Company.
"Officer's Certificate" means a certificate signed on behalf of the Company,
a Guarantor or Subsidiary Guarantor, as applicable, by an officer of the
Company, a Guarantor or Subsidiary Guarantor, as applicable, who must be the
principal executive officer, the principal financial officer, the treasurer or
the principal accounting officer of the Company, Guarantor or Subsidiary
Guarantor, as applicable.
"Old Notes" means the approximately $35 million aggregate principal amount
of four series of Indebtedness of Host outstanding on the Issue Date.
"Operating Agreements" means the asset or property management agreements,
franchise agreements, lease agreements and other similar agreements between
the Company, any Subsidiary Guarantor or any of their respective Restricted
Subsidiaries, on the one hand, and Marriott International, SLC or another
entity engaged in and having pertinent experience with the operation of such
similar properties, on the other, relating to the operation of the real estate
properties owned by the Company, any Subsidiary Guarantor or any of their
respective Restricted Subsidiaries, provided that the management of the
Company determines in good faith that such arrangements are fair to the
Company and to such Restricted Subsidiary.
"Operating Partnership" means Host Marriott, L.P., a Delaware limited
partnership, and, prior to the REIT Conversion, a Wholly Owned Subsidiary of
Host, and, upon consummation of the Merger, the successor obligor to the
Company under the Senior Notes.
"Paying Agent" means, until otherwise designated, the Trustee.
"Parent" of any Person means a corporation which at the date of
determination owns, directly or indirectly, a majority of the Voting Stock of
such Person or of a Parent of such Person.
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"Partnership Mergers" means the merger of one of more Subsidiaries of the
Operating Partnership into one or more of the Public Partnerships.
"Permitted Investment" means any of the following: (i) an Investment in Cash
Equivalents; (ii) Investments in a Person substantially all of whose assets
are of a type generally used in a Related Business (an "Acquired Person") if,
as a result of such Investments, (a) the Acquired Person immediately thereupon
is or becomes a Restricted Subsidiary of the Company, or (b) the Acquired
Person immediately thereupon either (I) is merged or consolidated with or into
the Company or any of its Restricted Subsidiaries and the surviving Person is
the Company or a Restricted Subsidiary of the Company or (II) transfers or
conveys all or substantially all of its assets to, or is liquidated into, the
Company or any of its Restricted Subsidiaries; (iii) an Investment in a
Person, provided that (A) such Person is principally engaged in a Related
Business, (B) the Company or one or more of its Restricted Subsidiaries
participates in the management of such Person, as a general partner, member of
such Person's governing board or otherwise and (C) any such Investment shall
not be a Permitted Investment if, after giving effect thereto, the aggregate
amount of Net Investments outstanding made in reliance on this clause (iii)
subsequent to the Issue Date would exceed 5% of Total Assets; (iv) Permitted
Sharing Arrangement Payments; (v) securities received in connection with an
Asset Sale so long as such Asset Sale complied with the Indenture including
the covenant "Limitation on Asset Sales" (but, only to the extent the fair
market value of such securities and all other non-cash and non-Cash Equivalent
consideration received complies with clause (ii) of the "Limitation on Asset
Sales" covenant); (vi) Investments in the Company or in Restricted
Subsidiaries of the Company; (vii) Permitted Mortgage Investments; (viii) any
Investments constituting part of the REIT Conversion; and (ix) any Investments
in a Non-Consolidated Entity, provided that (after giving effect to such
Investment) the total assets (before depreciation and amortization) of all
Non-Consolidated Entities attributable to the Company's proportionate
ownership interest therein, plus an amount equal to the Net Investments
outstanding made in reliance upon clause (iii) above, does not exceed 20% of
the total assets (before depreciation and amortization) of the Company and its
Consolidated Subsidiaries (to the extent of the Company's proportionate
ownership interest therein).
"Permitted Lien" means any of the following: (i) Liens imposed by
governmental authorities for taxes, assessments or other charges where
nonpayment thereof is not subject to penalty or which are being contested in
good faith and by appropriate proceedings, if adequate reserves with respect
thereto are maintained on the books of the Company in accordance with GAAP;
(ii) statutory liens of carriers, warehousemen, mechanics, materialmen,
landlords, repairmen or other like Liens arising by operation of law in the
ordinary course of business, provided that (a) the underlying obligations are
not overdue for a period of more than 30 days, or (b) such Liens are being
contested in good faith and by appropriate proceedings and adequate reserves
with respect thereto are maintained on the books of the Company in accordance
with GAAP; (iii) Liens securing the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business; (iv) easements, rights-of-way,
zoning, similar restrictions and other similar encumbrances or title defects
which, singly or in the aggregate, do not in any case materially detract from
the value of the property, subject thereto (as such property is used by the
Company or any of its Restricted Subsidiaries) or interfere with the ordinary
conduct of the business of the Company or any of its Restricted Subsidiaries;
(v) Liens arising by operation of law in connection with judgments, only to
the extent, for an amount and for a period not resulting in an Event of
Default with respect thereto; (vi) pledges or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security legislation; and (vii) Liens
securing on an equal and ratable basis the Senior Notes and any other
Indebtedness.
"Permitted Mortgage Investment" means an Investment in Indebtedness secured
by real estate assets or Capital Stock of Persons (other than the Company or
its Restricted Subsidiaries) owning such real estate assets; provided that (i)
the Company is able to consolidate the operations of the real estate assets in
its GAAP financial statements, (ii) such real estate assets are owned by a
partnership, LLC or other entity which is controlled by the Company or a
Restricted Subsidiary as a general partner, managing member or through similar
means, or (iii) the aggregate amount of such Permitted Mortgage Investments
(excluding those referenced in clauses (i) and (ii) above), determined at the
time each such Investment was made, does not exceed 10% of Total Assets after
giving effect to such Investment.
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"Permitted REIT Distributions" means a declaration or payment of any
dividend or the making of any distribution (i) to Host REIT that is necessary
to maintain Host REIT's status as a REIT under the Code or to
satisfy the distributions required to be made by Notice 88-19 (or Treasury
regulations issued pursuant thereto) by reason of Host REIT's making of the
election provided for therein, if (a) the aggregate principal amount of all
outstanding Indebtedness (other than the QUIPs Debt) of the Company and its
Restricted Subsidiaries on a consolidated basis at such time is less than 80%
of Adjusted Total Assets and (b) no Default or Event of Default shall have
occurred and be continuing and (ii) to any Person in respect of any Units,
which distribution is required as a result of or a condition to the
distribution or payment of such dividend or distribution to Host REIT;
provided that such Person's investment in the Operating Partnership in
consideration of which such Person received such Units shall have been
consummated in a transaction determined by the Company to be fair to the
Operating Partnership as set forth in an Officer's Certificate for Investments
in an amount less than $50 million and as set forth in a Board Resolution for
Investments equal to or greater than such amount.
"Permitted REIT Payments" means, without duplication, payments to Host REIT
and its Subsidiaries that hold only Qualified Assets in an amount necessary
and sufficient to permit Host REIT and such Subsidiaries to pay all of their
operating expenses and other general corporate expenses and liabilities
(including any reasonable professional fees and expenses).
"Permitted Sharing Arrangements" means any contracts, agreements or other
arrangements between the Company and/or one or more of its Subsidiaries and a
Parent of the Company and/or one or more Subsidiaries of such Parent, pursuant
to which such Persons share centralized services, establish joint payroll
arrangements, procure goods or services jointly or otherwise make payments
with respect to goods or services on a joint basis, or allocate corporate
expenses (other than taxes based on income) (provided that (i) such Permitted
Sharing Arrangements are, in the determination of management of the Company,
the Subsidiary Guarantors, or their Restricted Subsidiaries in the best
interests of the Company, the Subsidiary Guarantors, or their Restricted
Subsidiaries and (ii) the liabilities of the Company, the Subsidiary
Guarantors and their Restricted Subsidiaries under such Permitted Sharing
Arrangements are determined in good faith and on a reasonable basis).
"Permitted Sharing Arrangements Payments" means payments under Permitted
Sharing Arrangements.
"Permitted Tax Payments" means payment of any liability of the Company,
Host, Host REIT or any of their respective Subsidiaries for Taxes.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated, whether
voting or non-voting), which have a preference on liquidation or with respect
to distributions over any other class of Capital Stock, including preferred
partnership interests, whether general or limited, or such Person's preferred
or preference stock, whether outstanding on the Closing Date or issued
thereafter, including, without limitation, all series and classes of such
preferred or preference stock.
"Private Partnership" means a partnership (other than a Public Partnership)
or limited liability company that owns one or more full service hotels and
that, prior to the REIT Conversion, is partially but not Wholly Owned by Host
or one of its Subsidiaries.
"Private Partnership Acquisition" means the acquisition by the Operating
Partnership or a Restricted Subsidiary thereof from unaffiliated partners of
certain Private Partnerships of partnership interests in such Private
Partnerships in exchange for Units or the assets of such Private Partnerships
by merger or conveyance in exchange for Units.
"Procurement Contracts" means contracts for the procurement of goods and
services entered into in the ordinary course of business and consistent with
industry practices.
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"Pro Rata Share" means "PRS" where:
PRS equals CR divided by TC multiplied by OPTC
where:
CR equals the redemption value of such Capital Stock in the issuing
Restricted Subsidiary held in the aggregate by the Company and its
Restricted Subsidiaries.
TC equals the total contribution to the equity of the issuing
Restricted Subsidiary made by the Company and its Restricted
Subsidiaries, and
OPTC equals the total contribution to the equity of the issuing
Restricted Subsidiary made by other Persons.
"Public Partnerships" mean, collectively, Atlanta Marriott Marquis II
Limited Partnership, a Delaware limited partnership; Desert Springs Marriott
Limited Partnership, a Delaware limited partnership; Hanover Marriott Limited
Partnership, a Delaware limited partnership; Marriott Diversified American
Hotels, L.P., a Delaware limited partnership; Marriott Hotel Properties
Limited Partnership, a Delaware limited partnership; Marriott Hotel Properties
II Limited Partnership, a Delaware limited partnership; Mutual Benefit Chicago
Marriott Suite Hotel Partners, L.P., a Rhode Island Limited partnership; and
Potomac Hotel Limited Partnership, a Delaware limited partnership; Marriott
Suites Limited Partnership; or, as the context may require, any such entity
together with its Subsidiaries, or any of such Subsidiaries.
"Qualified Assets" means (i) Capital Stock of the Company or any of its
Subsidiaries or of other Subsidiaries of the Guarantors substantially all of
whose sole assets are direct or indirect interests in Capital Stock of the
Company and (ii) other assets related to corporate operations of the Guarantor
which are de minimus in relation to those of the Guarantors and their
Restricted Subsidiaries, taken as a whole.
"Qualified Capital Stock" means any Capital Stock of the Company that is not
Disqualified Stock.
"Qualified Exchange" means (i) any legal defeasance, redemption, retirement,
repurchase or other acquisition of then outstanding Capital Stock or
Indebtedness of the Company issued on or after the Issue Date with the Net
Cash Proceeds received by the Company from the substantially concurrent sale
of Qualified Capital Stock or (ii) any exchange of Qualified Capital Stock for
any then outstanding Capital Stock or Indebtedness issued on or after the
Issue Date.
"QUIPs" means the 6 3/4% Convertible Preferred Securities issued by Host
Financial Trust, a statutory business trust and a Subsidiary of Host.
"QUIPs Debt" means the $567 million aggregate principal amount of 6 3/4%
convertible subordinated debentures due 2026 of Host, held by Host Marriott
Financial Trust, a statutory business trust.
"Rating Agencies" means (i) S&P and (ii) Moody's or (iii) if S&P or Moody's
or both shall not make a rating of the Senior Notes publicly available, a
nationally recognized securities rating agency or agencies, as the case may
be, selected by the Company, which shall be substituted for S&P or Moody's or
both, as the case may be.
"Rating Category" means currently (i) with respect to S&P, any of the
following categories: BB, B, CCC, CC, C and D (or equivalent successor
categories); (ii) with respect to Moody's, any of the following categories:
Ba, B, Caa, Ca, C and D (or equivalent successor categories); and (iii) the
equivalent of any such category of S&P or Moody's used in another Rating
Agency. In determining whether the rating of the Senior Notes has decreased by
one or more gradations, gradations within Rating Categories (currently + and -
for S&P, 1,2 and 3 for Moody's; or the equivalent gradations for another
Rating Agency) shall be taken into account (e.g., with respect to S&P, a
decline in a rating from BB+ to BB, as well as from BB- to B+, will constitute
a decrease of one gradation).
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"Rating Date" means the date which is 90 days prior to the earlier of (i) a
Change of Control and (ii) the first public notice of the occurrence of a
Change of Control or of the intention by the Company to effect a Change of
Control.
"Rating Decline" means the occurrence, on or within 90 days after the
earliest to occur of (i) a Change of Control and (ii) the date of the first
public notice of the occurrence of a Change of Control or of the intention by
any Person to effect a Change of Control (which period shall be extended so
long as the rating of the Senior Notes is under publicly announced
consideration for possible downgrade by any of the Rating Agencies), of (a) in
the event the Senior Notes are rated by either Moody's or S&P on the Rating
Date as Investment Grade, a decrease in the rating of the Senior Notes by
either of such Rating Agencies to a rating that is below Investment Grade, or
(b) in the event the Senior Notes are rated below Investment Grade by both
Rating Agencies on the Rating Date, a decrease in the rating of the Senior
Notes by either Rating Agency by one or more gradations (including gradations
with Rating Categories as well as between Rating Categories).
"real estate assets" means real property and all FF&E associated or used in
connection therewith.
"Reference Period" with regard to any Person means the four full fiscal
quarters ended immediately preceding any date upon which any determination is
to be made pursuant to the terms of the Senior Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Stock (i)
issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or
(ii) constituting an amendment, modification or supplement to, or a deferral
or renewal of ((i) and (ii) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Stock in a principal amount or, in the case of
Disqualified Stock, liquidation preference, not to exceed the sum of (a) the
reasonable and customary fees and expenses incurred in connection with the
Refinancing plus (b) the lesser of (I) the principal amount or, in the case of
Disqualified Stock, liquidation preference, of the Indebtedness or
Disqualified Stock so refinanced and (II) if such Indebtedness being
refinanced was issued with an original issue discount, the accreted value
thereof (as determined in accordance with GAAP) at the time of such
Refinancing; provided that Refinancing Indebtedness (other than a revolving
line of credit from a commercial lender or other Indebtedness whose proceeds
are used to repay a revolving line of credit from a commercial lender to the
extent such revolving line of credit was not put in place for purposes of
evading the limitations described in this definition) shall (A) not have an
Average Life shorter than the Indebtedness or Disqualified Stock to be so
refinanced at the time of such Refinancing and (B) be subordinated in right of
payment to the rights of Holders of the Senior Notes if the Indebtedness or
Disqualified Stock to be refinanced was so subordinated.
"REIT Conversion" means the various transactions to be carried out in
connection with Host's conversion to a REIT, as generally described in the
Prospectus and the S-4 Registration Statement, including without limitation
(i) the contribution to the Operating Partnership and its Subsidiaries of
substantially all of the assets (excluding the assets of SLC) held by Host and
its other Subsidiaries (which shall be substantially completed on or prior to
the Conversion Date); (ii) the assumption by the Operating Partnership and/or
its Subsidiaries of substantially all of the liabilities of Host and its other
Subsidiaries (including, without limitation, the QUIPs Debt and the Old
Notes); (iii) the Partnership Mergers; (iv) the Private Partnership
Acquisitions; (v) the issuance of Limited Partner Notes in connection with the
foregoing; (vi) the Blackstone Acquisition; (vii) the contribution, prior to
or substantially concurrent with the Conversion Date, to Non-Controlled
Entities of Non-Conforming Assets; (viii) the leases to SLC or Subsidiaries of
SLC of the hotels owned by the Operating Partnership and its Subsidiaries;
(ix) the Host REIT Merger; (x) the E&P Distribution; and (xi) such other
related transactions and steps, occurring prior to or substantially concurrent
with or within a reasonable time after the Conversion Date as may be
reasonably necessary to complete the above transactions or otherwise to permit
Host REIT to elect to be treated as a REIT for Federal income tax purposes;
provided that Host may in its sole discretion exclude any one or more of the
specific transactions enumerated above in clauses (ii) through (x) hereof;
provided, further,
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that Host shall not have distributed to its shareholders any significant
amounts of assets (other than regular dividends and the E&P Distribution) on
or prior to the Conversion Date and subsequent to the Issue Date.
"Related Business" means the businesses conducted (or proposed to be
conducted) by the Company and its Restricted Subsidiaries as of the Closing
Date and any and all businesses that in the good faith judgment of the Board
of the Company are materially related businesses or real estate related
businesses. Without limiting the generality of the foregoing, Related Business
shall include the ownership and operation of lodging properties.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than a Permitted Investment.
"Restricted Payment" means, with respect to any Person (but without
duplication), (i) the declaration or payment of any dividend or other
distribution in respect of Capital Stock of such Person or the Parent or any
Restricted Subsidiary of such Person, (ii) any payment on account of the
purchase, redemption or other acquisition or retirement for value of Capital
Stock of such Person or the Parent or any Restricted Subsidiary of such
Person, (iii) other than with the proceeds from the substantially concurrent
sale of, or in exchange for, Refinancing Indebtedness, any purchase,
redemption, or other acquisition or retirement for value of, any payment in
respect of any amendment of the terms of or any defeasance of, any
Subordinated Indebtedness, directly or indirectly, by such Person or the
Parent or a Restricted Subsidiary of such Person prior to the scheduled
maturity, any scheduled repayment of principal, or scheduled sinking fund
payment, as the case may be, of such Indebtedness, (iv) any Restricted
Investment by such Person, and (v) the payment to any Affiliate (other than
the Company or its Restricted Subsidiaries) in respect of taxes owed by any
consolidated group of which both such Person or a Subsidiary of such Person
and such Affiliate are members; provided, however, that the term "Restricted
Payment" does not include (a) any dividend, distribution or other payment on
or with respect to Capital Stock of the Company to the extent payable solely
in shares of Qualified Capital Stock; (b) any dividend, distribution or other
payment to the Company, or to any of the Subsidiary Guarantors, by the Company
or any of its Restricted Subsidiaries; (c) Permitted Tax Payments; (d) the
declaration or payment of dividends or other distributions by any Restricted
Subsidiary of the Company, provided such distributions are made to the Company
(or a Subsidiary of the Company, as applicable) on a pro rata basis (and in
like form) with all dividends and distributions so made; (e) the retirement of
Units upon conversion of such Units to Capital Stock of Host REIT; (f) any
transactions comprising part of the REIT Conversion; (g) any payments with
respect to Disqualified Stock or Indebtedness at the stated time and amounts
pursuant to the original terms of the instruments governing such obligations;
(h) Permitted REIT Payments; and (i) payments in accordance with the existing
terms of the QUIPs; and provided, further, that any payments of bona fide
obligations of the Company or any Restricted Subsidiary shall not be deemed to
be Restricted Payments solely by virtue of the fact of another Person's co-
obligation with respect thereto.
"Restricted Subsidiary" means any Subsidiary of the Company other than (i)
an Unrestricted Subsidiary or (ii) a Non-Consolidated Entity.
"S-4 Registration Statement" means the registration statement of the
Operating Partnership on Form S-4, filed with the Commission on June 2, 1998,
as amended and supplemented from time to time.
"Secured Indebtedness" means any Indebtedness or Disqualified Stock secured
by a Lien (other than Permitted Liens) upon the property of the Company, the
Subsidiary Guarantors or any of their respective Restricted Subsidiaries.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" of the Company within the meaning of Rule 1-02(w) of Regulation S-
X promulgated by the Commission as in effect as of the Issue Date.
"SLC" means HMC Senior Communities, Inc., a Delaware corporation, and its
successors and assigns.
"S&P" means Standard & Poor's Ratings Services and its successors.
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"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor that is expressly subordinated in right of payment to the
Senior Notes or a Subsidiary Guarantee, as applicable.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the voting
power of the outstanding Voting Stock is owned, directly or indirectly, by
such Person, by such Person and one or more Subsidiaries of such Person or by
one or more Subsidiaries of such Person, or the accounts of which would be
consolidated with those of such Person in its consolidated financial
statements in accordance with GAAP, if such statements were prepared as of
such date, (ii) any partnership (a) in which such Person or one or more
Subsidiaries of such Person is, at the time, a general partner and owns alone
or together with the Company a majority of the partnership interest or (b) in
which such Person or one or more Subsidiaries of such Person is, at the time,
a general partner and which is controlled by such Person in a manner
sufficient to permit its financial statements to be consolidated with the
financial statements of such Person in conformance with GAAP and the financial
statements of which are so consolidated, (iii) any Non-Controlled Entity, and
(iv) any Fifty Percent Venture.
"Subsidiary Guarantee" means a Guarantee by each Subsidiary Guarantor for
payment of principal, premium and interest on the Senior Notes by such
Subsidiary Guarantor. The Subsidiary Guarantee will be a senior obligation of
each Subsidiary Guarantor and will be full and unconditional regardless of the
enforceability of the Senior Notes and the Indenture.
"Subsidiary Guarantors" means (i) the Initial Subsidiary Guarantors
identified in the following sentence and (ii) any Future Subsidiary Guarantors
that become Subsidiary Guarantors pursuant to the terms of the Indenture, but
excluding any Persons whose guarantees have been released pursuant to the
terms of the Indenture. The Initial Subsidiary Guarantors are HMH Rivers,
Inc.; Marriott SBM Two Corp.; Marriott PLP Corp.; HMC Retirement Properties,
Inc.; HMH Pentagon Corp.; HMC SFO, Inc.; HMC AP Canada, Inc.; Host Airport
Hotels, Inc.; Host of Houston 1979; Host of Houston, Ltd.; Host of Boston,
Ltd.; Marriott Financial Services, Inc.; HMC Capital Resources Corp.; Marriott
SBM One Corp.; YBG Associates LLC; PRM Corporation; and Marriott Park Ridge
Corp.
"Subsidiary Indebtedness" means, without duplication, all Indebtedness and
Disqualified Stock (including Guarantees (other than Guarantees by Restricted
Subsidiaries of Secured Indebtedness)) of which a Restricted Subsidiary other
than a Subsidiary Guarantor is the obligor. A release of the Guarantee of a
Subsidiary Guarantor which remains a Restricted Subsidiary shall be deemed to
be an Incurrence of Subsidiary Indebtedness in amount equal to the Company's
proportionate interest in the Unsecured Indebtedness of such Subsidiary
Guarantor.
"Tax" or "Taxes" means all Federal, state, local, and foreign taxes, and
other assessments of a similar nature (whether imposed directly or through
withholding), including any interest, additions to tax, or penalties
applicable thereto, imposed by any domestic or foreign governmental authority
responsible for the administration of any such taxes.
"Total Assets" means the sum of (i) Undepreciated Real Estate Assets and
(ii) all other assets (excluding intangibles) of the Company, the Subsidiary
Guarantors, and their respective Restricted Subsidiaries determined on a
consolidated basis (it being understood that the accounts of Restricted
Subsidiaries shall be consolidated with those of the Company only to the
extent of the Company's proportionate interest therein).
"Total Unencumbered Assets" as of any date means the sum of (i)
Undepreciated Real Estate Assets not securing any portion of Secured
Indebtedness and (ii) all other assets (but excluding intangibles and minority
interests in Persons who are obligors with respect to outstanding secured
debt) of the Company, the Subsidiary Guarantors and their respective
Restricted Subsidiaries not securing any portion of Secured Indebtedness,
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determined on a consolidated basis (it being understood that the accounts of
Restricted Subsidiaries shall be consolidated with those of the Company only
to the extent of the Company's proportionate interest therein).
"Transaction Date" means, with the respect to the Incurrence of any
Indebtedness or issuance of Disqualified Stock by the Company or any of its
Restricted Subsidiaries, the date such Indebtedness is to be Incurred or such
Disqualified Stock is to be issued and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
"Undepreciated Real Estate Assets" means, as of any date, the cost (being
the original cost to the Company, the Subsidiary Guarantors or any of their
respective Restricted Subsidiaries plus capital improvements) of real estate
assets of the Company, the Subsidiary Guarantors and their respective
Restricted Subsidiaries on such date, before depreciation and amortization of
such real estate assets, determined on a consolidated basis.
"Units" means the limited partnership units of the Operating Partnership.
"Unrestricted Subsidiary" means any Subsidiary of a Person that at the time
of determination shall be designated an Unrestricted Subsidiary by the Board
of the Company in the manner provided below. The Board of the Company may
designate any Subsidiary (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary, unless such
Subsidiary owns any Capital Stock of the Company, the Subsidiary Guarantors or
any of their respective Restricted Subsidiaries (other than the designated
Subsidiary and any other Subsidiary concurrently being designated as an
Unrestricted Subsidiary); provided that (a) any Guarantee by the Company, the
Subsidiary Guarantors or any of their respective Restricted Subsidiaries
(other than the designated Subsidiary and any other Subsidiary concurrently
being designated as an Unrestricted Subsidiary) of any Indebtedness of the
Subsidiary being so designated shall be deemed an "Incurrence" of such
Indebtedness and an "Investment" by the Company, the Subsidiary Guarantors or
such Restricted Subsidiaries at the time of such designation; (b) either (I)
the Subsidiary to be so designated has total assets of $1,000 or less or (II)
if such Subsidiary has assets greater than $1,000, such designation would not
be prohibited under the "Limitation on Restricted Payments" covenant described
below; and (c) if applicable, the Incurrence of Indebtedness and the
Investment referred to in clause (a) of this proviso would be permitted under
the "Limitation on Incurrences of Indebtedness and Issuances of Disqualified
Stock" and "Limitation on Restricted Payments" covenants. The Board of the
Company may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that (1) no Default or Event of Default shall have
occurred and be continuing at the time of or after giving effect to such
designation; and (2) all Liens, Indebtedness and Disqualified Stock of such
Unrestricted Subsidiary outstanding immediately after such designation would,
if Incurred, granted or issued at such time, have been permitted to be
Incurred, granted or issued and shall be deemed to have been Incurred, granted
or issued) for all purposes of the Indenture. Any such designation by the
Board of the Company shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board Resolution giving effect to such designation
and an Officer's Certificate certifying that such designation complied with
the foregoing provisions.
"Unsecured Indebtedness" means any Indebtedness or Disqualified Stock of the
Company, the Subsidiary Guarantors or any of their respective Restricted
Subsidiaries that is not Secured Indebtedness.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by individuals mandated
by applicable law) by such Person and/or one or more Wholly Owned Subsidiaries
of such Person.
Covenants at Issuance. The following covenants will be effective upon
issuance of the Senior Notes:
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REPURCHASE OF SENIOR NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF
CONTROL TRIGGERING EVENT
Upon the occurrence of a Change of Control Triggering Event, each Holder of
Senior Notes will have the right to require the Company to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Senior Notes pursuant to the unconditional, irrevocable Offer to Purchase
described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon to the date of purchase (the "Change of Control
Payment") on a date that is not more than 45 Business Days after the
occurrence of such Change of Control Triggering Event (the "Change of Control
Payment Date").
On or before the Change of Control Payment Date, the Company will (i) accept
for payment Senior Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Payment (together with accrued and unpaid interest)
of all Senior Notes so tendered and (iii) deliver to the Trustee Senior Notes
so accepted together with an Officer's Certificate listing the aggregate
principal amount of the Senior Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to the Holders of Senior
Notes so accepted payment in an amount equal to the Change of Control Payment,
and the Trustee will promptly authenticate and mail or deliver (or cause to be
transferred by book entry) to such Holders a new Note equal in principal
amount to any unpurchased portion of the Note surrendered; provided that each
such new Note will be in a principal amount of $1,000 or an integral multiple
thereof. Any Senior Notes not so accepted will be promptly mailed or delivered
by the Company to the Holder thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
consummation thereof.
The provisions of the Indenture relating to a Change of Control Triggering
Event may not afford the Holders protection in the event of a highly leveraged
transaction, reorganization, restructuring, merger, spin-off or similar
transaction that may adversely affect Holders, if such transaction does not
constitute a Change of Control Triggering Event, as defined. In addition, the
Company may not have sufficient financial resources available to fulfill its
obligation to repurchase the Senior Notes upon a Change of Control Triggering
Event.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation l4E under
the Exchange Act and the rules thereunder and all other applicable Federal and
state securities laws.
LIMITATION ON INCURRENCES OF INDEBTEDNESS AND ISSUANCES OF DISQUALIFIED STOCK
(a) The Indenture will provide that, except as set forth below, neither the
Company, the Subsidiary Guarantors nor any of their respective Restricted
Subsidiaries will, directly or indirectly, Incur any Indebtedness (including
Acquired Indebtedness) or issue any Disqualified Stock. Notwithstanding the
foregoing sentence, if, on the date of any such Incurrence or issuance, after
giving effect to, on a pro forma basis, such Incurrence or issuance and the
receipt and application of the proceeds therefrom, (i) the aggregate amount of
all outstanding Indebtedness (other than the QUIPs Debt) and Disqualified
Stock of the Company, the Subsidiary Guarantors and their respective
Restricted Subsidiaries (including amounts of Refinancing Indebtedness
outstanding pursuant to paragraph (d)(iii) hereof or otherwise), determined on
a consolidated basis (it being understood that the amounts of Indebtedness and
Disqualified Stock of Restricted Subsidiaries shall be consolidated with that
of the Company only to the extent of the Company's proportionate interest in
such Restricted Subsidiaries), without duplication, is less than or equal to
65% of Adjusted Total Assets and (ii) the Consolidated Coverage Ratio of the
Company would be greater than or equal to 2.0 to 1, the Company and its
Restricted Subsidiaries may Incur such Indebtedness or issue such Disqualified
Stock.
(b) In addition to the foregoing limitations set forth in (a) above, except
as set forth below, the Company, the Subsidiary Guarantors and their
Restricted Subsidiaries will not Incur any Secured Indebtedness or Subsidiary
Indebtedness. Notwithstanding the foregoing sentence, if, immediately after
giving effect to the Incurrence of such additional Secured Indebtedness and/or
Subsidiary Indebtedness and the application of the
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proceeds thereof, the aggregate amount of all outstanding Secured Indebtedness
and Subsidiary Indebtedness of the Company, the Subsidiary Guarantors and
their Restricted Subsidiaries (including amounts of Refinancing Indebtedness
outstanding pursuant to paragraph (d)(iii) hereof or otherwise), determined on
a consolidated basis (it being understood that the amounts of Secured
Indebtedness and Subsidiary Indebtedness of Restricted Subsidiaries shall be
consolidated with that of the Company only to the extent of the Company's
proportionate interest in such Restricted Subsidiaries), without duplication,
is less than or equal to 45% of Adjusted Total Assets, the Company and its
Restricted Subsidiaries may Incur such Secured Indebtedness and/or Subsidiary
Indebtedness.
(c) In addition to the limitations set forth in (a) and (b) above, the
Subsidiary Guarantors and their Restricted Subsidiaries will maintain at all
times Total Unencumbered Assets of not less than 125% of the aggregate
outstanding amount of the Unsecured Indebtedness (other than the QUIPs Debt)
(including amounts of Refinancing Indebtedness outstanding pursuant to
paragraph (d)(iii) hereof or otherwise) determined on a consolidated basis (it
being understood that the Unsecured Indebtedness of the Restricted
Subsidiaries shall be consolidated with that of the Company only to the extent
of the Company's proportionate interest in such Restricted Subsidiaries).
(d) Notwithstanding paragraphs (a) or (b), the Indenture will provide that
the Company, the Subsidiary Guarantors and their respective Restricted
Subsidiaries (except as specified below) may Incur or issue each and all of
the following: (i) Indebtedness outstanding (including Indebtedness issued to
replace, refinance or refund such Indebtedness) under the Credit Facility at
any time in an aggregate principal amount not to exceed $1.5 billion, less any
amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant (including that, in the case of a
revolver or similar arrangement, such commitment is permanently reduced by
such amount); (ii) Indebtedness or Disqualified Stock owed (A) to the Company
or (B) to any Subsidiary Guarantor; provided that any event which results in
any such Restricted Subsidiary obligated with respect to such Indebtedness or
Disqualified Stock ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness or Disqualified Stock (other than to the Company
or a Subsidiary Guarantor) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness or issuance of Disqualified Stock not
permitted by this clause (ii); (iii) Refinancing Indebtedness with respect to
outstanding Indebtedness (other than Indebtedness Incurred under clause (i),
(ii), (iv), (vi) or (viii) of this paragraph) and any refinancings thereof;
(iv) Indebtedness (A) in respect of performance, surety or appeal bonds
Incurred in the ordinary course of business, (B) under Currency Agreements and
Interest Swap and Hedging Obligations; provided that such agreements (a) are
designed solely to protect the Company, the Subsidiary Guarantors or any of
their Restricted Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates and (b) do not increase the Indebtedness of
the obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder, or (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company, the Subsidiary
Guarantors or any of their Restricted Subsidiaries pursuant to such
agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing such
acquisition), in an amount not to exceed the gross proceeds actually received
by the Company, the Subsidiary Guarantors and their Restricted Subsidiaries on
a consolidated basis in connection with such disposition; (v) Indebtedness of
the Company, to the extent the net proceeds thereof are promptly (A) used to
purchase all of the Senior Notes tendered in a Change of Control Offer made as
a result of a Change of Control or (B) deposited to defease the Senior Notes
as described below under "Legal Defeasance and Covenant Defeasance"; (vi)
Guarantees of the Senior Notes and Guarantees of Indebtedness of the Company
or any of the Subsidiary Guarantors by any of their respective Restricted
Subsidiaries; provided the guarantee of such Indebtedness is permitted by and
made in accordance with the terms of the Indenture at the time of the
incurrence of such underlying Indebtedness or at the time such guarantor
becomes a Restricted Subsidiary; (vii) Indebtedness evidenced by the Senior
Notes and the Guarantees thereof and represented by the Indenture up to the
amounts issued pursuant thereto as of the Issue Date; (viii) the QUIPs Debt;
(ix) Limited Partner Notes, and (x) Indebtedness Incurred pursuant to the
Blackstone Acquisition and any Indebtedness of Host, its Subsidiaries, a
Public Partnership or a Private Partnership incurred in connection with the
REIT Conversion.
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(e) For purposes of determining any particular amount of Indebtedness under
this covenant, (1) Indebtedness Incurred under the Credit Facility on or prior
to the Closing Date shall be treated as Incurred pursuant to clause (i) of
paragraph (d) of this covenant and (2) Guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included as additional
Indebtedness. For purposes of determining compliance with this covenant, in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the above clauses, the Company, in its
sole discretion, shall classify such item of Indebtedness as being Incurred
under only one of such clauses.
Indebtedness or Disqualified Stock of any Person that is not a Restricted
Subsidiary of the Company, which Indebtedness or Disqualified Stock is
outstanding at the time such Person becomes a Restricted Subsidiary of the
Company (including by designation) or is merged with or into or consolidated
with the Company or a Restricted Subsidiary of the Company, shall be deemed to
have been Incurred or issued at the time such Person becomes a Restricted
Subsidiary of the Company or is merged with or into or consolidated with the
Company, or a Restricted Subsidiary of the Company, and Indebtedness or
Disqualified Stock which is assumed at the time of the acquisition of any
asset shall be deemed to have been Incurred or issued at the time of such
acquisition.
LIMITATION ON LIENS
Neither the Company, the Subsidiary Guarantors, nor any Restricted
Subsidiary shall secure any Indebtedness under the Credit Facility by a Lien
or suffer to exist any Lien securing Indebtedness under the Credit Facility
unless effective provision is made to secure the Senior Notes equally and
ratably with the Lien securing such Indebtedness for so long as Indebtedness
under the Credit Facility is secured by a Lien.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture will provide that on and after the Issue Date each of the
Company and the Subsidiary Guarantors will not, and will not permit any of
their Restricted Subsidiaries to, directly or indirectly, make any Restricted
Payment, if (a) on the date of such Restricted Payment a Default or an Event
of Default would exist and be continuing or would occur as a consequence of
(after giving effect, on a pro forma basis, to) such Restricted Payment or (b)
immediately prior to such Restricted Payment or after giving effect thereto,
the aggregate amount of all Restricted Payments made by the Company, the
Subsidiary Guarantors and their Restricted Subsidiaries, including such
proposed Restricted Payment (if not made in cash, then the fair market value
of any property used therefor) from and after the Issue Date and on or prior
to the date of such Restricted Payment, shall exceed the sum of, without
duplication, (i) the amount determined by subtracting (x) 2.0 times the
aggregate Consolidated Interest Expense of the Company for the period (taken
as one accounting period) from the first day of the fiscal quarter in which
the Issue Date occurs to the last day of the last full fiscal quarter prior to
the date of the proposed Restricted Payment (the "Computation Period") from
(y) Consolidated EBITDA of the Company for the Computation Period, (ii) the
aggregate Net Cash Proceeds received by the Company from the sale (other than
to a Subsidiary of the Company and other than in connection with a Qualified
Exchange) of its Qualified Capital Stock or as a Capital Contribution from its
Parent, in either case, which Net Cash Proceeds are received by the Company
after the Issue Date, (iii) the fair market value of noncash tangible assets
or Capital Stock (other than that of the Company or its Parent) received by
the Company representing interests in Persons acquired in exchange for an
issuance of Qualified Capital Stock after the Issue Date, (iv) the fair market
value of noncash tangible assets or Capital Stock (other than that of the
Company or its Parent) representing interests in Persons contributed as a
Capital Contribution to the Company after the Issue Date and (v) $75 million.
Notwithstanding the foregoing, the provisions set forth in clause (b) of the
immediately preceding paragraph will not prohibit (i) the payment of any
dividend within 60 days after the date of its declaration if such dividend
could have been made on the date of its declaration in compliance with the
foregoing provisions, (ii) a Qualified Exchange, or (iii) a Permitted Sharing
Arrangements Payment; provided, however, that any amounts expended
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pursuant to clause (i) of this paragraph shall be included as Restricted
Payments made for purposes of clause (b) of the immediately preceding
paragraph, whereas amounts received and expended in connection with a
Qualified Exchange or a Permitted Sharing Arrangements Payment shall neither
be counted as Restricted Payments made nor be credited as Net Cash Proceeds
received for purposes of clause (b)(ii) of the immediately preceding
paragraph.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARY
GUARANTORS
The Indenture will provide that the Company and the Subsidiary Guarantors
will not create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any
Subsidiary Guarantor to (i) pay dividends or make any other distributions
permitted by applicable law on any Capital Stock of such Subsidiary Guarantor
held by the Company or its Restricted Subsidiaries, (ii) pay any Indebtedness
owed to the Company or any Subsidiary Guarantor, (iii) make loans or advances
to the Company or any Subsidiary Guarantor, or (iv) transfer their property or
assets to the Company or any Subsidiary Guarantor.
The foregoing provisions shall not prohibit any encumbrances or
restrictions: (i) imposed under the Senior Notes as in existence immediately
following the Issue Date in the Indenture, under the Credit Facility, and any
extensions, refinancings, renewals or replacements of such agreements;
provided that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any material
respect to the Holders than those encumbrances or restrictions that are then
in effect and that are being extended, refinanced, renewed or replaced; (ii)
imposed under any applicable documents or instruments pertaining to any
Secured Indebtedness (and relating solely to assets constituting collateral
thereunder or cash proceeds from or generated by such assets); (iii) existing
under or by reason of applicable law; (iv) existing with respect to any Person
or the property or assets of such Person acquired by the Company or any
Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than
such Person or the property or assets of such Person so acquired; (v) in the
case of clause (iv) of the first paragraph of this covenant, (A) that restrict
in a customary manner the subletting, assignment or transfer of any property
or asset that is a lease, license, conveyance or contract or similar property
or asset, (B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by the Indenture
or (C) arising or agreed to in the ordinary course of business, not relating
to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company and its Restricted
Subsidiaries, taken as a whole; (vi) with respect solely to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of,
or property and assets of, such Restricted Subsidiary; (vii) contained in the
terms of any Indebtedness or any agreement pursuant to which such Indebtedness
was issued if (A) the encumbrance or restriction applies only in the event of
a payment default or a default with respect to a financial covenant contained
in such Indebtedness or agreement, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders of the Senior Notes than is
customary in comparable financings (as determined by the Company) and (C) the
Company determines that any such encumbrance or restriction will not
materially affect its ability to make principal or interest payments on the
Senior Notes, or (viii) in connection with and pursuant to permitted
refinancings thereof, replacements of restrictions imposed pursuant to clause
(iv) of this paragraph that are not more restrictive than those being replaced
and do not apply to any other Person or assets other than those that would
have been covered by the restrictions in the Indebtedness so refinanced.
Nothing contained in this covenant shall prevent the Company, the Subsidiary
Guarantors or any of their respective Restricted Subsidiaries from (1)
creating, incurring, assuming or suffering to exist any Permitted Liens or
otherwise permitted in the "Limitation on Liens" covenant or (2) restricting
the sale or other disposition of property or assets of the Company or any of
its Restricted Subsidiaries that secure Indebtedness of the Company or any of
its Restricted Subsidiaries.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture will provide that neither the Company, the Subsidiary
Guarantors, nor any of their respective Restricted Subsidiaries will be
permitted to, directly or indirectly, enter into, renew or extend any
transaction or
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series of transactions (including, without limitations, the purchase, sale,
lease or exchange of property or assets, or the rendering of any service) with
any Affiliate of the Company or any of its Restricted Subsidiaries ("Affiliate
Transactions"), other than Exempted Affiliate Transactions, except upon fair
and reasonable terms no less favorable to the Company, the Subsidiary
Guarantor or such Restricted Subsidiary than could be obtained, at the time of
such transaction or, if such transaction is pursuant to a written agreement,
at the time of the execution of the agreement providing therefor, in a
comparable arm's-length transaction with a Person that is not an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions approved by a majority of the Board of the Company; (ii) any
transaction solely between or among the Company, a Subsidiary Guarantor and
any of their respective Restricted Subsidiaries or solely between or among
Restricted Subsidiaries; (iii) the payment of reasonable and customary fees
and expenses to members of the Board of the Company who are not employees of
the Company; (iv) Permitted Sharing Arrangements; (v) any Restricted Payments
not prohibited by the "Limitation on Restricted Payments" covenant or any
payments specifically exempted from the definition of Restricted Payments;
(vi) Permitted Tax Payments; (vii) the REIT Conversion; and (viii) Permitted
REIT Payments. Notwithstanding the foregoing, any Affiliate Transaction or
series of related Affiliate Transactions, other than Exempted Affiliate
Transactions and any transaction or series of related transactions specified
in any of clauses (ii) through (viii) of this paragraph, (a) with an aggregate
value in excess of $10 million must first be approved pursuant to a Board
Resolution by a majority of the Board of the Company who are disinterested in
the subject matter of the transaction, and (b) with an aggregate value in
excess of $25 million, will require the Company to obtain a favorable written
opinion from an independent financial advisor of national reputation as to the
fairness from a financial point of view of such transaction to the Company,
such Subsidiary Guarantor or such Restricted Subsidiary, except that in the
case of a real estate transaction or related real estate transactions with an
aggregate value in excess of $25 million but not in excess of $50 million, an
opinion may instead be obtained from an independent, qualified real estate
appraiser that the consideration received in connection with such transaction
is fair to the Company, such Subsidiary Guarantor or such Restricted
Subsidiary.
LIMITATION ON ASSET SALES
The Indenture will provide that the Company and the Subsidiary Guarantors
will not, and the Company and the Subsidiary Guarantors will not permit any of
their respective Restricted Subsidiaries to, consummate any Asset Sale, unless
(i) the consideration received by the Company, the Subsidiary Guarantor or
such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of as determined by the Board of the Company in good
faith and (ii) at least 75% of the consideration received consists of cash,
Cash Equivalents and/or real estate assets; provided that, with respect to the
sale of one or more real estate properties, up to 75% of the consideration may
consist of indebtedness of the purchaser of such real estate properties so
long as such Indebtedness is secured by a first priority Lien on the real
estate property or properties sold; and provided that, for purposes of this
clause (ii) the amount of (A) any Indebtedness (other than Indebtedness
subordinated in right of payment to the Senior Notes or a Subsidiary
Guarantee) that is required to be repaid or assumed (and is either repaid or
assumed by the transferee of the related assets) by virtue of such Asset Sale
and which is secured by a Lien on the property or assets sold and (B) any
securities or other obligations received by the Company, any Subsidiary
Guarantor or any such Restricted Subsidiary from such transferee that are
immediately converted by the Company, the Subsidiary Guarantor or such
Restricted Subsidiary into cash (or as to which the Company, any Subsidiary
Guarantor or such Restricted Subsidiary has received at or prior to the
consummation of the Asset Sale a commitment (which may be subject to customary
conditions) from a nationally recognized investment, merchant or commercial
bank to convert into cash within 90 days of the consummation of such Asset
Sale and which are thereafter actually converted into cash within such 90-day
period) will be deemed to be cash.
In the event and to the extent that the Net Cash Proceeds received by the
Company, any Subsidiary Guarantor or such Restricted Subsidiary from one or
more Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 1% of Total Assets (determined as of the date
closest to the
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commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Restricted Subsidiaries has been filed with the Commission
or provided to the Trustee pursuant to the "Report" covenant), then prior to
12-months after the date Net Cash Proceeds so received exceeded 1% of Total
Assets, the Net Cash Proceeds may be (A) invested in or committed to be
invested in, pursuant to a binding commitment subject only to reasonable,
customary closing conditions, and providing such Net Cash Proceeds are, in
fact, so invested, within an additional 180 days, (x) fixed assets and
property (other than notes, bonds, obligations and securities) which in the
good faith reasonable judgment of the Board of the Company will immediately
constitute or be part of a Related Business of the Company, the Subsidiary
Guarantor or such Restricted Subsidiary (if it continues to be a Restricted
Subsidiary) immediately following such transaction, (y) Permitted Mortgage
Investments or (z) a controlling interest in the Capital Stock of an entity
engaged in a Related Business; provided that concurrently with an Investment
specified in clause (z), such entity becomes a Restricted Subsidiary or (B)
used to repay and permanently reduce Indebtedness outstanding under the Credit
Facility (including that, in the case of a revolver or similar arrangement,
such commitment is permanently reduced by such amount). Pending the
application of any such Net Cash Proceeds as described above, the Company may
invest such Net Cash Proceeds in any manner that is not prohibited by the
Indenture. Any Net Cash Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph (including any
Net Cash Proceeds which were committed to be invested as provided in such
sentence but which are not in fact invested within the time period provided)
will be deemed to constitute "Excess Proceeds."
Within 30 days following each date on which the aggregate amount of Excess
Proceeds exceeds $25 million, the Company will make an Offer to Purchase from
the Holders and holders of any other Indebtedness of the Company ranking pari
passu with the Senior Notes from time to time outstanding with similar
provisions requiring the Company to make an offer to purchase or redeem such
Indebtedness with the proceeds from such Asset Sale, on a pro rata basis, an
aggregate principal amount (or accreted value, as applicable) of Senior Notes
and such other Indebtedness equal to the Excess Proceeds on such date, at a
purchase price equal to 100% of the principal amount (or accreted value, as
applicable) of the Senior Notes and such other Indebtedness, plus, in each
case, accrued interest (if any) to the Payment Date. To the extent that the
aggregate amount of Senior Notes and other senior Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount (or accreted value, as applicable) of Senior Notes
and other Indebtedness tendered pursuant to an Asset Sale Offer exceeds the
amount of Excess Proceeds, the Senior Notes to be purchased shall be selected
on a pro rata basis. Upon completion of such Offer to Purchase, the amount of
Excess Proceeds shall be reset at zero.
Notwithstanding, and without complying with, any of the foregoing
provisions:
(i) the Company, the Subsidiary Guarantors and their respective
Restricted Subsidiaries may, in the ordinary course of business, convey,
sell, lease, transfer, assign or otherwise dispose of inventory acquired
and held for resale in the ordinary course of business;
(ii) the Company, the Subsidiary Guarantors and their respective
Restricted Subsidiaries may convey, sell, lease, transfer, assign or
otherwise dispose of assets pursuant to and in accordance with the
limitation on mergers, sales or consolidation provisions in the Indenture;
(iii) the Company, the Subsidiary Guarantors and their respective
Restricted Subsidiaries may sell or dispose of damaged, worn out or other
obsolete property in the ordinary course of business so long as such
property is no longer necessary for the proper conduct of the business of
the Company, the Subsidiary Guarantor or such Restricted Subsidiary, as
applicable; and
(iv) the Company, the Subsidiary Guarantors and their respective
Restricted Subsidiaries may exchange assets held by the Company, the
Subsidiary Guarantor or a Restricted Subsidiary for one or more real estate
properties and/or one or more Related Businesses of any Person or entity
owning one or more real estate properties and/or one or more Related
Businesses; provided that the Board of the Company has determined in good
faith that the fair market value of the assets received by the Company are
approximately equal to the fair market value of the assets exchanged by the
Company.
No transaction listed in clauses (i) through (iv) inclusive shall be deemed
to be an "Asset Sale."
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LIMITATION ON MERGER OF SUBSIDIARY GUARANTORS AND RELEASE OF SUBSIDIARY
GUARANTORS
The Indenture will provide that no Subsidiary Guarantor shall consolidate or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person) another Person (other than the Company or another Subsidiary
Guarantor), unless (i) subject to the provisions of the following paragraph,
the Person formed by or surviving any such consolidation or merger (if other
than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor pursuant to a supplemental indenture in form reasonably satisfactory
to the Trustee, pursuant to which such Person shall unconditionally and fully
guarantee, on a senior basis, all of such Subsidiary Guarantor's obligations
under such Subsidiary Guarantor's Guarantee under the Indenture on the terms
set forth in the Indenture; and (ii) immediately before and immediately after
giving effect to such transaction on a pro forma basis, no Default or Event of
Default shall have occurred or be continuing.
The Guarantee of the Senior Notes by a Subsidiary Guarantor shall be
automatically released upon (i) the sale or other disposition of Capital Stock
of such Subsidiary Guarantor if, as a result of such sale or disposition, such
Subsidiary Guarantor ceases to be a Subsidiary of the Company, (ii) the
consolidation or merger of any such Subsidiary Guarantor with any Person other
than the Company or a Subsidiary of the Company if, as a result of such
consolidation or merger, such Subsidiary Guarantor ceases to be Subsidiary of
the Company, (iii) a Legal Defeasance or Covenant Defeasance, or (iv) the
unconditional and complete release of such Subsidiary Guarantor from its
Guarantee of all Guaranteed Indebtedness.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture will prohibit the Company and its Restricted Subsidiaries from
being required to register as an "investment company" (as that term is defined
in the Investment Company Act of 1940, as amended).
Covenants upon REIT Conversion. All of the covenants listed under the
heading "Covenants at Issuance" will also be applicable to the Senior Notes
after the REIT Conversion the first covenant governing "Restricted Payments"
under such heading will be replaced by the following covenant:
LIMITATION ON RESTRICTED PAYMENTS
The Indenture will provide that the Company and the Subsidiary Guarantors
will not, and the Company and the Subsidiary Guarantors will not permit any of
their respective Restricted Subsidiaries to, directly or indirectly, make a
Restricted Payment if, at the time of, and after giving effect to, the
proposed Restricted Payment: (A) a Default or Event of Default shall have
occurred and be continuing, (B) the Company could not Incur at least $1.00 of
Indebtedness under paragraph (a) of the "Limitation on Incurrence of
Indebtedness and Issuance of Disqualified Stock" covenant or (C) the aggregate
amount of all Restricted Payments (the amount, if other than in cash, the fair
market value of any property used therefor) made on and after the Issue Date
shall exceed the sum of (1) 95% of the aggregate amount of the Funds From
Operations (or, if the Funds From Operations is a loss, minus 100% of the
amount of such loss) accrued on a cumulative basis during the period (taken as
one accounting period) beginning on the first day of the fiscal quarter in
which the Issue Date occurs and ending on the last day of the last fiscal
quarter preceding the Transaction Date, (2) 100% of the aggregate Net Cash
Proceeds received by the Company after the Issue Date from the issuance and
sale permitted by the Indenture of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Subsidiary of the Company including from an
issuance to a Person who is not a Subsidiary of the Company of any options,
warrants or other rights to acquire Capital Stock of the Company (in each
case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Senior Notes), and the amount of
any Indebtedness (other than Indebtedness subordinate in right of payment to
the Senior Notes) of the Company that was issued and sold for cash upon the
conversion of such Indebtedness after the Issue Date into Capital Stock (other
than Disqualified Stock) of the Company, or otherwise received as Capital
Contributions, (3) an amount equal to the net reduction in Investments (other
than reductions in Permitted Investments) in any Person other than a
Restricted Subsidiary after the Issue Date resulting from payments of interest
on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets,
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in each case to the Company or any of its Restricted Subsidiaries or from the
Net Cash Proceeds from the sale of any such Investment (except, in each case,
to the extent any such payment or proceeds are included in the calculation of
Funds From Operations) or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), (4) the fair market value of noncash tangible assets or
Capital Stock (other than that of the Company or its Parent) representing
interests in Persons acquired after the Issue Date in exchange for an issuance
of Qualified Capital Stock and (5) the fair market value of noncash tangible
assets or Capital Stock (other than that of the Company or its Parent)
representing interests in Persons contributed as a Capital Contribution to the
Company after the Issue Date. Notwithstanding the foregoing, the Company may
make Permitted REIT Distributions.
Covenants upon Attainment and Maintenance of an Investment Grade Rating. The
covenants--"Limitation on Liens," the "Limitation on Restricted Payments," the
"Limitation on Dividend and other Payment Restrictions Affecting Subsidiary
Guarantors," the "Limitation on Asset Sales" and the "Limitation on
Transactions with Affiliates"--will not be applicable in the event, and only
for so long as, the Senior Notes are rated Investment Grade.
REPORTS
The Indenture will provide that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder, within 15 days after it is or
would have been required to file such with the Commission, annual and
quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the Commission,
if the Company were subject to the requirements of Section 13 or 15(d) of the
Exchange Act, including, with respect to annual information only, a report
thereon by the certified independent public accountants of the Company, as the
case may be, as such would be required in such reports to the Commission, and,
in each case, together with a management's discussion and analysis of
financial condition and results of operations which would be so required.
Whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the
Commission for public availability and will make such information available to
securities analysts and prospective investors upon request.
EVENTS OF DEFAULT
The Indenture will define an Event of Default with respect to any series of
Senior Notes as (i) the failure by the Company to pay any installment of
interest on the Senior Notes of that series as and when the same becomes due
and payable and the continuance of any such failure for 30 days, (ii) the
failure by the Company to pay all or any part of the principal of, or premium,
if any, on, the Senior Notes of that series when and as the same becomes due
and payable at maturity, redemption, by acceleration or otherwise, (iii) the
failure by the Company or any Subsidiary Guarantor to observe or perform any
other covenant or agreement contained in the Senior Notes of that series or
the Indenture with respect to that series of Senior Notes and, subject
to certain exceptions, the continuance of such failure for a period of 30 days
after written notice is given to the Company by the Trustee or to the Company
and the Trustee by the Holders of at least 25% in aggregate principal amount
of the Senior Notes of that series outstanding, (iv) certain events of
bankruptcy, insolvency or reorganization in respect of the Company or any of
its Significant Subsidiaries, (v) a default in (I) Secured Indebtedness of the
Company or any of its Restricted Subsidiaries with an aggregate principal
amount in excess of 5% of Total Assets, or (II) other Indebtedness of the
Company or any of its Restricted Subsidiaries with an aggregate principal
amount in excess of $50 million, in either case, (a) resulting from the
failure to pay principal or interest when due (after giving effect to any
applicable extensions or grace or cure periods) or (b) as a result of which
the maturity of such Indebtedness has been accelerated prior to its final
Stated Maturity; and (vi) final unsatisfied judgments not covered by insurance
aggregating in excess of 0.5% of Total Assets, at any one time rendered
against the Company or any of its Significant Subsidiaries and not stayed,
bonded or discharged within 60 days. The Indenture provides that if a Default
occurs and is continuing, the Trustee must, within 90 days after the
occurrence of such default, give to the Holders notice of such default;
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provided that the Trustee may withhold from Holders of the Senior Notes notice
of any continuing Default or Event of Default (except a Default or Events of
Default relating to the payment of principal or interest) if it determines
that withholding notice is in their interest.
If an Event of Default with respect to the Senior Notes of any series occurs
and is continuing (other than an Event of Default specified in clause (iv),
above, relating to the Company), then either the Trustee or the Holders of 25%
in aggregate principal amount of the Senior Notes of that series then
outstanding, by notice in writing to the Company (and to the Trustee if given
by Holders) (an "Acceleration Notice"), may declare all principal, determined
as set forth below, and accrued interest thereon to be due and payable
immediately. If an Event of Default specified in clause (iv) above relating to
the Company occurs, all principal and accrued interest thereon will be
immediately due and payable on all outstanding Senior Notes without any
declaration or other act on the part of Trustee or the Holders. The Holders of
a majority in aggregate principal amount of Senior Notes of any series
generally are authorized to rescind such acceleration if all existing Events
of Default with respect to the Senior Notes of such series, other than the
non-payment of the principal of, premium, if any, and interest on the Senior
Notes of that series which have become due solely by such acceleration, have
been cured or waived. Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding Senior Notes of a series may direct
the Trustee in its exercise of any trust or power with respect to such series.
The Holders of a majority in aggregate principal amount of the Senior Notes
of a series at the time outstanding may waive on behalf of all the Holders any
default with respect to such series, except a default with respect to any
provision requiring supermajority approval to amend, which default may only be
waived by such a supermajority with respect to such series, and except a
default in the payment of principal of or interest on any Note of that series
not yet cured or a default with respect to any covenant or provision which
cannot be modified or amended without the consent of the Holder of each
outstanding Senior Note of that series affected. Subject to the provisions of
the Indenture relating to the duties of the Trustee, the Trustee will be under
no obligation to exercise any of its rights or powers under the Indenture at
the request, order or direction of any of the Holders, unless such Holders
have offered to the Trustee reasonable security or indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the Senior Notes of any series at the time
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, with respect to such
series.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company will not merge with or into, or
sell, convey, or transfer, or otherwise dispose of all or substantially of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to any Person or permit any
Person to merge with or into the Company, unless: (i) either the Company shall
be the continuing Person or the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or that acquired such
property and assets of the Company shall be an entity organized and validly
existing under the laws of the United States of America or any state or
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company,
on the Senior Notes and under the Indenture; (ii) immediately after giving
effect, on a pro forma basis, to such transaction, no Default or Event of
Default shall have occurred and be continuing; and (iii) the Company will have
delivered to the Trustee an Officer's Certificate and an Opinion of Counsel,
in each case stating that such consolidation, merger or transfer and such
supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company, in accordance with the foregoing, the successor
Person formed by such consolidation or into which the Company is merged or to
which such transfer is made, shall succeed to, be substituted for, and may
exercise every right and power of the Company under the Indenture with the
same effect as if such successor Person had been named
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therein as the Company and the Company shall be released from the obligations
under the Senior Notes and the Indenture.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will provide that the Company may, at its option, elect to
have its obligations and the obligations of the Guarantors and Subsidiary
Guarantors discharged with respect to the outstanding Senior Notes of any
series ("Legal Defeasance"). Such Legal Defeasance means that the Company
shall be deemed to have paid and discharged the entire indebtedness
represented, and the Indenture shall cease to be of further effect as to all
outstanding Senior Notes of such series and Guarantees thereof, except as to
(i) rights of Holders to receive payments in respect of the principal of,
premium, if any, and interest on such Senior Notes when such payments are due
from the trust funds; (ii) the Company's obligations with respect to such
Senior Notes concerning issuing temporary Senior Notes, registration of Senior
Notes, mutilated, destroyed, lost or stolen Senior Notes, and the maintenance
of an office or agency for payment and money for security payments held in
trust; (iii) the rights, powers, trust, duties, and immunities of the Trustee,
and the Company's, the Guarantors' and the Subsidiary Guarantors' obligations
in connection therewith; and (iv) the Legal Defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect,
with respect to any series of Senior Notes, to have the obligations of the
Company, the Guarantors and the Subsidiary Guarantors released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any failure to comply with such obligations shall not
constitute a Default or Event of Default with respect to the Senior Notes of
such series. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Senior Notes of such series.
In order to exercise either Legal Defeasance or Covenant Defeasance, with
respect to any series of Senior Notes, (i) the Company must irrevocably
deposit with the Trustee, in trust, for the benefit of the Holders of the
Senior Notes of such series, U.S. legal tender, noncallable government
securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on such Senior Notes on
the stated date for payment thereof or on the redemption date of such
principal or installment of principal of, premium, if any, or interest on such
Senior Notes; (ii) in the case of the Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to Trustee confirming that (A) the Company has received from, or
there has been published by the Internal Revenue Service, a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
Federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of such Senior Notes
will not recognize income, gain or loss for Federal income tax purposes as a
result of such Legal Defeasance and will be subject to Federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to such Trustee
confirming that the Holders of such Senior Notes will not recognize income,
gain or loss for Federal income tax purposes as a result of such Covenant
Defeasance and will be subject to Federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred with respect to such series and be continuing on the date
of such deposit or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after
the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall
not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company
or any of its Restricted Subsidiaries is a party or by which the Company or
any of its Restricted Subsidiaries is bound; (vi) the Company shall have
delivered to the Trustee an Officer's Certificate stating that the deposit was
not made by the Company with the intent of preferring the Holders of such
Senior Notes over any other creditors of the Company or with the intent of
defeating, hindering, delaying or defrauding any other creditors of the
Company or others; and (vii) the Company shall have delivered to the Trustee
an Officer's Certificate stating that the conditions precedent provided for
have been complied with.
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AMENDMENTS AND SUPPLEMENTS
The Indenture will contain provisions permitting the Company, the
Guarantors, the Subsidiary Guarantors and the Trustee to enter into a
supplemental indenture for certain limited purposes without the consent of the
Holders. Subject to certain limited exceptions, modifications and amendments
of the Indenture or any supplemental indenture with respect to any series may
be made by the Company, the Guarantors, the Subsidiary Guarantors and the
Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Senior Notes of such series
(except that any amendments or supplements to the provisions relating to
security interests or with respect to the Guarantees of the Guarantors, the
Initial Subsidiary Guarantors and the Future Subsidiary Guarantors shall
require the consent of the Holders of not less than 66 2/3% of the aggregate
principal amount of the Senior Notes of such series at the time outstanding);
provided that no such modification or amendment may, without the consent of
each Holder affected thereby, (i) change the Stated Maturity of the principal
of, or any installment of interest on, any Senior Note, (ii) reduce the
principal amount of, or premium, if any, or interest on, any Senior Note,
(iii) change the place of payment of principal of, or premium, if any, or
interest on, any Senior Note, (iv) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity (or, in the case of
a redemption, on or after the Redemption Date) of any Note, (v) reduce the
above-stated percentages of outstanding Senior Notes the consent of whose
Holders is necessary to modify or amend the Indenture, (vi) waive a default in
the payment of principal of, premium, if any, or interest on the Senior Notes,
(vii) alter the provisions relating to the redemption of the Senior Notes at
the option of the Company, or (viii) reduce the percentage or aggregate
principal amount of outstanding Senior Notes the consent of whose Holders is
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Senior Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company, the Guarantors or the
Subsidiary Guarantors in the Indenture, or in any of the Senior Notes or
because of the creation of any Indebtedness represented thereby, shall be had
against any incorporator, partner, stockholder, officer, director, employee or
controlling Person of the Company, the Guarantors or the Subsidiary Guarantors
or of any successor Person thereof, except as an obligor or Guarantor of the
Senior Notes pursuant to the Indenture. Each Holder, by accepting the Senior
Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in
its exercise of the rights
and powers vested in it under the Indenture as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company or the Guarantors, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or otherwise. The
Trustee is permitted to engage in other transactions; provided that if it
acquires any conflicting interest, it must eliminate such conflict or resign.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Senior Notes will initially be issued in the
form of one or more registered Senior Notes in global form (the "Global
Notes"). Each Global Note will be deposited on the date of the Closing Date
with, or on behalf of, The Depository Trust Company ("DTC") and registered in
the name of Cede & Co. (DTC's partnership nominee).
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DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock
Exchange, the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. Access to the system of DTC is also available to
others such as securities brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The rules applicable
to DTC and its Participants are on file with the Commission.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Underwriters with an interest in the Global Note and (ii)
ownership of the Senior Notes evidenced by the Global Notes will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the interests of Participants), the Direct
Participants and the Indirect Participants. The laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own and that security interests in negotiable instruments can only
be perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Senior Notes evidenced by the Global
Note will be limited to such extent.
So long as DTC or its nominee is the registered owner of a Senior Note, DTC
or such nominee, as the case may be, will be considered the sole owner or
holder of the Senior Notes represented by the Global Notes for all purposes
under the Indenture. Except as provided below, owners of beneficial interests
in a Global Note will not be entitled to have Senior Notes represented by such
Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Notes, and will not be considered
the owners or holders thereof under the Indenture for any purpose, including
with respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. As a result, the ability of a person having a beneficial
interest in the Senior Notes represented by a Global Note to pledge such
interest to persons or entities that do not participate in DTC's system, or to
otherwise take actions with respect to such interest, may be affected by the
lack of a physical certificate evidencing such interest.
To facilitate subsequent transfers, all Senior Notes deposited by
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of the Senior Notes with DTC and their
registration in the name of Cede & Co. effect no change in beneficial
ownership. DTC has no knowledge of the actual beneficial owners of the Senior
Notes. DTC's records reflect only the identity of the Direct Participants to
whose accounts such Senior Notes are credited, which may or may not be the
beneficial owners of the Senior Notes. The Participants will remain
responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to the beneficial owners of the Senior
Notes will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
None of the Company, any Guarantor, any Subsidiary Guarantor, nor the
Trustee will have any responsibility or liability for any aspect of the
records relating to or payments made on account of Senior Notes by DTC, or for
maintaining, supervising or reviewing any records of DTC relating to such
Senior Notes.
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Payments with respect to the principal of, premium, if any, and interest on,
any Senior Note represented by a Global Note registered in the name of DTC or
its nominee on the applicable record date will be payable by the Trustee to or
at the direction of DTC or its nominee in its capacity as the registered
Holder of the Global Note representing such Senior Notes under the Indenture.
Under the terms of the Indenture, the Company and the Trustee may treat the
persons in whose names the Senior Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, none of the
Company, any Guarantor, any Subsidiary Guarantor, nor the Trustee has or will
have any responsibility or liability for the payment of such amounts to
beneficial owners of Senior Notes (including principal, premium, if any, or
interest), or to immediately credit the accounts of the relevant Participants
with such payment, in amounts proportionate to their respective holdings in
principal amount of beneficial interests in the Global Note as shown on the
records of DTC. Payments by the Direct Participants and the Indirect
Participants to the beneficial owners of Senior Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants.
Certificated Notes
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Senior
Notes in definitive form under the Indenture, then, upon surrender by DTC of
the Global Notes, Certificated Notes will be issued to each person that DTC
identifies as the beneficial owner of the Senior Notes represented by Global
Notes. In addition, subject to certain conditions, any person having a
beneficial interest in a Global Note may, upon request to the Trustee,
exchange such beneficial interest for Senior Notes in the form of Certificated
Notes. Upon any such issuance, the Trustee is required to register such
Certificated Notes in the name of such person or persons (or the nominee of
any thereof), and cause the same to be delivered thereto.
None of the Company, any Guarantor, any Subsidiary Guarantor, or the Trustee
shall be liable for any delay by DTC or any Direct Participant or Indirect
Participant in identifying the beneficial owners of the Senior Notes, and the
Company, the Guarantors, the Subsidiary Guarantors, and the Trustee may
conclusively rely on, and shall be protected in relying on, instructions from
DTC for all purposes (including with respect to the registration and delivery,
and the respective principal amounts, of the Senior Notes to be issued).
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable. The
Company will have no responsibility for the performance by DTC or its
Participants of their respective obligations as described hereunder or under
the rules and procedures governing their respective operations.
SAME-DAY FUNDS SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Senior Notes
represented by the Global Notes (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by DTC. With respect to Senior Notes represented by
Certificated Notes, the Company will make all payments of principal, premium,
if any, and interest, by mailing a check to each such Holder's registered
address. The Senior Notes will trade in DTC's Same- Day Funds Settlement
System until maturity, or until the Senior Notes are issued in certificated
form, and secondary market trading activity in the Senior Notes will therefore
be required by DTC to settle in immediately available funds. No assurance can
be given as to the effect, if any, of settlement in immediately available
funds on trading activity in the Senior Notes.
S-112
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated July , 1998 (the "Underwriting Agreement"), Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), BT Alex. Brown Incorporated ("BT Alex.
Brown"), Bear, Stearns & Co. Inc. ("Bear Stearns"), Goldman, Sachs & Co.
("Goldman Sachs"), Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and NationsBanc Montgomery Securities LLC ("NationsBanc")
(collectively, the "Underwriters") have severally agreed to purchase from the
Company the respective principal amount of Senior Notes of such Series set
forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
UNDERWRITERS SERIES A NOTES SERIES B NOTES
------------ -------------- --------------
<S> <C> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation.................................... $ $
BT Alex. Brown Incorporated.....................
Bear, Stearns & Co. Inc. ......................
Goldman, Sachs & Co. ...........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ..............................
NationsBanc Montgomery Securities LLC...........
---- ----
Total......................................... $ $
==== ====
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the Senior Notes offered
hereby are subject to approval by their counsel of certain legal matters and
to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the Senior Notes offered hereby, if any are purchased.
The Underwriters initially propose to offer the Senior Notes in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus Supplement and in part to certain dealers at
such price less a concession not in excess of % of the principal amount of
the Senior Notes. The Underwriters may allow, and such dealers may re-allow,
to certain other dealers, a concession not in excess of % of the principal
amount of the Senior Notes. After the initial offering of the Senior Notes,
the public offering price and other selling terms may be changed by the
Underwriters at any time without notice.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Senior Notes are a new issue of securities with no established trading
market. The Company does not intend to apply for listing of the Senior Notes
on any securities exchange or the NASDAQ National Market. The Company has been
advised by the Underwriters that the Underwriters intend to make a market in
the Senior Notes; however, they are not obligated to do so, and they may
discontinue any such market making at any time without notice. Therefore, no
assurance can be given as to the liquidity of the trading market for the
Senior Notes.
Each of the Company and the Underwriters has represented and agreed that (i)
it has not offered or sold and, prior to the date six months after the Closing
Date will not offer or sell, any Senior Notes to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom for the purposes of
the Public Offers of Securities Regulations 1995; (ii) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
with respect to anything done by it in relation to the Senior Notes in, from
or otherwise involving the United Kingdom; and (iii) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue or sale of the Senior Notes to a
person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or
is a person to whom the document may otherwise lawfully be issued or passed
on.
S-113
<PAGE>
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the Senior Notes
offered hereby in any jurisdiction where action for that purpose is required.
The Senior Notes offered hereby may not be offered or sold, directly or
indirectly, nor may this Prospectus Supplement and the accompanying Prospectus
or any other offering material or advertisements in connection with the offer
and sale of the Senior Notes be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
Prospectus Supplement and the accompanying Prospectus comes are advised to
inform themselves about and to observe any restrictions relating to the
Offering and the distribution of this Prospectus Supplement and the
accompanying Prospectus. This Prospectus Supplement and the accompanying
Prospectus do not constitute an offer to sell or a solicitation of any offer
to buy any of the Senior Notes offered hereby in any jurisdiction in which
such an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Senior Notes.
Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. The Underwriters may bid for and purchase the Senior
Notes in the open market to cover such syndicate short position or to
stabilize the price of the Senior Notes. These activities may stabilize or
maintain the market price of the Senior Notes above independent market levels.
The Underwriters are not required to engage in these activities, and may end
these activities at any time.
Each of the Underwriters and certain of their affiliates have in the past
provided, and may in the future provide, various investment banking and
commercial banking services for the Company, for which they have received, and
may in the future receive, usual and customary fees. In July 1997, DLJ, BT
Securities Corporation (predecessor to BT Alex. Brown), Goldman Sachs, Merrill
Lynch and Montgomery Securities (prior to its merger with NationsBank) acted
as Underwriters for the Company's offering of the 8 7/8% Senior Notes, for
which they received usual and customary fees. Bankers Trust Company, an
affiliate of BT Alex. Brown, is acting as agent and lender under the Credit
Facility, which the Company is currently negotiating, for which it will
receive usual and customary fees. BT Wolfensohn, a division of BT Alex. Brown,
and Merrill Lynch are acting as financial advisors to Host Marriott in
connection with the REIT Conversion for which they will receive usual and
customary fees. Merrill Lynch is also acting as financial advisor to Host
Marriott in connection with the Blackstone Acquisition for which it will
receive usual and customary fees. In addition, DLJ is acting as dealer manager
and financial advisor for the Company in connection with the Offers and
Consent Solicitations.
LEGAL MATTERS
Certain legal matters relating to the issuance and sale of the Senior Notes
will be passed upon for the Company by Latham & Watkins, Washington, D.C.
Certain legal matters relating to the Offering will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California.
EXPERTS
The combined consolidated balance sheets of the Company as of January 2,
1998 and January 3, 1997 and the combined consolidated statements of
operations and cash flows for the years ended January 2, 1998, January 3, 1997
and December 29, 1995, which are included in this Prospectus Supplement; the
consolidated financial statements of Host Marriott and HMH Properties as of
January 2, 1998 and January 3, 1997 and consolidated statements of operations
and cash flows for the years ended January 2, 1998, January 3, 1997 and
December 29, 1995, included on Form 10-K and incorporated by reference in this
Prospectus and elsewhere in the Registration Statement; and the combined
consolidated financial statements of Host Marriott Hotels as of January 2,
1998 and January 3, 1997 and combined consolidated statements of operations
and cash flow, for the years ended January 2, 1998, January 3, 1997 and
December 29, 1995 included on Form 8-K and incorporated by reference in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firms as experts in giving said reports.
S-114
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following financial information is included on the pages indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Combined Consolidated Balance Sheets at January 2, 1998 and January 3,
1997..................................................................... F-3
Combined Consolidated Statements of Operations for Fiscal Years Ended
January 2, 1998, January 3, 1997 and December 29, 1995................... F-4
Combined Consolidated Statements of Shareholder's Equity for the Fiscal
Years Ended January 2, 1998, January 3, 1997 and December 29, 1995....... F-5
Combined Consolidated Statements of Cash Flows for Fiscal Years Ended
January 2, 1998, January 3, 1997 and December 29, 1995................... F-6
Notes to Combined Consolidated Financial Statements....................... F-7
Condensed Combined Consolidated Balance Sheet at March 27, 1998
(unaudited).............................................................. F-26
Condensed Combined Consolidated Statement of Operations for the Twelve
Weeks Ended March 27, 1998 and March 28, 1997 (unaudited)................ F-27
Condensed Combined Statements of Cash Flows for the Twelve Weeks Ended
March 27, 1998 and March 28, 1997 (unaudited)............................ F-28
Notes to Condensed Combined Consolidated Financial Statements
(unaudited).............................................................. F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying combined consolidated balance sheets of the
Company (as defined in Note 1) as of January 2, 1998 and January 3, 1997, and
the related combined consolidated statements of operations, shareholder's
equity and cash flows for each of the three fiscal years in the period ended
January 2, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the combined consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as of January 2, 1998 and January 3, 1997 and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended January 2, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
June 25, 1998
F-2
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ASSETS
Property and equipment, net..................................... $2,431 $1,829
Note receivable from affiliate.................................. -- 140
Note receivable................................................. -- 101
Due from hotel managers......................................... 40 48
Investment in affiliate......................................... 18 17
Other assets.................................................... 108 100
Short-term marketable securities................................ 191 --
Cash and cash equivalents....................................... 264 150
------ ------
$3,052 $2,385
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior notes.................................................... $1,550 $ 950
Mortgage debt................................................... 241 328
Other notes..................................................... 34 34
------ ------
1,825 1,312
Deferred income taxes........................................... 145 121
Other liabilities............................................... 112 115
------ ------
Total liabilities........................................... 2,082 1,548
------ ------
Shareholder's Equity
Common stock, 100 shares authorized issued and outstanding, no
par value.................................................... -- --
Additional paid-in capital.................................... 963 843
Retained earnings (deficit)................................... 7 (6)
------ ------
Total shareholder's equity.................................. 970 837
------ ------
$3,052 $2,385
====== ======
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-3
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
REVENUES
Hotels.................................................... $ 493 $ 353 $ 294
Net gains (losses) on property transactions............... 1 1 (10)
Equity in earnings of affiliate........................... 6 5 4
----- ----- -----
500 359 288
----- ----- -----
OPERATING COSTS AND EXPENSES
Depreciation and amortization............................. 100 75 71
Base and incentive management fees (including Marriott
International management fees of $74 million, $49 million
and $40 million in 1997, 1996 and 1995, respectively).... 78 52 41
Property taxes............................................ 38 29 24
Ground rent, lease payments, insurance and other.......... 53 42 21
----- ----- -----
269 198 157
----- ----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST.................................... 231 161 131
Minority interest......................................... (1) -- --
Corporate expenses........................................ (18) (18) (17)
Interest expense.......................................... (135) (125) (100)
Interest income........................................... 28 28 21
----- ----- -----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM......... 105 46 35
Provision for income taxes................................ (43) (19) (14)
----- ----- -----
INCOME BEFORE EXTRAORDINARY ITEM.......................... 62 27 21
Extraordinary items--gain (loss) on extinguishment of debt
(net of income taxes).................................... 5 -- (17)
----- ----- -----
NET INCOME................................................ $ 67 $ 27 $ 4
===== ===== =====
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-4
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT)
------ ---------- -----------
<S> <C> <C> <C>
Balance, December 30, 1994....................... $ -- $ 857 $ 27
Net income..................................... -- -- 4
Cash transfers to Host Marriott and
affiliates.................................... -- (151) --
Non-cash transfers to Host Marriott and
affiliates.................................... -- (71) --
Capital contributions.......................... -- 4 --
Dividends to Host Marriott and affiliates...... -- -- (36)
----- ----- ----
Balance, December 29, 1995....................... -- 639 (5)
Net income..................................... -- -- 27
Capital contributions.......................... -- 189 --
Dividends to Host Marriott and affiliates...... -- -- (28)
Sale of residual lease interest in 16 Courtyard
properties.................................... -- 24 --
Purchase of general partner interest in a full-
service property
(Note 8)...................................... -- (9) --
----- ----- ----
Balance, January 3, 1997......................... -- 843 (6)
Net income..................................... -- -- 67
Capital contributions.......................... -- 221 --
Dividends to Host Marriott and affiliates...... -- -- (54)
Purchase of controlling interests in two
limited partnerships
(Note 8)...................................... -- (101) --
----- ----- ----
Balance, January 2, 1998......................... $ -- $ 963 $ 7
===== ===== ====
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-5
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 67 $ 27 $ 4
Extraordinary loss (gain) on extinguishment of debt, net
of taxes............................................... (5) -- 17
Adjustments to reconcile to cash from operations:
Depreciation and amortization......................... 100 75 71
Income taxes.......................................... 43 19 14
Net realizable value writedown........................ -- -- 10
Other................................................. 5 7 3
Changes in operating accounts:
Other assets.......................................... (20) (1) --
Other liabilities..................................... 10 5 (1)
----- ----- -----
Cash provided by operations........................... 200 132 118
----- ----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets........................... 16 369 340
Less non-cash proceeds.................................. -- (34) (33)
----- ----- -----
Cash received from sales of assets.................... 16 335 307
Capital expenditures.................................... (82) (89) (78)
Acquisitions............................................ (401) (496) (331)
Purchases of short-term marketable securities........... (191) -- --
Other................................................... 16 (19) 20
----- ----- -----
Cash used in investing activities................... (642) (269) (82)
----- ----- -----
FINANCING ACTIVITIES
Repayment of debt....................................... (222) (4) (815)
Issuances of debt....................................... 591 -- 1,076
Contributed capital, including advances from
affiliates............................................. 221 189 3
Transfers to Host Marriott and affiliates, net.......... -- -- (151)
Dividends to Host Marriott and affiliates............... (54) (28) (36)
Other................................................... 20 (2) --
----- ----- -----
Cash provided by financing activities............... 556 155 77
----- ----- -----
INCREASE IN CASH AND CASH EQUIVALENTS..................... 114 18 113
CASH AND CASH EQUIVALENTS, beginning of year.............. 150 132 19
----- ----- -----
CASH AND CASH EQUIVALENTS, end of year.................... $ 264 $ 150 $ 132
===== ===== =====
Non-cash Financing Activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties............................................. $ 123 $ -- $ 95
===== ===== =====
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-6
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
HMH Properties, Inc. (the "Company" or "Properties") was formed on October
8, 1993 in connection with Host Marriott's pro rata distribution of Marriott
International, Inc. ("Marriott International") (the "Distribution") to hold
the majority of Host Marriott's lodging properties not financed by mortgage
debt. HMC Capital Resources Corporation ("Resources") was incorporated in
Delaware on June 13, 1997, to acquire and own lodging real estate. HMC Capital
Corporation ("Capital") was incorporated as a Delaware corporation on November
25, 1996, and is the holder of a mortgage on the New York Marriott Financial
Center Hotel, which is owned by Resources. Resources and Capital
(collectively, "Capital Resources") are wholly owned subsidiaries of HMC
Capital Resources Holding Corporation ("Holdings"), a Delaware corporation
formed on June 25, 1997, which is a wholly owned subsidiary of Host Marriott.
During June 1998, the Company commenced a consent solicitation (the "1998
Consent Solicitation") for the amendment of certain provisions of its senior
notes indentures. The 1998 Consent Solicitation, if successful, would
facilitate, among other things, the merger of Holdings with and into
Properties (the "1998 Merger") and Host Marriott's REIT Conversion (as defined
below). The 1998 Merger will be accounted for by Properties as a
reorganization in a manner similar to that in a pooling of interests.
Concurrently with the 1998 Merger and the 1998 Consent Solicitation, the
Company expects to refinance the $1,550 million of senior notes (the "Bond
Refinancing") through offers to purchase such debt securities for cash. The
Company expects to obtain the funds for the Bond Refinancing by the issuance
of senior notes by the Company and a new $1,250 million credit facility for
the Company.
During the third quarter of 1997, the Company completed a consent
solicitation with holders of the Properties Notes (defined herein) to amend
certain provisions of the senior notes indenture. A similar consent
solicitation was conducted by HMC Acquisition Properties, Inc.
("Acquisitions") (together, the "1997 Consent Solicitations"). The 1997
Consent Solicitations facilitated the merger of Acquisitions, a wholly owned
indirect subsidiary of Host Marriott, which owned 17 full-service hotel
properties, with and into the Company (the "1997 Merger"). The 1997 Merger was
accounted for by Properties as a reorganization in a manner similar to a
pooling of interests. These financial statements present the combined
consolidated financial position, results of operations and cash flows of
Properties, Acquisitions and Holdings for all periods presented. Following the
1998 Merger these combined consolidated financial statements become the
historical statements of Properties. Hereafter, the "Company" refers to the
merged entity. As of January 2, 1998, the Company owned, or had controlling
interests in, 65 lodging properties generally located throughout the United
States and operated primarily under the Marriott or Ritz-Carlton brands most
of which are managed by Marriott International. The Company's hotel properties
represent quality assets in the luxury and upscale full-service segments of
the lodging industry.
On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to reorganize Host Marriott's current
business operations by spin-off of Host Marriott's senior living business
("Senior Living") and contribution of Host Marriott's hotels and certain other
assets and liabilities, including the Company, to a newly formed Delaware
limited partnership, Host Marriott, L.P. (the "Operating Partnership") whose
sole general partner will be Host Marriott Trust, a newly formed Maryland Real
Estate Investment Trust ("REIT") that will merge with Host Marriott
Corporation, a Delaware corporation (the "REIT Conversion"). Host Marriott's
contribution of its hotels and certain assets and liabilities to the Operating
Partnership (the "Contribution") in exchange for units of limited partnership
interests in the Operating Partnership will be accounted for at Host
Marriott's historical basis. However, consummation of the REIT Conversion is
subject to significant contingencies that are outside the control of Host
Marriott, including final Board approval, consents of shareholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its
F-7
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
affiliates and other third parties. Accordingly, there can be no assurance
that the REIT Conversion will be completed.
Properties is a direct wholly owned subsidiary of Host Marriott Hospitality,
Inc. ("Hospitality") which is a direct wholly owned subsidiary of Host
Marriott. Holdings is a direct wholly owned subsidiary of Host Marriott. All
material intercompany transactions and balances between Properties and
Holdings and their subsidiaries have been eliminated.
The Company operates as a unit of Host Marriott, utilizing Host Marriott's
employees, insurance and administrative services. Through May 25, 1995,
Properties utilized Host Marriott's centralized systems for cash management
and substantially all cash received by the Company was deposited in and
commingled with Host Marriott's general corporate funds. Subsequent to May 25,
1995, Properties has maintained separate cash accounts. The Company has no
employees. Certain operating expenses, capital expenditures and other cash
requirements of the Company are paid by Host Marriott and charged directly or
allocated to the Company. Certain general and administrative costs of Host
Marriott are allocated to the Company, using a variety of methods, principally
including Host Marriott's specific identification of individual cost items and
otherwise through allocations based upon estimated levels of effort devoted by
its general and administrative departments to individual entities or relative
measures of size of the entities based on assets. In the opinion of
management, the methods for allocating corporate, general and administrative
expenses and other direct costs are reasonable. It is not practicable to
estimate the costs that would have been incurred by the Company if it had been
operated on a stand-alone basis, however, management believes that these
expenses are comparable to the expected allocation by Host Marriott of general
and administrative costs on a forward-looking basis.
Principles of Consolidation
The combined consolidated financial statements include the accounts of the
Company and its subsidiaries and controlled affiliates. Investments in 50% or
less owned affiliates over which the Company has the ability to exercise
significant influence, but does not control, are accounted for using the
equity method. All material intercompany transactions and balances have been
eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31. Full
year results for 1996 include 53 weeks versus 52 weeks for fiscal years 1997
and 1995.
Revenues and Expenses
Revenues include house profit from the Company's hotel properties because
the Company has delegated substantially all of the operating decisions related
to the generation of house profit from its hotels to the manager. Revenues
also include net gains (losses) on property transactions and equity in the
earnings of an affiliate. House profit reflects the net revenues flowing to
the Company as property owner and represents hotel operating results, less
property-level expenses, excluding depreciation and amortization, management
fees, property taxes, ground and equipment rent, insurance and lease payments,
which are classified as operating costs and expenses.
Property and Equipment
Property and equipment is recorded at cost. For newly developed properties,
cost includes interest, rent and real estate taxes incurred during development
and construction. Replacements and improvements are capitalized.
F-8
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to 10
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related improvements.
Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire.
In cases where management is holding for sale particular lodging properties,
the Company assesses impairment based on whether the estimated sales price
less costs of disposal of each individual property to be sold is less than its
net book value. A lodging property is considered to be held for sale when the
Company has made the decision to dispose of the property. Otherwise, the
Company assesses impairment of its real estate properties based on whether the
estimated net undiscounted future cash flows from each individual property
(excluding debt service) will be less than its net book value. If a property
is impaired, its basis is adjusted to its fair market value less cost to sell.
Deferred Charges
Deferred financing costs related to long-term debt are deferred and
amortized over the remaining life of the debt.
Cash, Cash Equivalents and Short-Term Marketable Securities
The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $15 million and $3 million as of January 2,
1998 and January 3, 1997, respectively, of cash related to certain
consolidated partnerships, the use of which is restricted generally to
partnership purposes to the extent it is not distributed to the partners.
Short-term marketable securities include investments with a maturity of 91
days to one year at the date of purchase. The Company's short-term marketable
securities represent investments in U.S. government agency notes and high
quality commercial paper. The short-term marketable securities are categorized
as available for sale and as a result are stated at fair market value.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents
and short-term marketable securities. The Company maintains cash and cash
equivalents and short-term marketable securities with high credit-quality
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these financial institutions and limits the amount
of credit exposure with any institution.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Statements of Financial Accounting Standards
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 129, "Disclosure of
Information About Capital Structure" in 1997. The adoption of these statements
did not have a material effect on the Company's consolidated financial
statements and the appropriate disclosure required by these statements have
been incorporated herein. The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," in 1998 and the adoption did not have a material effect
on the Company's consolidated financial statements.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan" and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" in 1995. The adoption of these
statements did not have a material effect on the Company's consolidated
financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in millions):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land and land improvements................................... $ 253 $ 178
Building and leasehold improvements.......................... 2,221 1,664
Furniture and equipment...................................... 325 239
Construction in progress..................................... 19 47
------ ------
2,818 2,128
Less accumulated depreciation and amortization............... (387) (299)
------ ------
$2,431 $1,829
====== ======
</TABLE>
Interest cost capitalized in connection with the Company's development and
construction activities totaled $1 million in 1996 and $2 million in 1995. No
interest was capitalized during 1997.
In the second quarter of 1995, the Company made a determination that its
owned Courtyard and Residence Inn properties were held for sale and recorded a
$10 million charge to write down the carrying value of five individual
Courtyard and Residence Inn properties to their estimated net realizable
value.
3. NOTE RECEIVABLE FROM AFFILIATE
In connection with the sale of several hotels to an affiliated limited
partnership, Chesapeake Hotel Limited Partnership ("CHLP") in 1984, a
subsidiary of the Company received as proceeds $168 million in notes
receivable that are secured by nonrecourse mortgages on the underlying
properties. On September 10, 1997, Host Marriott successfully completed the
purchase of all of the partnership units in CHLP. The Company acquired a
controlling interest along with $105 million in CHLP receivables, from Host
Marriott on October 10, 1997 for $135 million and consolidated CHLP in the
fourth quarter (see Note 8).
4. INVESTMENT IN AFFILIATE
On February 26, 1994, Host Marriott transferred to the Company a 49% limited
partner interest in an affiliate that owns a hotel in Santa Clara, California,
in exchange for $30 million in cash. The difference between the cash
transferred to Host Marriott and the carried-over cost basis of the 49%
interest, net of the related tax effects, has been charged to additional paid-
in capital. The investment is accounted for using the equity method.
F-10
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a 49% interest in the operating profits (income before
interest costs) in the partnership which is included in equity in the earnings
of an affiliate. The Company's equity in income of the partnership was $6
million, $5 million and $4 million for 1997, 1996 and 1995, respectively.
5. INCOME TAXES
Total deferred tax assets and liabilities at January 2, 1998 and January 3,
1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Gross deferred tax assets.................................... $ 32 $ 20
Gross deferred tax liabilities............................... (177) (141)
------ ------
Net deferred income tax liability............................ $ (145) (121)
====== ======
</TABLE>
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of January 2, 1998 and January 3, 1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Tax credit carryforwards.................................... $ 10 $ 9
Reserves.................................................... 14 6
Affiliate notes receivable.................................. (41) (43)
Property and equipment...................................... (136) (98)
Investment affiliate........................................ 6 3
Deferred management fee..................................... 2 2
------ ------
$ (145) $ (121)
====== ======
</TABLE>
At January 2, 1998, the Company had approximately $10 million of alternative
minimum tax credit carryforwards which do not expire.
The provision (benefit) for income taxes consists of (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current--Federal........................................... $16 $ 18 $ (3)
--Foreign............................................... 2 -- --
--State................................................. 3 2 --
--- ---- ----
21 20 (3)
--- ---- ----
Deferred--Federal.......................................... 19 (1) 15
--State................................................. 3 -- 2
--- ---- ----
22 (1) 17
--- ---- ----
$43 $ 19 $ 14
=== ==== ====
</TABLE>
F-11
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Federal tax return........................... 35.0% 35.0% 35.0%
State income tax, net of Federal tax benefit........... 4.7 4.7 4.7
Other.................................................. 1.3 1.6 .3
---- ---- ----
41.0% 41.3% 40.0%
==== ==== ====
</TABLE>
The Company is included in the consolidated Federal income tax return of
Host Marriott and its affiliates (the "Group"). Tax expense allocated to the
Company, as a member of the Group, is based upon the Company's relative
contribution to the Group's consolidated taxable income/loss and changes in
temporary differences. This allocation method results in Federal tax expense
allocated to the Company for all periods presented substantially equal to the
expense that would be recognized if the Company and its subsidiaries filed a
separate return. On a separate return basis, net state income tax expense
would have been substantially equal to the expense reported for the fiscal
years ended January 2, 1998 and January 3, 1997, and would have been
approximately $1 million higher for the fiscal year ended December 29, 1995.
The Company reimburses Host Marriott for its allocable share of current
taxes payable. At January 2, 1998, approximately $13 million was payable to
Host Marriott. For Federal income tax purposes, the Company is a member of the
affiliated group of Host Marriott and its subsidiaries. The Company's share of
the affiliated group's tax liability is limited to the lesser of the liability
computed as if the Company was in a separate affiliated group, or its
allocable portion of the affiliated group's tax liability. Cash paid to Host
Marriott for income taxes was $44 million, $1 million and $1 million in 1997,
1996 and 1995, respectively.
If the REIT Conversion is consummated, it is expected that the Company will
be merged into a limited partnership and taxable income or loss will be
allocated among its partners. Further, Host Marriott expects to qualify as a
real estate investment trust ("REIT") and will allocate its taxable income or
loss to its shareholders. Accordingly, if the REIT Conversion occurs, the
Company will not have a Federal tax provision or a state tax provision in many
states and in accordance with Statement of Financial Accounting Standards No.
109 will record an adjustment to the tax provision in the fiscal year during
which the REIT Conversion takes the place for the tax effect of the reversal
of certain of the Company's deferred taxes.
6. LEASES
The Company sold and leased back 18 Residence Inn properties from a real
estate investment trust (the "Purchaser REIT") in 1996. The initial term of
the lease expires in 2010 and can be renewed for a total of 40 years at the
Company's option. The minimum rent payments are $17 million annually with
additional contingent rent equal to 7.5% of the excess of total hotels sales
on the leased properties over 1996 total hotel sales on the leased properties.
The Residence Inn leases also require the Company to escrow an amount equal to
5% of the annual hotel sales into a furniture, fixture and equipment reserve
which is available for renewals and replacements.
The Company leases certain other property and equipment under non-cancelable
leases. Leases include long-term ground leases for certain hotels, generally
with multiple renewal options. Certain leases contain provisions for the
payment of contingent rentals based on a percentage of sales in excess of
stipulated amounts.
F-12
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum annual rental commitments for all non-cancelable operating
leases are as follows (in millions):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1998................................................................... $ 36
1999................................................................... 35
2000................................................................... 34
2001................................................................... 32
2002................................................................... 31
Thereafter............................................................. 269
----
Total minimum lease payments........................................... $437
====
</TABLE>
Rent expense consists of (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Minimum rentals on operating leases........................... $30 $21 $ 9
Additional rentals based on sales............................. 12 9 7
--- --- ---
$42 $30 $16
=== === ===
</TABLE>
7. DEBT
Debt consists of the following at January 2, 1998 and January 3, 1997 (in
millions):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Properties Notes, 9.5%, maturing May 15, 2005................. $ 600 $ 600
Acquisition Notes, 9.0% maturing December 2007................ 350 350
New Properties Notes, 8.875% maturing December 2007........... 600 --
------ ------
Total Senior Notes.......................................... 1,550 950
------ ------
Notes secured by $403 million of real estate assets, with an
average rate of 7.9% at January 2, 1998, maturing through
2002......................................................... 219 328
Line of Credit, secured by $500 million of real estate assets,
with a variable rate of Eurodollar plus 1.7% or Base Rate (as
defined) plus 0.7% at the option of the Company (7.6% at
January 2, 1998) due June 2004............................... 22 --
------ ------
Total mortgage debt......................................... 241 328
------ ------
Other notes with an average rate of 7.1% at January 2, 1998,
maturing
through 2014................................................. 34 34
------ ------
$1,825 $1,312
====== ======
</TABLE>
In May 1995, the Company issued $600 million of senior secured notes at 9.5%
(the "Properties Notes"), collectively the "Properties Offering".
Concurrently, HMTP, the operator/manager of HM Services' food, beverage and
merchandise concessions business, issued $400 million of senior notes. The
bonds were issued at par and have a final maturity of May 2005. The net
proceeds were used to defease, and subsequently redeem, all of the senior
notes of Hospitality and to repay borrowings under the line of credit with
Marriott International. In connection with the redemptions and defeasance, the
Company recognized an extraordinary loss in 1995 of $14 million, net of taxes,
primarily representing premiums paid on the redemptions and the write-off of
deferred financing fees and discounts on the Hospitality senior notes.
F-13
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1995, Acquisitions issued $350 million of 9% senior notes (the
"Acquisitions Notes"). The Acquisitions Notes were issued at par and have a
final maturity of December 2007. A portion of the net proceeds were utilized
to repay in full the outstanding borrowings under the $230 million revolving
line of credit (the "Acquisitions Revolver"), which was then terminated. In
connection with the termination of the Acquisitions Revolver, the Company
recognized an extraordinary loss in 1995 of $3 million, net of taxes,
representing the write-off of deferred financing fees on the Acquisitions
Revolver.
On July 10, 1997, Properties and Acquisitions completed the Consent
Solicitations with the holders of Properties Notes and Acquisition Notes to
amend certain provisions of their senior note indentures. The Consent
Solicitations facilitated the merger of Acquisitions with and into Properties.
The amendments to the indentures also increased the ability of the Company to
acquire, through certain subsidiaries, additional properties subject to non-
recourse indebtedness and controlling interests in corporations, partnerships
and other entities holding attractive properties and increased the threshold
for distributions to affiliates to the excess of the Company's earnings before
interest expense, income taxes, depreciation and amortization and other non-
cash items subsequent to the Consent Solicitations over 220% of the Company's
interest expense.
Concurrent with the Consent Solicitations and Merger, the Company issued
$600 million of 8 7/8% senior notes (the "New Properties Notes") at par
maturing in December 2007. The Company received net proceeds from the offering
of approximately $570 million, net of the costs of the Consent Solicitation
and the offering.
The Properties Notes, the Acquisitions Notes and the New Properties Notes
(collectively, the "Senior Notes") are guaranteed on a joint and several basis
by certain of the Company's subsidiaries and rank pari passu in right of
payment with all other existing and future senior indebtedness of the Company.
The indentures governing the Senior Notes contain covenants that, among other
things, limit the ability to incur additional indebtedness and issue preferred
stock, pay dividends or make other distributions, repurchase capital stock or
subordinated indebtedness, create certain liens, enter into certain
transactions with affiliates, sell certain assets, issue or sell stock of
subsidiaries, and enter into certain mergers and consolidations. The Company
is required to make semi-annual cash interest payments on the notes at their
stated interest rate. The Company is not required to make principal payments
until maturity except in the event of (i) certain changes in control or (ii)
certain assets in which the proceeds are not reinvested in other hotel
properties within a specified period of time. Investments in subsidiaries of
the Company which do not guarantee the Senior Notes are currently limited to
15% of the sum of parent and guarantor subsidiaries' assets plus the
investment in non-guarantor subsidiaries. The limitation increases to 20%
effective July 10, 1998.
During 1997, Resources entered into a revolving line of credit agreement
(the "Line of Credit") with a group of commercial banks under which it may
borrow up to $500 million for the acquisition of lodging real estate
properties and for Host Marriott's working capital purposes. On June 19, 2000,
any outstanding borrowings on the Line of Credit convert to a term loan
arrangement with all unpaid balances due June 19, 2004. Borrowings under the
Line of Credit are secured by substantially all of the assets of Capital
Resources and its subsidiaries and are also guaranteed in their entirety by
Host Marriott. Borrowings under the Line of Credit bear interest at either the
Eurodollar rate plus 1.7% or the Base Rate (as defined in the Agreement) plus
0.7% at Capital Resources' option payable monthly. An annual fee of 0.35% is
charged on the unused portion of the commitment.
The Credit Agreement contains covenants that, among other things, limit
Capital Resources' ability to pay dividends, incur additional debt, create
additional liens on its assets, engage in certain transaction with affiliates,
make investments and incur certain capital expenditures. Capital Resources is
also required to make certain contributions to a property improvement fund and
to maintain certain debt coverage and leverage ratios.
F-14
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company purchased 100% of the outstanding bonds secured by a first
mortgage on the San Francisco Marriott in 1997. The Company purchased the
bonds for $219 million, an $11 million discount to the face value of $230
million. In connection with the redemption and defeasance of the bonds, the
Company recognized an extraordinary gain of $5 million, which represents the
$11 million discount less the write-off of unamortized deferred financing
fees, net of taxes.
The Company paid dividends of approximately $54 million, $28 million and $36
million in 1997, 1996 and 1995, respectively. Prior to the Properties
Offering, all of Properties' net cash flow was transferred to Hospitality, and
therefore, the Company maintained no cash balances. Subsequent to the
Properties Offering, the Company established and maintains separate cash
balances.
In December 1997, the Company acquired control of the partnership that owns
the Marriott Desert Springs Resort. The hotel's third party mortgage debt
consists of a $103 million senior loan and a $20 million mezzanine loan
carrying fixed interest rates of 7.8% and 10.365%, respectively.
Aggregate debt maturities at January 2, 1998 are as follows (in millions):
<TABLE>
<S> <C>
1998.................................................................. $ 4
1999.................................................................. 4
2000.................................................................. 6
2001.................................................................. 8
2002.................................................................. 99
Thereafter............................................................ 1,704
------
$1,825
======
</TABLE>
Cash paid for interest, net of amounts capitalized, was $130 million in
1997, $121 million in 1996 and $98 million in 1995. Deferred financing costs,
which are included in other assets, amounted to $62 million and $30 million at
January 2, 1998 and January 3, 1997, respectively. Amortization expense
related to deferred financing costs totaled $5 million, $4 million and $1
million in 1997, 1996 and 1995, respectively.
8. ACQUISITIONS AND DISPOSITIONS
In 1997, the Company acquired the 306-room Ritz-Carlton, Marina del Rey for
$57 million and controlling interests in the 404-room Norfolk Waterside
Marriott for $33 million, the 884-room Marriott Desert Springs Resort for $184
million including the assumption of $123 million in mortgage debt, the 380-
room Manhattan Beach Marriott Hotel (formerly the Manhattan Beach Radisson
Plaza Hotel), which was converted to the Marriott brand, for $29 million, the
300-room Coronado Island Marriott Resort (formerly the Le Meridien Hotel) for
$54 million and the 299-room Ontario Airport Marriott in Ontario California
for $25 million, including a $22 million draw under the Credit Agreement. The
Company also acquired a controlling interest in the Chesapeake Hotels Limited
Partnership ("CHLP"), the owner of six full-service properties (2,994 rooms),
along with $105 million in CHLP receivables from Host Marriott for
approximately $135 million. The Company already owned the non-recourse second
mortgages on the CHLP properties. In connection with the acquisition of a
controlling interest in CHLP, the difference between the cash transferred and
Host Marriott's carried-over cost basis of the investment, net of the related
tax effect, has been charged to additional paid-in capital. The Company also
completed the acquisition of the New York Marriott Financial Center, after
acquiring the mortgage on the hotel for $101 million in late 1996. During the
first quarter of 1998, the Company acquired a controlling interest in the
partnership that owns the 1,671-room Atlanta Marriott Marquis for $239
million, including the assumption of $164 million of mortgage debt. The
Company also acquired a controlling interest in a newly formed
F-15
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
partnership that owns the 359-room Albany Marriott, the 320-room Minneapolis
Marriott Southwest and the 350-room San Diego Marriott Mission Valley for $50
million. During the second quarter of 1998, the Company acquired the
partnership that owns the 289-room Park Ridge Marriott in Park Ridge, New
Jersey for approximately $24 million. The transaction included the purchase of
Host Marriott's 1% managing general partner interest.
During 1996, the Company added 13 full-service hotel properties totaling
4,136 rooms for approximately $386 million. The acquisition of the Salt Lake
City Marriott for $67 million included the purchase of a 20% general partner
interest from Host Marriott for $10 million. The difference between the cash
transferred to Host Marriott and the carried-over cost basis of the 20%
interest, net of the related tax effect, has been charged to additional paid-
in capital. The 1996 acquisitions included the acquisition of a controlling
interest in a venture that owns the Pittsburgh City Center Marriott for $18
million, and the acquisition, through foreclosure, of a controlling interest
in the 250-room Newport Beach Marriott Suites. The Company also completed
construction and opened the Pentagon City Residence Inn in April 1996. The
Company added seven full-service hotels in 1995 totaling 3,133 rooms in
separate transactions for approximately $329 million.
In May 1998, the Company sold the 191-room Napa Valley Marriott for
approximately $21 million and recorded a pre-tax gain of approximately $10
million. In September 1997, the Company sold the Sheraton Elk Grove Suites for
$16 million, which approximated its carrying amount. During the first and
second quarters of 1996, the Company sold and leased back to the Purchaser
REIT 16 of its Courtyard properties and 18 of its Residence Inn properties for
$349 million (10% of which was deferred). Host Marriott purchased the
Company's rights to the deferred proceeds and obligations under the lease for
the 16 Courtyard properties at their fair market value. The Company's rights
to the deferred proceeds and obligations under the lease for the 18 Residence
Inns remain with the Company. The Company recorded a $14 million deferred gain
in 1996 and is amortizing the gain over the initial term of the lease.
During the first and third quarters of 1995, the Company sold and leased
back to the Purchaser REIT 37 of its Courtyard properties for $330 million.
Ten percent of the sales amount of these transactions was deferred. The
Company transferred its rights to the deferred proceeds and obligations under
the lease to a designated subsidiary of Hospitality in connection with the
Properties Offering.
In connection with the Properties Offering, HMTP transferred certain hotel
assets to the Company and the Company transferred certain undeveloped land
parcels, a note receivable and the leases and related assets of the 37
Courtyard properties to Hospitality or a designated subsidiary of Hospitality.
Summarized unaudited pro forma results of operations, assuming the above
transactions and the 1998 Merger, Bond Refinancing and debt activity discussed
herein occurred on December 30, 1995, are as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenue........................................................... $637 $568
Operating profit before corporate expenses and interest........... 302 265
Income before extraordinary items................................. 61 35
</TABLE>
F-16
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial instruments are shown below (in
millions):
<TABLE>
<CAPTION>
JANUARY 2, 1998 JANUARY 3, 1997
--------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ --------- -------
<S> <C> <C> <C> <C>
Financial assets
Short-term marketable securities........ $ 191 $ 191 $ -- $ --
Note receivable from affiliate.......... -- -- 140 150
Mortgage note receivable................ -- -- 101 101
Financial liabilities
Senior Notes............................ 1,550 1,649 950 981
Mortgage debt........................... 241 240 328 324
Other notes............................. 34 34 34 34
</TABLE>
The fair market value of marketable securities is estimated based on quoted
market prices, when available. If a quoted price is not available, fair value
is estimated using quoted market prices for similar instruments. Receivables
from affiliates, and other financial assets are valued based on the expected
future cash flows discounted at risk-adjusted rates. The senior notes are
valued based on quoted market prices. Valuations for secured and other
unsecured debt are determined based on the expected future payments discounted
at risk-adjusted rates. The fair values of other assets and other liabilities
are estimated to be equal to their carrying value.
10. RELATIONSHIP BETWEEN THE COMPANY AND MARRIOTT INTERNATIONAL
In connection with the Distribution and thereafter, Host Marriott and
Marriott International entered into agreements which provide, among other
things, that (i) 55 of the Company's lodging properties are managed by
Marriott International under agreements with initial terms of 15 to 20 years
and which are subject to renewal at the option of Marriott International for
up to 16 to 30 years (see Note 11), (ii) Marriott International will guarantee
Host Marriott's performance in connection with certain loans and other
obligations and (iii) nine of the Company's full-service properties are
operated under franchise agreements with Marriott International.
For 1997, 1996 and 1995, the Company paid to Marriott International $74
million, $49 million and $40 million, respectively, in lodging management
fees. Franchise fees paid to Marriott International for 1997, 1996 and 1995
were $4 million, $2 million and $1 million, respectively.
In connection with the purchase of the Marriott World Trade Center, the
Company received a mortgage loan of $10 million from Marriott International.
Marriott International also provided additional funding for the hotel,
repayment of which is contingent on the future earnings of the hotel, which
has been included in other liabilities. The balance was $8 million and $9
million as of January 2, 1998 and January 3, 1997, respectively.
In addition, Marriott International has the right to purchase up to 20% of
the voting stock of Host Marriott if certain events involving a change in
control of Host Marriott occur.
11. MANAGEMENT AGREEMENTS
The Company is party to management agreements (the "Agreements") which
provide for Marriott International to manage the majority of its hotels
generally for an initial term of 15 to 30 years with renewal terms of up to an
additional 16 to 30 years. The Agreements generally provide for payment of
base management fees equal to two to four percent of sales and incentive
management fees generally equal to 20% to 50% of hotel operating profits (as
defined in the Agreements) over a priority return (as defined) to the Company,
with total
F-17
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
incentive management fees not to exceed 20% of operating profits, or 20% of
current year operating profit. In the event of early termination of the
Agreements, Marriott International will receive additional fees based on the
unexpired term and expected future base and incentive management fees. No
agreement with respect to a single lodging facility is cross-collateralized or
cross-defaulted to any other agreement and a single agreement may be canceled
under certain conditions, although such cancellation will not trigger the
cancellation of any other Agreement.
Pursuant to the terms of the Agreements, Marriott International is required
to furnish the hotels with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in the
Marriott International hotel system. Chain Services include central training,
advertising and promotion, a national reservation system, computerized payroll
and accounting services, and such additional services as needed which may be
more efficiently performed on a centralized basis. Costs and expenses incurred
in providing such services are allocated among all domestic hotels managed,
owned or leased by Marriott International or its subsidiaries. Similar
services and expenses are incurred and allocated at foreign hotels. In
addition, the hotels also participate in the Marriott Rewards program. The
costs of these programs are charged to all hotels in the respective hotel
system.
The Company is obligated to provide the manager with sufficient funds to
cover the cost of (a) certain non-routine repairs and maintenance to the
hotels which are normally capitalized; and (b) replacements and renewals to
the hotels' property and improvements. Under certain circumstances, the
Company will be required to establish escrow accounts for such purposes under
terms outlined in the Agreements.
Pursuant to the terms of the Agreements, the Company is required to provide
Marriott International with funding for working capital to meet the operating
needs of the hotels. Marriott International converts cash advanced by the
Company into other forms of working capital consisting primarily of operating
cash, inventories and trade receivables. Under the terms of the Agreements,
Marriott International maintains possession of and sole control over the
components of working capital and accordingly, the Company reports the total
amounts so advanced to Marriott International as a component of other assets.
Upon termination of the Agreements, the working capital will be returned to
the Company.
At January 2, 1998 and January 3, 1997, $41 million and $42 million,
respectively, have been advanced to the hotel managers for working capital and
are included in due from hotel managers in the accompanying balance sheet.
Franchise Agreements
The Company has entered into franchise agreements with Marriott
International for nine hotels. Pursuant to these franchise agreements, the
Company generally pays a franchise fee based on a percentage of room sales and
food and beverage sales as well as certain other fees for advertising and
reservations. Franchise fees for room sales vary from four to six percent of
room sales, while fees for food and beverage sales vary from two to three
percent of sales. The initial terms of the franchise agreements are from 20 to
25 years.
Two other hotels are subject to franchise agreements with brands other than
Marriott. The original terms of the franchise agreements range from three to
ten years. Franchise fees paid range from 1.5% to 5% of room sales and certain
other fees are paid for reservations and advertising. Franchise fees paid for
these properties, including franchise fees related to the hotel sold in
December 1995, were $300,000 for 1997 and 1996 and $430,000 for 1995.
F-18
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has entered into management agreements with The Ritz-Carlton
Hotel Company, LLC ("Ritz-Carlton"), an affiliate of Marriott International,
to manage two of the Company's hotels. These agreements have an initial term
of 15 to 25 years with renewal terms at the option of Ritz-Carlton of up to an
additional 10 to 40 years. Base management fees vary from two to four percent
of sales and incentive management fees are generally equal to 20% of available
cash flow or operating profit, as defined in the agreements.
The Company has also entered into management agreements with hotel
management companies other than Marriott International for ten of its hotels
(eight of which are franchised under the Marriott brand). These agreements
generally provide for an initial term of 10 to 20 years with renewal terms at
the option of either party of up to an additional 1 to 40 years. The
agreements generally provide for payment of base management fees equal to one
to three percent of sales. Three of the ten agreements also provide for
incentive management fees generally equal to 15 to 20 percent of available
cash flow, as defined in the agreements.
12. LITIGATION
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
13. HOTEL OPERATIONS
As discussed in Note 1, revenues reflect house profit from the Company's
hotel properties. House profit reflects the net revenues flowing to the
Company as property owner and represents all gross hotel operating revenues,
less all gross property-level expenses, excluding depreciation, management
fees, property taxes, ground and equipment rent, insurance and certain other
costs, which are classified as operating costs and expenses. Accordingly, the
following table presents the Company's house profit for 1997, 1996 and 1995
(in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------ ---- ----
<S> <C> <C> <C>
Sales
Rooms...................................................... $ 882 $653 $550
Food and beverage.......................................... 351 263 207
Other...................................................... 79 64 48
------ ---- ----
Total hotel sales........................................ 1,312 980 805
------ ---- ----
Department costs
Rooms...................................................... 210 158 132
Food and beverage.......................................... 277 207 160
Other...................................................... 36 33 24
------ ---- ----
Total department costs................................... 523 398 316
------ ---- ----
Department profit.......................................... 789 582 489
Other deductions........................................... 296 229 195
------ ---- ----
House profit............................................. $ 493 $353 $294
====== ==== ====
</TABLE>
F-19
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates in one business segment in the lodging industry:
hotels. The Company's hotels are primarily operated under the Marriott or
Ritz-Carlton brand. These properties average 420 rooms and offer other
amenities such as meeting space and banquet facilities, a variety of
restaurants and lounges, gift shops and parking facilities. The hotels are
typically located in downtown, airports, suburban and resort areas throughout
the United States. The Company evaluates the performance of its segment based
primarily on operating profit before depreciation, corporate expenses and
interest expense. Company income taxes are included in the consolidated
Federal income tax return of Host Marriott and its affiliates and are
allocated based upon the relative contribution to Host Marriott's consolidated
taxable income/loss and changes in temporary differences. The allocation of
taxes is not evaluated at the segment level and, therefore, the Company does
not believe the information material to the reader of these financial
statements.
The Company's foreign operations consist of one full-service property that
had revenues of $5 million and $4 million, long-lived assets of $28 million
and $24 million in 1996 and 1997, respectively. There were no intercompany
sales between the property and the Company.
F-20
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents revenues and other financial information by
business segment (in millions):
1997
<TABLE>
<CAPTION>
CORPORATE
HOTELS & OTHER CONSOLIDATED
------ --------- ------------
<S> <C> <C> <C>
Revenues...................................... $ 493 $ 7 $ 500
Operating profit.............................. 224 7 231
Interest expense.............................. (135) -- (135)
Interest income............................... 28 -- 28
Depreciation and amortization................. (100) -- (100)
Capital expenditures.......................... 82 -- 82
Total assets.................................. 3,034 18 3,052
1996
<CAPTION>
CORPORATE
HOTELS & OTHER CONSOLIDATED
------ --------- ------------
<S> <C> <C> <C>
Revenues...................................... $ 353 $ 6 $ 359
Operating profit.............................. 155 6 161
Interest expense.............................. (125) -- (125)
Interest income............................... 28 -- 28
Depreciation and amortization................. (75) -- (75)
Capital expenditures.......................... 89 -- 89
Total assets.................................. 2,368 17 2,385
1995
<CAPTION>
CORPORATE
HOTELS & OTHER CONSOLIDATED
------ --------- ------------
<S> <C> <C> <C>
Revenues...................................... $ 294 $ (6) $ 288
Operating profit.............................. 137 (6) 131
Interest expense.............................. (100) -- (100)
Interest income............................... 21 -- 21
Depreciation and amortization................. (71) -- (71)
Capital expenditures.......................... 78 -- 78
Total assets.................................. 2,105 16 2,121
</TABLE>
F-21
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
All but seven of the subsidiaries of the Company guarantee the Senior Notes.
The separate financial statements of each guaranteeing subsidiary (each, a
"Guarantor Subsidiary") are not presented because the Company's management has
concluded that such financial statements are not material to investors. The
guarantee of each Guarantor Subsidiary is full and unconditional and joint and
several and each Guarantor Subsidiary is a wholly owned subsidiary of the
Company. The non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") are
the owners of the Marriott World Trade Center, the Pittsburgh Marriott City
Center, the Norfolk Waterside Marriott, the Manhattan Beach Marriott, the
Desert Springs Marriott Resort and Spa, Ontario Airport Marriott and HMH HPT
Residence Inn, Inc., the lessee of the Residence Inn properties.
The following condensed combined consolidating financial information sets
forth the financial position as of January 2, 1998 and January 3, 1997 and
results of operations and cash flows for the three fiscal years in the period
ended January 2, 1998 of the parent, Guarantor Subsidiaries and the Non-
Guarantor Subsidiaries:
SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS)
JANUARY 2, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Property and equipment, net..... $1,087 $916 $428 $2,431
Investment in affiliate......... 18 -- -- 18
Other assets.................... 78 31 39 148
Short-term marketable
securities..................... 191 -- -- 191
Cash and cash equivalents....... 237 12 15 264
------ ---- ---- ------
Total assets................... $1,611 $959 $482 $3,052
====== ==== ==== ======
Debt............................ $1,176 $429 $220 $1,825
Deferred income taxes........... 39 81 25 145
Other liabilities............... 20 67 25 112
------ ---- ---- ------
Total liabilities.............. 1,235 577 270 2,082
Owner's equity.................. 376 382 212 970
------ ---- ---- ------
Total liabilities and owner's
equity........................ $1,611 $959 $482 $3,052
====== ==== ==== ======
JANUARY 3, 1997
Property and equipment, net..... $ 895 $766 $168 $1,829
Investment in affiliate......... 17 -- -- 17
Note receivable from affiliate.. -- 140 -- 140
Note receivable................. 101 -- -- 101
Other assets.................... 45 73 30 148
Cash and cash equivalents....... 141 9 -- 150
------ ---- ---- ------
Total assets................... $1,199 $988 $198 $2,385
====== ==== ==== ======
Debt............................ $ 710 $527 $ 75 $1,312
Deferred income taxes........... 27 91 3 121
Other liabilities............... 23 70 22 115
------ ---- ---- ------
Total liabilities.............. 760 688 100 1,548
Owner's equity.................. 439 300 98 837
------ ---- ---- ------
Total liabilities and owner's
equity........................ $1,199 $988 $198 $2,385
====== ==== ==== ======
</TABLE>
F-22
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN MILLIONS)
FISCAL YEAR ENDED JANUARY 2, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES....................... $285 $141 $ 74 $ 500
OPERATING COSTS AND EXPENSES... 145 71 53 269
---- ---- ----- -----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST...................... 140 70 21 231
Corporate expenses............. (10) (6) (3) (19)
Interest expense............... (98) (31) (6) (135)
Interest income................ 20 8 -- 28
---- ---- ----- -----
INCOME BEFORE INCOME TAXES..... 52 41 12 105
Provision for income taxes..... (22) (16) (5) (43)
---- ---- ----- -----
INCOME BEFORE EXTRAORDINARY
ITEMS......................... 30 25 7 62
Extraordinary item--gain on
extinguishment of debt (net of
income taxes)................. 5 -- -- 5
---- ---- ----- -----
NET INCOME..................... $ 35 $ 25 $ 7 $ 67
==== ==== ===== =====
FISCAL YEAR ENDED JANUARY 3, 1997
REVENUES....................... $191 $123 $ 45 $ 359
OPERATING COSTS AND EXPENSES... 96 66 36 198
---- ---- ----- -----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST...................... 95 57 9 161
Corporate expenses............. (9) (7) (2) (18)
Interest expense............... (70) (50) (5) (125)
Interest income................ 13 15 -- 28
---- ---- ----- -----
INCOME BEFORE INCOME TAXES..... 29 15 2 46
Provision for income taxes..... (12) (6) (1) (19)
---- ---- ----- -----
NET INCOME..................... $ 17 $ 9 $ 1 $ 27
==== ==== ===== =====
FISCAL YEAR ENDED DECEMBER 29, 1995
REVENUES....................... $198 $ 90 $ -- $ 288
OPERATING COSTS AND EXPENSES... 90 67 -- 157
---- ---- ----- -----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST...................... 108 23 -- 131
Corporate expenses............. (13) (4) -- (17)
Interest expense............... (55) (45) -- (100)
Interest income................ 6 15 -- 21
---- ---- ----- -----
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM............ 46 (11) -- 35
Provision for income taxes..... (18) 4 -- (14)
---- ---- ----- -----
INCOME BEFORE EXTRAORDINARY
ITEM.......................... 28 (7) -- 21
Extraordinary item--loss on
extinguishment of debt........ (17) -- -- (17)
---- ---- ----- -----
NET INCOME..................... $ 11 $ (7) $ -- $ 4
==== ==== ===== =====
</TABLE>
F-23
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FISCAL YEAR ENDED JANUARY 2, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS..... $ 112 $ 68 $ 20 $ 200
----- ----- ----- -----
INVESTING ACTIVITIES............
Cash received from sales of
assets........................ -- 16 -- 16
Capital expenditures........... (41) (31) (10) (82)
Acquisitions................... (115) (134) (152) (401)
Purchases of short-term
marketable securities......... (191) -- -- (191)
Other.......................... 13 3 -- 16
----- ----- ----- -----
Cash used in investing
activities.................... (334) (146) (162) (642)
----- ----- ----- -----
FINANCING ACTIVITIES
Repayment of debt.............. (2) (220) -- (222)
Issuances of debt.............. 435 134 22 591
Dividends to Parent............ (54) -- -- (54)
Capital contribution from Host
Marriott...................... 2 219 -- 221
Other financing................ -- -- 20 20
Transfers to/from Parent....... (63) (52) 115 --
----- ----- ----- -----
Cash provided by financing
activities.................... 318 81 157 556
----- ----- ----- -----
INCREASE IN CASH AND CASH
EQUIVALENTS.................... 96 3 15 114
CASH AND CASH EQUIVALENTS,
beginning of year.............. 141 9 -- 150
----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end
of year........................ $ 237 $ 12 $ 15 $ 264
===== ===== ===== =====
</TABLE>
FISCAL YEAR ENDED JANUARY 3, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS..... $ 78 $ 42 $ 12 $ 132
----- ---- ---- -----
INVESTING ACTIVITIES
Cash received from sales of
assets........................ 335 -- -- 335
Capital expenditures........... (42) (38) (9) (89)
Acquisitions................... (453) (25) (18) (496)
Other.......................... (23) 4 -- (19)
----- ---- ---- -----
Cash used in investing
activities.................... (183) (59) (27) (269)
----- ---- ---- -----
FINANCING ACTIVITIES
Repayment of debt.............. (4) -- -- (4)
Issuances of debt.............. (25) 25 -- --
Dividends to Parent............ (28) -- -- (28)
Capital contributions from Host
Marriott...................... 101 88 -- 189
Transfers to/from Parent....... 72 (87) 15 --
Other.......................... (2) -- -- (2)
----- ---- ---- -----
Cash used in financing
activities.................... 114 26 15 155
----- ---- ---- -----
INCREASE IN CASH AND CASH
EQUIVALENTS.................... 9 9 -- 18
CASH AND CASH EQUIVALENTS,
beginning of year.............. 132 -- -- 132
----- ---- ---- -----
CASH AND CASH EQUIVALENTS, end
of year........................ $ 141 $ 9 $ -- $ 150
===== ==== ==== =====
</TABLE>
F-24
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL YEAR ENDED DECEMBER 29, 1995
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS..... $ 98 $ 20 $ -- $ 118
----- ----- ----- ------
INVESTING ACTIVITIES
Cash received from sales of
assets........................ 307 -- -- 307
Capital expenditures........... (67) (11) -- (78)
Acquisitions................... (88) (96) (147) (331)
Other.......................... 10 -- 10 20
----- ----- ----- ------
Cash provided by (used in)
investing activities.......... 162 (107) (137) (82)
----- ----- ----- ------
FINANCING ACTIVITIES
Repayment of debt.............. (815) -- -- (815)
Issuance of debt............... 909 92 75 1,076
Contributed capital............ 3 -- -- 3
Transfers to Hospitality, net.. (151) -- -- (151)
Transfer to/from Parent........ (57) (5) 62 --
Dividends to Parent............ (36) -- -- (36)
----- ----- ----- ------
Cash provided by (used in)
financing activities.......... (147) 87 137 77
----- ----- ----- ------
INCREASE IN CASH AND CASH
EQUIVALENTS.................... 113 -- -- 113
CASH AND CASH EQUIVALENTS,
beginning of year.............. 19 -- -- 19
----- ----- ----- ------
CASH AND CASH EQUIVALENTS, end
of year........................ $ 132 $ -- $ -- $ 132
===== ===== ===== ======
</TABLE>
F-25
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
MARCH 27, 1998
(UNAUDITED, IN MILLIONS EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net............................................. $2,728
Due from hotel managers................................................. 77
Investments in affiliate................................................ 18
Other assets............................................................ 159
Short-term marketable securities........................................ 98
Cash and cash equivalents............................................... 253
------
$3,333
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior notes............................................................ $1,550
Mortgage debt........................................................... 404
Other notes............................................................. 32
------
Total debt.......................................................... 1,986
Deferred income taxes................................................... 154
Other liabilities....................................................... 195
------
Total liabilities................................................... 2,335
------
Shareholder's equity
Common stock, 100 shares issued, authorized and outstanding, no par
value................................................................ --
Additional paid-in capital............................................ 963
Retained earnings..................................................... 35
------
Total shareholder's equity.......................................... 998
------
$3,333
======
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-26
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES AND
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
TWELVE WEEKS ENDED MARCH 27, 1998 AND MARCH 28, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES
Hotels............................................................ $164 $114
Equity in earnings of affiliate................................... 2 2
---- ----
Total revenues.................................................. 166 116
---- ----
OPERATING COSTS AND EXPENSES
Depreciation and amortization..................................... 28 23
Base and incentive management fees (including Marriott
International management fees of $24 million and $16 million in
1998 and 1997, respectively)..................................... 25 18
Property taxes.................................................... 12 9
Ground rent, insurance and other.................................. 15 11
---- ----
Total operating costs and expenses.............................. 80 61
---- ----
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST........... 86 55
Corporate expenses................................................ (5) (4)
Interest expense.................................................. (41) (28)
Interest income................................................... 6 4
---- ----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................. 46 27
Provision for income taxes........................................ (18) (11)
---- ----
INCOME BEFORE EXTRAORDINARY ITEM.................................. 28 16
Extraordinary item--gain on extinguishment of debt (net of income
taxes of $3 million)............................................. -- 5
---- ----
NET INCOME........................................................ $ 28 $ 21
==== ====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-27
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
HMC CAPITAL RESOURCES HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWELVE WEEKS ENDED MARCH 27, 1998 AND MARCH 28, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
OPERATING ACTIVITIES
Net income....................................................... $ 28 $ 21
Extraordinary item............................................... -- (5)
Adjustments to reconcile to cash from operations:
Depreciation and amortization.................................. 28 23
Income taxes................................................... 18 11
Changes in operating accounts.................................. (16) 7
Other.......................................................... 2 1
----- -----
Cash provided by operations.................................. 60 58
----- -----
INVESTING ACTIVITIES
Acquisitions..................................................... (123) (57)
Capital expenditures:
Renewals and replacements...................................... (18) (11)
Other.......................................................... (6) (4)
Sale of short-term marketable securities......................... 93 --
Other............................................................ -- 12
----- -----
Cash used in investing activities.............................. (54) (60)
----- -----
FINANCING ACTIVITIES
Dividends to Host Marriott Corporation and affiliates............ -- (13)
Repayment of debt................................................ (2) (220)
Capital contributed by Parent.................................... -- 219
Deposits into debt service reserves.............................. (15) --
----- -----
Cash used in financing activities.............................. (17) (14)
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS............................ $ (11) $ (16)
===== =====
Non-cash Financing Activities:
Assumption of mortgage debt for the purchase of controlling
interest in one property...................................... $ 164 $ --
===== =====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-28
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
HMC CAPITAL RESOURCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. HMH Properties, Inc. (the "Company" or "Properties") was formed on October
8, 1993 in connection with Host Marriott's pro rata distribution of Marriott
International, Inc. ("Marriott International") (the "Distribution") to hold
the majority of Host Marriott's lodging properties not financed by mortgage
debt. HMC Capital Resources Corporation ("Resources") was incorporated in
Delaware on June 13, 1997, to acquire and own lodging real estate. HMC Capital
Corporation ("Capital") was incorporated as a Delaware corporation on November
25, 1996, and is the holder of a mortgage on the New York Marriott Financial
Center Hotel, which is owned by Resources. Resources and Capital
(collectively, "Capital Resources") are wholly owned subsidiaries of HMC
Capital Resources Holding Corporation ("Holdings"), a Delaware corporation
formed on June 25, 1997, which is a wholly owned subsidiary of Host Marriott.
During June 1998, the Company commenced a consent solicitation (the "1998
Consent Solicitation") for the amendment of certain provisions of its senior
notes indentures. The 1998 Consent Solicitation, if successful, would
facilitate, among other things, the merger of Holdings with and into
Properties (the "1998 Merger") and Host Marriott's REIT Conversion (as defined
below). The 1998 Merger will be accounted for by Properties as a
reorganization in a manner similar to that in a pooling of interests.
Concurrently with the 1998 Merger and the 1998 Consent Solicitation, the
Company expects to refinance the $1,550 million of senior notes (the "Bond
Refinancing") through offers to purchase such debt securities for cash. The
Company expects to obtain the funds for the Bond Refinancing by the issuance
of senior notes by the Company and a new $1,250 million credit facility for
the Company.
During the third quarter of 1997, the Company completed a consent
solicitation with holders of the Properties Notes (defined herein) to amend
certain provisions of the senior notes indenture. A similar consent
solicitation was conducted by HMC Acquisition Properties, Inc.
("Acquisitions") (together, the "1997 Consent Solicitations"). The 1997
Consent Solicitations facilitated the merger of Acquisitions, a wholly owned
indirect subsidiary of Host Marriott, which owned 17 full-service hotel
properties, with and into the Company (the "1997 Merger"). The 1997 Merger was
accounted for by Properties as a reorganization in a manner similar to a
pooling of interests. These financial statements present the combined
consolidated financial position, results of operations and cash flows of
Properties, Acquisitions and Holdings for all periods presented. Following the
1998 Merger, these combined consolidated financial statements become the
historical statements of Properties. Hereafter, the "Company" refers to the
merged entity. As of January 2, 1998, the Company owned, or had controlling
interests in, 65 lodging properties generally located throughout the United
States and operated primarily under the Marriott or Ritz-Carlton brands most
of which are managed by Marriott International. The Company's hotel properties
represent quality assets in the luxury and upscale full-service segments of
the lodging industry.
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 combined consolidated financial statements
should be read in conjunction with the Company's annual report for the fiscal
year ended January 2, 1998 included herein.
In the opinion of the Company, the accompanying unaudited condensed combined
consolidated financial statements, which have been prepared without audit,
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of March
27, 1998 and the results of operations and cash flows for the twelve weeks
ended March 27, 1998 and March 28, 1997. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
2. On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to reorganize Host Marriott's current
business operations by spin-off of Host Marriott's senior living business
F-29
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
HMC CAPITAL RESOURCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
("Senior Living") and contribution of Host Marriott's hotels and certain other
assets and liabilities, including the Company, to a newly formed Delaware
limited partnership, Host Marriott, L.P. (the "Operating Partnership") whose
sole general partner will be Host Marriott Trust, a newly formed Maryland Real
Estate Investment Trust ("REIT") that will merge with Host Marriott
Corporation, a Delaware corporation (the "REIT Conversion"). Host Marriott's
contribution of its hotels and certain assets and liabilities to the Operating
Partnership in exchange for units of limited partnership interests in the
Operating Partnership will be accounted for at Host Marriott's historical
basis. However, consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of Host Marriott, including final
Board approval, consents of shareholders, partners, bondholders, lenders and
ground lessors of Host Marriott, its affiliates and other third parties.
Accordingly, there can be no assurance that the REIT Conversion will be
completed.
3. Revenues include house profit from the Company's hotel properties because
the Company has delegated substantially all of the operating decisions related
to the generation of house profit from its hotels to the managers. Revenues
also include net gains (losses) on property transactions and equity in
earnings of an affiliate. House profit reflects the net revenues flowing to
the Company as property owner and represents hotel operating results less
property-level expenses excluding depreciation and amortization, management
fees, property taxes, ground and equipment rent, insurance and lease payments
which are classified as operating costs and expenses.
House profit generated by the Company's hotels for 1998 and 1997 consists
of:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------
MARCH 27, MARCH 28,
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Sales
Rooms................................................... $268 $195
Food & Beverage......................................... 117 77
Other................................................... 31 19
---- ----
Total Hotel Sales..................................... 416 291
---- ----
Department Costs
Rooms................................................... 61 44
Food & Beverage......................................... 87 59
Other................................................... 16 10
---- ----
Total Department Costs................................ 164 113
---- ----
Department Profit....................................... 252 178
Other Deductions........................................ 88 64
---- ----
House Profit.......................................... $164 $114
==== ====
</TABLE>
4. During the first quarter of 1998, the Company acquired a controlling
interest in the partnership that owns the 1,671-room Atlanta Marriott Marquis
for $239 million, including the assumption of $164 million in mortgage debt.
The Company also acquired a controlling interest in a newly formed partnership
that owns the 359-room Albany Marriott, the 320-room Minneapolis Marriott
Southwest and the 350-room San Diego Marriott Mission Valley for $50 million.
During the second quarter of 1998, the Company also acquired the partnership
that owns the 289-room Park Ridge Marriott in Park Ridge, New Jersey for
approximately $24 million, including a note receivable. The transaction
included the purchase of Host Marriott's 1% managing general partner interest,
as
F-30
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
HMC CAPITAL RESOURCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
well as its interest in the note receivable. The Company also sold the 192-
room Napa Valley Marriott for approximately $21 million and recorded a pre-tax
gain of approximately $10 million.
5. The Company adopted Statement Financial Accounting Standards ("SFAS") No.
130 "Reporting Comprehensive Income" in the first quarter of 1998. The
adoption of this statement did not have a material impact on the Company's
condensed combined consolidated financial statements. For the twelve weeks
ended March 27, 1998 and March 28, 1997, the Company had no other
comprehensive income. Therefore, comprehensive income is equivalent to net
income for all periods presented.
6. The Company operates in the full-service segment of the lodging industry.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses and interest expense.
The allocation of income taxes is not evaluated at the segment level and,
therefore, the Company does not believe the information is material to the
condensed combined consolidated financial statements. The following table
presents revenues and other financial information by business segment for the
twelve weeks ended March 27, 1998 and March 28, 1997 (in millions):
TWELVE WEEKS ENDED MARCH 27, 1998
<TABLE>
<CAPTION>
CORPORATE
HOTELS & OTHER CONSOLIDATED
------ --------- ------------
<S> <C> <C> <C>
Revenues........................................ $ 164 $ 2 $ 166
Operating profit................................ 84 2 86
Corporate expense............................... -- (5) (5)
Interest expense................................ (41) -- (41)
Interest income................................. 6 -- 6
Income before taxes and extraordinary item...... 49 (3) 46
Total assets.................................... 3,315 18 3,333
</TABLE>
TWELVE WEEKS ENDED MARCH 28, 1997
<TABLE>
<CAPTION>
CORPORATE
HOTELS & OTHER CONSOLIDATED
------ --------- ------------
<S> <C> <C> <C>
Revenues........................................ $ 114 $ 2 $ 116
Operating profit................................ 53 2 55
Corporate expense............................... -- (4) (4)
Interest expense................................ (28) -- (28)
Interest income................................. 4 -- 4
Income before taxes and extraordinary item...... 29 (2) 27
Total assets.................................... 2,395 19 2,414
</TABLE>
7. All but nine of the subsidiaries of the Company guarantee the senior notes.
The separate financial statements of each guaranteeing subsidiary (each, a
"Guarantor Subsidiary") are not presented because the Company's management has
concluded that such financial statements are not material to investors. The
guarantee of each Guarantor Subsidiary is full and unconditional and joint and
several and each Guarantor Subsidiary is a wholly owned subsidiary of the
Company. The non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") are
the owners of the Marriott World Trade Center, the Pittsburgh Marriott City
Center, the Norfolk Waterside Marriott, the Manhattan Beach Marriott,
Marriott's Desert Springs Resort and Spa, the Atlanta Marriott Marquis, the
Albany Marriott, the Minneapolis Marriott Southwest, the San Diego Marriott
Mission Valley, the Ontario Airport Marriott and HMH HPT Residence Inn, Inc.,
the lessee of the Residence Inn properties.
F-31
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
HMC CAPITAL RESOURCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The following condensed combined consolidating financial information sets
forth the combined financial position as of March 27, 1998 and the results of
operations and cash flows for the twelve weeks ended March 27, 1998 and March
28, 1997 of the parent, the Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries.
SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATING BALANCE SHEETS
MARCH 27, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Property and equipment, net..... $1,082 $913 $733 $2,728
Investment in affiliate......... 18 -- -- 18
Other assets.................... 92 47 97 236
Short-term marketable
securities..................... 98 -- -- 98
Cash and cash equivalents....... 231 13 9 253
------ ---- ---- ------
Total assets.................. $1,521 $973 $839 $3,333
====== ==== ==== ======
Debt............................ $1,196 $429 $361 $1,986
Deferred income taxes........... 40 82 32 154
Other liabilities............... 47 46 102 195
------ ---- ---- ------
Total liabilities............. 1,283 557 495 2,335
Owner's equity.................. 238 416 344 998
------ ---- ---- ------
Total liabilities and owner's
equity....................... $1,521 $973 $839 $3,333
====== ==== ==== ======
</TABLE>
F-32
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
HMC CAPITAL RESOURCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN MILLIONS)
TWELVE WEEKS ENDED MARCH 27, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES....................... $ 72 $54 $40 $166
OPERATING COSTS AND EXPENSES... 34 26 20 80
---- --- --- ----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST...................... 38 28 20 86
Corporate expenses............. (2) (2) (1) (5)
Interest expense............... (27) (9) (5) (41)
Interest income................ 6 -- -- 6
---- --- --- ----
INCOME BEFORE INCOME TAXES..... 15 17 14 46
Provision for income taxes..... (6) (7) (5) (18)
---- --- --- ----
NET INCOME..................... $ 9 $10 $ 9 $ 28
==== === === ====
</TABLE>
TWELVE WEEKS ENDED MARCH 28, 1997
<TABLE>
<CAPTION>
GUARANTOR GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES.................... $ 64 $ 40 $ 12 $116
OPERATING COSTS AND
EXPENSES................... 32 19 10 61
---- ---- ----- ----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST................... 32 21 2 55
Corporate expenses.......... (2) (1) (1) (4)
Interest expense............ (16) (11) (1) (28)
Interest income............. 1 3 -- 4
---- ---- ----- ----
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM..... 15 12 -- 27
Provision for income taxes.. (6) (5) -- (11)
---- ---- ----- ----
INCOME BEFORE EXTRAORDINARY
ITEM....................... 9 7 -- 16
Extraordinary item--gain on
extinguishment of debt..... -- 5 -- 5
---- ---- ----- ----
NET INCOME.................. $ 9 $ 12 $ -- $ 21
==== ==== ===== ====
</TABLE>
F-33
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
HMC CAPITAL RESOURCES HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATING STATEMENT OF CASH FLOWS
(IN MILLIONS)
TWELVE WEEKS ENDED MARCH 27, 1998
<TABLE>
<CAPTION>
GUARANTOR GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS.. $ 20 $ 15 $ 25 $ 60
----- ----- ----- -----
INVESTING ACTIVITIES
Acquisitions............... -- -- (123) (123)
Capital expenditures....... (5) (3) (16) (24)
Sales of short-term
marketable securities..... 93 -- -- 93
----- ----- ----- -----
Cash provided by (used
in) investing
activities.............. 88 (3) (139) (54)
----- ----- ----- -----
FINANCING ACTIVITIES
Repayment of debt.......... (2) -- -- (2)
Transfers to/from Parent... (112) (11) 123 --
Deposits into debt service
reserves.................. -- -- (15) (15)
----- ----- ----- -----
Cash provided by (used
in) financing
activities.............. (114) (11) 108 (17)
----- ----- ----- -----
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........ $ (6) $ 1 $ (6) $ (11)
===== ===== ===== =====
TWELVE WEEKS ENDED MARCH 28, 1997
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS.. $ 44 $ 13 $ 1 $ 58
----- ----- ----- -----
INVESTING ACTIVITIES
Acquisitions............... (57) -- -- (57)
Capital expenditures....... (7) (7) (1) (15)
Other...................... 12 -- -- 12
----- ----- ----- -----
Cash used in investing
activities.............. (52) (7) (1) (60)
----- ----- ----- -----
FINANCING ACTIVITIES
Repayment of debt.......... (1) (219) -- (220)
Capital contribution from
Parent.................... -- 219 -- 219
Transfers to/from Parent... 6 (6) -- --
Dividends to Host Marriott
Corporation and
affiliates................ (13) -- -- (13)
----- ----- ----- -----
Cash used in financing
activities.............. (8) (6) -- (14)
----- ----- ----- -----
DECREASE IN CASH AND CASH
EQUIVALENTS................. $ (16) $ -- $ -- $ (16)
===== ===== ===== =====
</TABLE>
F-34
<PAGE>
PROSPECTUS
$2,500,000,000
HOST MARRIOTT CORPORATION
DEBT SECURITIES, PREFERRED STOCK, DEPOSITARY SHARES,
COMMON STOCK, WARRANTS AND SUBSCRIPTION RIGHTS
---------------
Host Marriott Corporation, a Delaware corporation (the "Company" or "Host
Marriott"), directly or through agents, dealers, or underwriters designated
from time to time, may offer, issue and sell: (i) debt securities consisting
of debentures, notes or other evidences of indebtedness (the "Debt
Securities"); (ii) shares of common stock of the Company, par value $1.00 per
share (the "Common Stock"); (iii) shares of preferred stock of the Company,
without par value (the "Preferred Stock"); (iv) shares of its Preferred Stock
represented by depositary shares (the "Depositary Shares"); (v) warrants to
purchase Debt Securities, Common Stock, Preferred Stock or Depositary Shares
(the "Warrants"); and (vi) subscription rights evidencing the right to
purchase Debt Securities, Common Stock, Preferred Stock, Depositary Shares or
Warrants (the "Subscription Rights"), with an aggregate public offering price
of up to $2,500,000,000 (or the equivalent if the securities are denominated
in foreign currency or foreign currency units). In addition, Debt Securities
may be issued, directly or through agents, dealers or underwriters designated
from time to time, by one or more of the Company's direct or indirect wholly
owned subsidiaries which are co-registrants on the Registration Statement
under the Securities Act of 1933, as amended (the "Act") of which this
Prospectus is a part (each such subsidiary a "Co-Registrant", and together,
the "Co-Registrants"). The Debt Securities may be issued as exchangeable
and/or convertible Debt Securities, exchangeable for or convertible into
shares of Common Stock, Preferred Stock or Depositary Shares. The Preferred
Stock may be issued as exchangeable and/or convertible Preferred Stock,
exchangeable for or convertible into Debt Securities or shares of Common
Stock. The Company's payment obligations under any series of Debt Securities
may be guaranteed by certain of the Co-Registrants and the payment obligation
of any Co-Registrant issuing any series of Debt Securities will be guaranteed
by the Company and may be guaranteed by one or more of the Co-Registrants
(each entity providing such a guarantee, a "Guarantor" and collectively, the
"Guarantors"). The Debt Securities, the Common Stock, the Preferred Stock, the
Depositary Shares, the Warrants and the Subscription Rights (collectively, the
"Offered Securities") may be offered, separately or together, in one or more
separate classes or series and in amounts, at prices and on terms to be
determined at the time of offering and to be set forth in one or more
supplements to this Prospectus (each, a "Prospectus Supplement").
Additionally, the Company may issue Subscription Rights to its stockholders.
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Debt
Securities, and any guarantees thereof, the specific designation, aggregate
principal amount, designated currency (or currency unit), purchase price,
maturity, interest rate (or manner of calculation thereof), time of payment of
interest (if any), terms of the subordination (if any), redemption or
conversion thereof, and any other specific terms of the Debt Securities; (ii)
in the case of Common Stock, the number of shares, purchase price and terms of
the offering and sale thereof; (iii) in the case of Preferred Stock, the
specific designation, number of shares, liquidation preference, purchase
price, dividend, voting, redemption, exchange and conversion provisions and
any other specific terms of the Preferred Stock; (iv) in the case of
Depositary Shares, the aggregate number of shares offered, the fractional
share of Preferred Stock represented by each such Depositary Shares and the
purchase price; (v) in the case of Warrants, the specific designations,
number, duration, purchase price, exercise price, detachability and any other
terms in connection with the offering, sale and exercise of the Warrants, as
well as the terms on which, and the securities for which, such Warrants may be
exercised; and (vi) in the case of Subscription Rights, the designations,
number, exercise price and duration, transferability, any oversubscription
privilege and any other terms in connection with the distribution of such
Subscription Rights, as well as the terms on which and the securities for
which such Subscription Rights may be exercised.
The Common Stock is traded on the New York Stock Exchange (the "NYSE") under
the symbol "HMT." Any Common Stock sold pursuant to a Prospectus Supplement
may be listed on the NYSE. On June 12, 1998, the last reported sales price of
the Common Stock on the NYSE was $17 3/8 per share. Neither the Company nor
any Co-Registrant has determined whether any of the other Offered Securities
will be listed on the NYSE. If the Company or any Co-Registrant decides to
seek listing of any such Offered Securities, the Prospectus Supplement
relating thereto will disclose such exchange or market. The applicable
Prospectus Supplement will also contain information, where applicable, about
certain material United States federal income tax considerations relating to
the Offered Securities covered by such Prospectus Supplement.
---------------
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 Offered Securities may be offered directly to the Company's stockholders
(in the case of Subscription Rights) or to purchasers, directly or through
agents, underwriters or dealers, as designated from time to time, or through a
combination of such methods, each as set forth in the applicable Prospectus
Supplement. The Company and the Co-Registrants reserve the sole right to
accept, and together with their agents, from time to time, to reject in whole
or in part any proposed purchase of Offered Securities to be made directly or
through agents. Certain terms of the offering and sale of the Offered
Securities, including, where applicable, the names of any underwriters,
dealers, or agents, any applicable commission, discounts and other items
constituting compensation of such underwriters, dealers or agents, and the
proceeds to the Company or to any Co-Registrant from such sale will be set
forth in the accompanying Prospectus Supplement. See "Plan of Distribution"
for possible indemnification arrangements for underwriters, dealers and
agents.
No Offered Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of the
Offered Securities.
The date of this Prospectus is June 17, 1998.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN AND THEREIN, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR ANY
PROSPECTUS SUPPLEMENT SHALL CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY OFFERED SECURITIES IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE HEREIN OR IN ANY PROSPECTUS SUPPLEMENT IS CORRECT AS
OF ANY DATE SUBSEQUENT TO THE DATE HEREOF OR OF SUCH PROSPECTUS SUPPLEMENT.
IN CONNECTION WITH THE OFFERING OF CERTAIN OFFERED SECURITIES, CERTAIN
PERSONS PARTICIPATING IN SUCH OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICES OF SUCH OFFERED
SECURITIES OR OTHER SECURITIES OF THE COMPANY INCLUDING STABILIZING
TRANSACTIONS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY
BIDS. SPECIFICALLY, SUCH PERSONS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE THE OFFERED SECURITIES IN THE OPEN MARKET.
AVAILABLE INFORMATION
The Company and the Co-Registrants have filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Offered Securities. This Prospectus and any
Prospectus Supplement do not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information about the
Company and the Offered Securities, reference is hereby made to the
Registration Statement, including the exhibits and schedules filed as a part
thereof and otherwise incorporated therein. Statements made in this Prospectus
as to the contents of any agreement or other document referred to herein are
not necessarily complete, and in each instance, reference is made to the copy
of such document so filed, each such statement being qualified in its entirety
by such reference.
The Company and certain of the Co-Registrants are subject to the
informational reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and, in accordance therewith, the Company and
Host Properties, Inc. ("Properties"), a Co-Registrant, each file periodic
reports, proxy statements and other information with the Commission. The
Registration Statement, including the exhibits thereto, as well as such
reports and other information filed by the Company or Properties with the
Commission, can be inspected, without charge, and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington D.C., 20549 and at the Commission's regional offices
located at Seven World Trade Center, Suite 1300, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
also maintains a site on the World Wide Web at http://www.sec.gov., which
contains reports, proxy statements and other information regarding registrants
that file electronically with the Commission and certain of the Company's
filings are available at such web site. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports and other
information concerning the Company can also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
2
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission pursuant to the Exchange
Act are hereby incorporated by reference in, and shall be deemed to be a part
of, this Prospectus:
1. Host Marriott Corporation's Annual Report on Form 10-K for the fiscal
year ended January 2, 1998, filed with the Commission on March 27, 1998.
2. Host Marriott Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 27, 1998, filed with the Commission on May 11, 1998, as
amended.
3. Current Report on Form 8-K filed by Host Marriott Corporation dated
April 17, 1998, filed on April 17, 1998.
4. Description of the Company's Common Stock included in a Registration
Statement on Form 10 filed with the Commission.
5. Description of the Company's Common Stock included in a Registration
Statement on Form 8-A filed with the Commission on February 10, 1989.
6. HMH Properties, Inc.'s Annual Report on Form 10-K for the fiscal year
ended January 2, 1998, filed with the Commission on March 27, 1998.
7. HMH Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 27, 1998, filed with the Commission on May 11, 1998, as
amended.
All documents filed by the Company or the Co-Registrants pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of all Offered
Securities to which this Prospectus relates shall be deemed to be incorporated
by reference into this Prospectus and to be a part hereof from the respective
dates of filing of such documents. Any statement contained in this Prospectus
or in any Prospectus Supplement or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus and any Prospectus Supplement to the extent
that a statement contained herein or in any Prospectus Supplement or in any
other subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus or any
Prospectus Supplement.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon request, a copy
of any of the foregoing documents (other than exhibits incorporated by
reference into such document). Requests for documents should be submitted to
the Corporate Secretary, Host Marriott Corporation, 10400 Fernwood Road,
Bethesda, Maryland, 20817-1109. The information relating to the Company or the
Co-Registrants contained in this Prospectus does not purport to be
comprehensive and should be read together with the information contained in
the documents incorporated or deemed to be incorporated by reference herein.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including the documents that are incorporated herein by
reference, contains "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act and include
statements regarding the intent, belief or current expectations of the Company
or a Co-Registrant, primarily with respect to capital expenditures, cost
reduction, cash flow, operating performance and improvements and related
industry developments. When used in this Prospectus, words such as
"anticipate," "estimate," "plan," "project," "expect," "intend," "may be,"
"objective," "predict," "will be," "believes," and similar words or phrases
are intended to identify such statements. Such statements are subject to
inherent uncertainties and risks that could cause the actual results,
performance or achievements of the Company or any Co-Registrant to differ
materially from any future results, performance or achievements
3
<PAGE>
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other important factors include, among other things:
substantial leverage; the Company's or a Co-Registrant's success in
implementing its business strategies; the terms of the Company's or a Co-
Registrant's indebtedness; competition in, and risks of, the lodging industry;
general economic and business conditions; and other factors referenced in this
Prospectus. The Company and each Co-Registrant disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's or a Co-
Registrant's expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
4
<PAGE>
THE COMPANY
The Company is one of the largest owners of hotels in the world, with 100
upscale and luxury full-service hotel lodging properties in its portfolio as
of June 5, 1998, primarily located in the United States. These properties are
generally operated under the Marriott and Ritz-Carlton brand names and managed
by Marriott International, Inc. ("Marriott International"), formerly a wholly-
owned subsidiary of the Company. The Marriott and Ritz-Carlton brand names are
among the most respected and widely recognized brand names in the lodging
industry. The Company also owns 31 senior living communities, all of which are
managed by Marriott International. The Company's primary focus is on the
acquisition of full-service hotel lodging properties. Since the beginning of
1994 through June 5, 1998, the Company has added 75 full-service hotels
representing more than 34,000 rooms for an aggregate purchase price of
approximately $3.5 billion.
On April 17, 1998, the Company announced that it had reached a definitive
agreement with various affiliates of The Blackstone Group and Blackstone Real
Estate Partners (collectively, "Blackstone") to acquire interests in 12 world-
class luxury hotels and a mortgage loan secured by a thirteenth hotel and
certain other assets in a transaction valued at approximately $1.735 billion,
including the assumption of debt. Following the transaction, Blackstone will
have the largest ownership interest in Host Marriott on a fully diluted basis.
Host Marriott expects to pay approximately $862 million in cash and assumed
debt and to issue approximately 43.7 million operating partnership units of
Host Marriott, L.P., a Delaware limited partnership, which is the new
operating partnership (the "Operating Partnership") formed as part of the
Company's reorganization, described below. Each Operating Partnership unit
will be exchangeable for one share of Host Marriott common stock (or its cash
equivalent). Upon completion of the acquisition, Blackstone will own
approximately 18% of the shares outstanding of Host Marriott common stock on a
fully converted basis. The Blackstone portfolio consists of two Ritz-Carltons,
two Four Seasons, one Grand Hyatt, three Hyatt Regencies and four Swissotel
properties and a mortgage on a third Four Seasons. These hotels are located in
major urban and convention/resort markets with significant barriers to new
competition.
In addition, on April 17, 1998, Host Marriott announced that its Board of
Directors (the "Board") has authorized the Company to reorganize its remaining
business operations to qualify as a real estate investment trust ("REIT"),
effective as of January 1, 1999, and to spin-off its senior living communities
business ("Senior Living") through a taxable stock dividend to its
shareholders. After the REIT reorganization, which is subject to shareholder
and final Board approval, the Company intends to operate as an "UPREIT," with
all of its assets and operations conducted through the Operating Partnership,
of which Host Marriott will be the general partner. Marriott International's
role in managing Marriott hotels owned by Host Marriott will be unchanged. The
Operating Partnership is currently a wholly owned subsidiary of the Company
and is one of the Co-Registrants that may issue or guarantee Debt Securities.
Host Marriott will distribute shares in Senior Living to its shareholders at
the time of the REIT reorganization and Host Marriott expects to make a cash
distribution at that time. The projected aggregate value of these
distributions, which are expected to be treated as taxable dividends to
shareholders, is currently estimated to be between $400 and $550 million. An
additional taxable distribution may be required in 1999. Senior Living is
expected to own Host Marriott's approximately $700 million portfolio of senior
living properties. This portfolio currently consists of 31 retirement
communities, totaling 7,218 units in 12 states. The communities will continue
to be managed by Marriott International. In addition, Senior Living will lease
substantially all of the hotels owned by the REIT and its affiliates. Senior
Living will operate independently of Host Marriott, will be publicly listed
and will pursue its own growth opportunities. In order to facilitate the
transition, there may initially be some Board of Directors overlap, which will
be eliminated over time.
Following the REIT reorganization, Host Marriott will own Operating
Partnership units in the Operating Partnership equal to the number of
outstanding shares of Host Marriott common stock at the time of the
conversion. The UPREIT structure will not affect the ownership by shareholders
of their existing Host Marriott shares. As part of the reorganization, limited
partners in Host Marriott's full-service hotel partnerships and joint ventures
are expected to be given an opportunity to receive, on a tax-deferred basis,
Operating Partnership units
5
<PAGE>
in exchange for their current partnership interests. Furthermore, Host
Marriott anticipates repurchasing or exchanging its approximately $1.55
billion of outstanding debt securities, adjusting the conversion ratio of its
Quarterly Income Preferred Securities to reflect the distribution of Senior
Living and cash to Host Marriott stockholders, and issuing additional debt and
equity securities.
The Blackstone transaction is expected to close simultaneously with the
reorganization of Host Marriott as a real estate investment trust. At that
time, Blackstone's hotels and other assets will be contributed into the
Operating Partnership. The hotels will continue to be managed under the
existing management contracts.
The REIT expects to qualify as a real estate investment trust under federal
income tax law beginning January 1, 1999. However, consummation of the REIT
reorganization is subject to significant contingencies that are outside the
control of the Company, including final Board approval, consent of
shareholders, partners, bondholders, lenders, and ground lessors of Host
Marriott, its affiliates and other third parties. Accordingly, there can be no
assurance that the REIT reorganization will be completed or that it will be
effective as of January 1, 1999. Consummation of the Blackstone transaction is
also subject to certain conditions, including consummation of the REIT
reorganization by March 31, 1999.
The Company's principal executive offices are located at 10400 Fernwood
Road, Bethesda, Maryland 20817-1109, and its telephone number is (301) 380-
9000.
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<PAGE>
USE OF PROCEEDS
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company and the Co-Registrants anticipate that any net proceeds from the sale
of Offered Securities will be used for general operational purposes, which may
include, but are not limited to, working capital, capital expenditures,
acquisitions and the repayment, refinancing or repurchase of the indebtedness
of the Company or its subsidiaries (including certain of the Co-Registrants)
or capital stock of the Company. The factors which the Company and the Co-
Registrants will consider in any refinancing will include the amount and
characteristics of any Offered Securities issued and may include, among
others, the impact of such refinancing on the liquidity of the Company or any
Co-Registrant or on their respective debt-to-capital ratios and earnings per
share. When a particular series of Offered Securities is offered, the
Prospectus Supplement relating thereto will set forth the intended use for the
net proceeds received from the sale of such Offered Securities. Pending the
application of the net proceeds, the Company and the Co-Registrants expect to
invest such proceeds in short-term, interest-bearing instruments or other
investment-grade debt securities or to reduce indebtedness under the Company's
bank credit agreement.
RISK FACTORS
CERTAIN OF THE SECURITIES TO BE OFFERED HEREBY THEMSELVES MAY INVOLVE A HIGH
DEGREE OF RISK. SUCH RISKS WILL BE SET FORTH IN THE PROSPECTUS SUPPLEMENT
RELATING TO SUCH OFFERED SECURITIES.
ERISA MATTERS
The Company and its subsidiaries may each be considered a "party in
interest" (within the meaning of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")) or a "disqualified person" (within the meaning
of Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"))
with respect to many employee benefit plans ("Plans") that are subject to
ERISA. The purchase of Offered Securities by a Plan that is subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of Section 4975 of the Code (including individual retirement
arrangements and other plans described in Section 4975(e)(1) of the Code) and
with respect to which the Company or any of its affiliates is a service
provider (or otherwise is a party in interest or a disqualified person) may
constitute or result in a prohibited transaction under ERISA or Section 4975
of the Code, unless such Offered Securities are acquired pursuant to and in
accordance with an applicable exemption. Any pension or other employee benefit
plan proposing to acquire any Offered Securities should consult with its
counsel.
7
<PAGE>
RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's ratio of earnings to combined
fixed charges and preferred stock dividends on a historical basis for the
periods indicated.
<TABLE>
<CAPTION>
1ST QUARTER FISCAL YEAR
----------- --------------------------------------
1998 1997 1997 1996 1995 1994 1993
----- ----- ------- ------- ------ ------ ------
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined
fixed charges and preferred
stock dividends(a)........... 1.7x 1.3x 1.3x 1.0x -- -- --
Deficiency of earnings to com-
bined fixed charges and pre-
ferred stock dividends(b).... -- -- -- -- $ 70 $ 12 $ 45
</TABLE>
- --------
(a) The ratio of earnings to fixed charges and preferred stock dividends is
computed by dividing income from continuing operations before income taxes
and fixed charges and preferred stock dividends by total fixed charges and
preferred stock dividends. Fixed charges represent interest expense
(including capitalized interest), the amortization of debt issuance costs,
and the portion of rental expense that represents interest.
(b) The deficiency of earnings to fixed charges and preferred stock dividends
in 1995, 1994 and 1993 is largely the result of depreciation and
amortization of $122 million in 1995, $113 million in 1994 and $196
million in 1993. In addition, the deficiency for 1995 was impacted by the
$60 million pre-tax charge to write-down the carrying value of one
undeveloped land parcel to its estimated sales value.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges of the
Company for the periods indicated.
<TABLE>
<CAPTION>
1ST QUARTER FISCAL YEAR
----------- --------------------------------------
1998 1997 1997 1996 1995 1994 1993
----- ----- ------- ------- ------ ------ ------
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges(a)................ 1.7x 1.3x 1.3x 1.0x -- -- --
Deficiency of earnings to
fixed charges(b).......... -- -- -- -- $ 70 $ 12 $ 45
</TABLE>
- --------
(a) The ratio of earnings to fixed charges is computed by dividing income from
continuing operations before income taxes and fixed charges by total fixed
charges. Fixed charges represent interest expense (including capitalized
interest), the amortization of debt issuance costs, and the portion of
rental expense that represents interest.
(b) The deficiency of earnings to fixed charges in 1995, 1994 and 1993 is
largely the result of depreciation and amortization of $122 million in
1995, $113 million in 1994 and $196 million in 1993. In addition, the
deficiency for 1995 was impacted by the $60 million pre-tax charge to
write down the carrying value of one undeveloped land parcel to its
estimated sales value.
8
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The Debt Securities offered hereby are to be issued under an indenture (the
"Indenture") to be executed by the Company and/or the Co-Registrants issuing
such Debt Securities (for purposes of this section, the issuers of Debt
Securities are sometimes referred to as the "Issuer") and a trustee to be
identified in the applicable Prospectus Supplement, as trustee (the
"Trustee"). The terms of the Debt Securities will include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "TIA") as in effect on the date of the Indenture.
The Debt Securities will be subject to all such terms, and potential
purchasers of the Debt Securities are referred to the Indenture and the TIA
for a statement thereof. A copy of the form of Indenture to be used by each
Issuer in connection with any series of Debt Securities has been filed as an
exhibit to the Registration Statement. Section references used in this
Prospectus refer to sections of the Indenture.
The Company and the Co-Registrants may offer under this Prospectus up to
$2,500,000,000 aggregate principal amount of Debt Securities, or if Debt
Securities are issued at a discount, or in a foreign currency or composite
currency, such principal amount as may be sold for an initial public offering
price of up to $2,500,000,000. Unless otherwise specified in the applicable
Prospectus Supplement, the Debt Securities will represent direct, unsecured
obligations of the Issuer and will rank equally with all other unsecured and
unsubordinated indebtedness of the Issuer. The Company's payment obligations
under any series of Debt Securities may be guaranteed by certain of the Co-
Registrants and the payment obligations of any Co-Registrant issuing any
series of Debt Securities will be guaranteed by the Company and may be
guaranteed by one or more of the Co-Registrants.
The following statements relating to the Debt Securities and the Indenture
are summaries and do not purport to be complete. Such summaries may make use
of certain terms defined in the Indenture and are qualified in their entirety
by express reference to the Indenture. Certain other specific terms of any
series of Debt Securities will be described in the applicable Prospectus
Supplement. To the extent that any particular terms of the Debt Securities
described in a Prospectus Supplement differ from any of the terms described
herein, then such terms described herein shall be deemed to have been
superseded by such Prospectus Supplement.
GENERAL
The terms of each series of Debt Securities will be set forth or determined
in the manner provided in an Officers' Certificate or by a supplemental
indenture. (Indenture sec. 2.2) The particular terms of each series of Debt
Securities will be described in a Prospectus Supplement relating to such
series (including any pricing supplement thereto).
The Debt Securities that may be offered under the Indenture are not limited
in aggregate principal amount. The Debt Securities may be issued in one or
more series with the same or various maturities, at par, at a premium, or at a
discount. The Prospectus Supplement (including any pricing supplement thereto)
will set forth the initial offering price, the aggregate principal amount and
the following terms of the Debt Securities in respect of which this Prospectus
is delivered: (1) the title of such Debt Securities; (2) the price or prices
(expressed as a percentage of the aggregate principal amount thereof) at which
the Debt Securities will be issued; (3) any limit on the aggregate principal
amount of such Debt Securities; (4) the date or dates on which principal on
such Debt Securities will be payable; (5) the rate or rates (which may be
fixed or variable) per annum or, if applicable, the method used to determine
such rate or rates (including any commodity, commodity index, stock exchange
index or financial index) at which such Debt Securities will bear interest, if
any, the date or dates from which such interest, if any, will accrue, the date
or dates on which such interest, if any, will commence and be payable and any
regular record date for the interest payable on any interest payment date; (6)
the place or places where principal of, premium, if any, and interest, if any,
on such Debt Securities will be payable; (7) the period or periods within
which, the price or prices at which and the terms and conditions upon which
the Debt Securities may be redeemed, in whole or in part, at the option of the
Issuer; (8) the obligation, if any, of the Issuer to redeem or purchase the
Debt Securities, in whole or in part, pursuant to any sinking fund or
analogous provisions or at the option of a Holder thereof; (9) the dates, if
any, on which and the price or prices at which the Debt
9
<PAGE>
Securities will be repurchased by the Issuer at the option of the Holders
thereof and other detailed terms and provisions of such repurchase
obligations; (10) the denominations in which such Debt Securities may be
issuable, if other than denominations of $1,000 and any integral multiple
thereof; (11) whether the Debt Securities are to be issuable in the form of
Certificated Debt Securities (as defined below) or Global Debt Securities (as
defined below); (12) the portion of principal amount of such Debt Securities
that shall be payable upon declaration of acceleration of the maturity date
thereof, if other than the principal amount thereof; (13) the currency of
denomination of such Debt Securities; (14) the designation of the currency,
currencies or currency units in which payment of principal of, premium, if
any, and interest, if any, on such Debt Securities will be made; (15) if
payments of principal of, premium, if any, or interest, if any, on the Debt
Securities are to be made in one or more currencies or currency units other
than that or those in which such Debt Securities are denominated, the manner
in which the exchange rate with respect to such payments will be determined;
(16) the manner in which the amounts of payment of principal of, premium, if
any, or interest, if any, on such Debt Securities will be determined, if such
amounts may be determined by reference to an index based on a currency or
currencies other than that in which the Debt Securities are denominated or
designated to be payable or by reference to a commodity, commodity index,
stock exchange index or financial index; (17) the provisions, if any, relating
to any security provided for such Debt Securities; (18) any addition to or
change in the Events of Default described herein or in the Indenture with
respect to such Debt Securities; (19) any addition to or change in the
covenants described herein or in the Indenture with respect to such Debt
Securities and any change in the acceleration provisions described herein or
in the Indenture with respect to such Debt Securities; (20) the terms and
conditions, if any, upon which the Debt Securities shall be exchanged for or
converted into Common Stock, Preferred Stock or Depository Shares; (21) any
other terms of such Debt Securities, which may modify or delete any provision
of the Indenture insofar as it applies to such series; (22) any depositories,
interest rate calculation agents, exchange rate calculation agents or other
agents with respect to the Debt Securities; (23) whether such Debt Securities
rank as senior subordinated Debt Securities or subordinated Debt Securities or
any combination thereof; and (24) the form and terms of any guarantee of the
Debt Securities. (Indenture sec. 2.2)
Debt Securities may be issued that provide for an amount less than the
stated principal amount thereof to be due and payable upon declaration of
acceleration of the maturity thereof pursuant to the terms of the Indenture
("Discount Debt Securities"). Federal income tax considerations and other
special considerations applicable to any such Discount Debt Securities will be
described in the applicable Prospectus Supplement.
Debt Securities may be issued in bearer form, with or without coupons.
Federal income tax considerations and other special considerations applicable
to bearer securities will be described in the applicable Prospectus
Supplement.
If the purchase price of any of the Debt Securities is denominated in a
foreign currency or currencies or a foreign currency unit or units, or if the
principal of and any premium and interest, if any, on any series of Debt
Securities is payable in a foreign currency or currencies or a foreign
currency unit or units, the restrictions, elections, general tax
considerations, specific terms and other information with respect to such
issue of Debt Securities and such foreign currency or currencies or foreign
currency unit or units will be set forth in the applicable Prospectus
Supplement.
EXCHANGE AND/OR CONVERSION RIGHTS
The terms, if any, on which Debt Securities of a series may be exchanged for
or converted into shares of Common Stock, Preferred Stock or Depository Shares
will be set forth in the Prospectus Supplement relating thereto.
TRANSFER AND EXCHANGE
Each Debt Security will be represented by either one or more global
securities (a "Global Debt Security") registered in the name of The Depository
Trust Company, as Depositary (the "Depositary") or a nominee of the Depositary
(each such Debt Security represented by a Global Debt Security being herein
referred to as a "Book-
10
<PAGE>
Entry Debt Security"), or a certificate issued in definitive registered form
(a "Certificated Debt Security"), as set forth in the applicable Prospectus
Supplement. Except as set forth under "--Global Debt Securities and Book-Entry
System" below, Book-Entry Debt Securities will not be issuable in certificated
form.
Certificated Debt Securities. Certificated Debt Securities may be
transferred or exchanged at the Trustee's office or paying agencies in
accordance with the terms of the Indenture. No service charge will be made for
any transfer or exchange of Certificated Debt Securities, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
The transfer of Certificated Debt Securities and the right to receive the
principal of, premium, if any, and interest, if any, on such Certificated Debt
Securities may be effected only by surrender of the certificate representing
such Certificated Debt Securities and either reissuance by the Company or the
Trustee of such certificate to the new Holder or the issuance by the Company
or the Trustee of a new certificate to the new Holder.
Global Debt Securities and Book-Entry System. Each Global Debt Security
representing Book-Entry Debt Securities will be deposited with, or on behalf
of, the Depositary, and registered in the name of the Depositary or a nominee
of the Depositary. Except as set forth below, Book-Entry Debt Securities will
not be exchangeable for Certificated Debt Securities and will not otherwise be
issuable as Certificated Debt Securities.
The procedures that the Depositary has indicated it intends to follow with
respect to Book-Entry Debt Securities are set forth below.
Ownership of beneficial interests in Book-Entry Debt Securities will be
limited to persons that have accounts with the Depositary for the related
Global Debt Security ("participants") or persons that may hold interests
through participants. Upon the issuance of a Global Debt Security, the
Depositary will credit, on its book-entry registration and transfer system,
the participants' accounts with the respective principal amounts of the Book-
Entry Debt Securities represented by such Global Debt Security beneficially
owned by such participants. The accounts to be credited shall be designated by
any dealers, underwriters or agents participating in the distribution of such
Book-Entry Debt Securities. Ownership of Book-Entry Debt Securities will be
shown on, and the transfer of such ownership interests will be effected only
through, records maintained by the Depositary for the related Global Debt
Security (with respect to interests of participants) and on the records of
participants (with respect to interests of persons holding through
participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to own, transfer or pledge beneficial interests in
Book-Entry Debt Securities.
So long as the Depositary for a Global Debt Security, or its nominee, is the
registered owner of such Global Debt Security, the Depositary or such nominee,
as the case may be, will be considered the sole owner or Holder of the Book-
Entry Debt Securities represented by such Global Debt Security for all
purposes under the Indenture. Except as set forth below, beneficial owners of
Book-Entry Debt Securities will not be entitled to have such securities
registered in their names, will not receive or be entitled to receive physical
delivery of a certificate in definitive form representing such securities and
will not be considered the owners or Holders thereof under the Indenture.
Accordingly, each person beneficially owning Book-Entry Debt Securities must
rely on the procedures of the Depositary for the related Global Debt Security
and, if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a
Holder under the Indenture.
The Company and the Co-Registrants understand, however, that under existing
industry practice, the Depositary will authorize the persons on whose behalf
it holds a Global Debt Security to exercise certain rights of Holders of Debt
Securities, and the Indenture provides that the Issuer, the Trustee and their
respective agents will treat as the Holder of a Debt Security the persons
specified in a written statement of the Depositary with respect to such Global
Debt Security for purposes of obtaining any consents or directions required to
be given by Holders of the Debt Securities pursuant to the Indenture.
(Indenture sec. 2.14.6)
11
<PAGE>
Payments of principal of, premium, if any, and interest on Book-Entry Debt
Securities will be made to the Depositary or its nominee, as the case may be,
as the registered holder of the related Global Debt Security. (Indenture sec.
2.14.5) None of the Issuer, the Trustee or any other agent of the Issuer or
agent of the Trustee will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in such Global Debt Security or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company and the Co-Registrants expect that the Depositary, upon receipt
of any payment of principal of, premium, if any, or interest, if any, on a
Global Debt Security, will immediately credit participants' accounts with
payments in amounts proportionate to the respective amounts of Book-Entry Debt
Securities held by each such participant as shown on the records of the
Depositary. The Company and the Co-Registrants also expect that payments by
participants to owners of beneficial interests in Book-Entry Debt Securities
held through such participants will be governed by standing customer
instructions and customary practices, as is now the case with the securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such participants.
If the Depositary is at any time unwilling or unable to continue as
Depositary or ceases to be a clearing agency registered under the Exchange
Act, and a successor Depositary registered as a clearing agency under the
Exchange Act is not appointed by the Issuer within 90 days, the Issuer will
issue Certificated Debt Securities in exchange for each Global Debt Security.
In addition, the Issuer may at any time and in its sole discretion determine
not to have the Book-Entry Debt Securities of any series represented by one or
more Global Debt Securities and, in such event, will issue Certificated Debt
Securities in exchange for the Global Debt Securities of such series. Global
Debt Securities will also be exchangeable by the Holders for Certificated Debt
Securities if an Event of Default with respect to the Book Entry Debt
Securities represented by such Global Debt Securities has occurred and is
continuing. Any Certificated Debt Securities issued in exchange for a Global
Debt Security will be registered in such name or names as the Depositary shall
instruct the Trustee. It is expected that such instructions will be based upon
directions received by the Depositary from participants with respect to
ownership of Book-Entry Debt Securities relating to such Global Debt Security.
The foregoing information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources the Company and
the Co-Registrants believe to be reliable, but the Company and the Co-
Registrants take no responsibility for the accuracy thereof.
COVENANTS
Unless otherwise indicated in this Prospectus or a Prospectus Supplement,
the Debt Securities will not have the benefit of any covenants that limit or
restrict the Issuer's business or operations, the pledging of the Issuer's
assets or the incurrence of indebtedness by the Issuer.
The applicable Prospectus Supplement will describe any material covenants in
respect of a series of Debt Securities. Other than the covenants of the Issuer
included in the Indenture as described above or as described in the applicable
Prospectus Supplement, there are no covenants or other provisions in the
Indenture providing for a put or increased interest or otherwise that would
afford Holders of Debt Securities additional protection in the event of a
recapitalization transaction, a change of control of the Issuer or a highly
leveraged transaction.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Issuer may not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all of its properties and assets to,
any Person (a "successor Person") unless (i) the Issuer is the surviving
corporation or the successor Person (if other than the Issuer) is a
corporation, partnership, limited liability company, trust or other entity
organized and validly existing under the laws of any U.S. domestic
jurisdiction and expressly assumes the Issuer's obligations on the Debt
Securities and under the Indenture, (ii) immediately after giving effect to
the transaction, no Event of Default, and no event which, after notice or
lapse of time, or
12
<PAGE>
both, would become an Event of Default, shall have occurred and be continuing
under the Indenture and (iii) certain other conditions are met. In the event
the Issuer's obligations on the Debt Securities and under the Indenture are
assumed by a successor Person, the Issuer will be released from such
obligations. (Indenture sec. 5.1)
EVENTS OF DEFAULT
Unless otherwise specified in the applicable Prospectus Supplement, the
following will be Events of Default under the Indenture with respect to Debt
Securities of any series: (a) default in the payment of any interest upon any
Debt Security of that series when it becomes due and payable, and continuance
of such default for a period of 30 days (unless the entire amount of such
payment is deposited by the Company with the Trustee or with a paying agent
prior to the expiration of such period of 30 days); (b) default in the payment
of principal of or premium, if any, on any Debt Security of that series when
due and payable, at maturity, upon redemption or otherwise; (c) default in the
deposit of any sinking fund payment, when and as due in respect of any Debt
Security of that series; (d) default in the performance or breach of any other
covenant or warranty of the Issuer in the Indenture (other than a covenant or
warranty that has been included in the Indenture solely for the benefit of a
series of Debt Securities other than that series), which default continues
uncured for a period of 30 days after written notice to the Issuer by the
Trustee or to the Issuer and the Trustee by the Holders of at least 25% in
aggregate principal amount of the outstanding Debt Securities of that series
as provided in the Indenture; (e) certain events of bankruptcy, insolvency or
reorganization with respect to the Issuer; and (f) any other Event of Default
provided with respect to Debt Securities of that series that is described in
the Prospectus Supplement accompanying this Prospectus. No Event of Default
with respect to a particular series of Debt Securities (except as to certain
events of bankruptcy, insolvency or reorganization with respect to the Issuer)
necessarily constitutes an Event of Default with respect to any other series
of Debt Securities. (Indenture sec. 6.1). The occurrence of an Event of
Default may constitute an event of default under bank credit agreements, if
any, of the Issuer in existence from time to time. In addition, the occurrence
of certain Events of Default or an acceleration under the Indenture may
constitute an event of default under certain other indebtedness of the Issuer
outstanding from time to time.
If an Event of Default with respect to Debt Securities of any series
outstanding at the time occurs and is continuing, then in every such case the
Trustee or the holders of not less than 25% in principal amount of the
outstanding Debt Securities of that series may, by a notice in writing to the
Issuer (and to the Trustee if given by the holders), declare to be due and
payable immediately the principal (or, if the Debt Securities of that series
are Discount Debt Securities, such portion of the principal amount as may be
specified in the terms of that series) of and accrued and unpaid interest, if
any, on all Debt Securities of that series. In the case of an Event of Default
resulting from certain events of bankruptcy, insolvency or reorganization, the
principal (or such specified amount) of and accrued and unpaid interest, if
any, on all outstanding Debt Securities shall ipso facto become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any Holder of outstanding Debt Securities. At any time after
a declaration of acceleration with respect to Debt Securities of any series
has been made, but before a judgment or decree for payment of the money due
has been obtained by the Trustee, the holders of a majority in principal
amount of the outstanding Debt Securities of that series may rescind and annul
such acceleration if all Events of Default, other than the non-payment of
accelerated principal and interest, if any, with respect to Debt Securities of
that series have been cured or waived as provided in the Indenture. (Indenture
sec. 6.2) For information as to waiver of defaults see the discussion set
forth below under "Modification and Waiver."
The Indenture provides that the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
holder of outstanding Debt Securities, unless the Trustee receives indemnity
satisfactory to it against any loss, liability or expense. (Indenture sec.
7.1(e)) Subject to certain rights of the Trustee, the Holders of a majority in
principal amount of the outstanding Debt Securities of any series shall have
the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on the Trustee with respect to the Debt Securities of that series.
(Indenture sec. 6.12)
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<PAGE>
No Holder of any Debt Security of any series will have any right to
institute any proceeding, judicial or otherwise, with respect to the Indenture
or for the appointment of a receiver or trustee, or for any remedy under the
Indenture, unless such holder shall have previously given to the Trustee
written notice of a continuing Event of Default with respect to Debt
Securities of that series and unless also the holders of at least 25% in
principal amount of the outstanding Debt Securities of that series shall have
made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as trustee, and the Trustee shall not have received
from the Holders of a majority in principal amount of the outstanding Debt
Securities of that series a direction inconsistent with such request and shall
have failed to institute such proceeding within 60 days. (Indenture sec. 6.7)
Notwithstanding the foregoing, the Holder of any Debt Security will have an
absolute and unconditional right to receive payment of the principal of,
premium, if any, and any interest on such Debt Security on or after the due
dates expressed in such Debt Security and to institute suit for the
enforcement of any such payment. (Indenture sec. 6.8)
The Indenture requires the Issuer, within 120 days after the end of each of
its fiscal years, to furnish to the Trustee a statement as to compliance with
the Indenture. (Indenture sec. 4.3) The Indenture provides that the Trustee
may withhold notice to the holders of Debt Securities of any series of any
Default or Event of Default (except in payment on any Debt Securities of such
series) with respect to Debt Securities of such series if it in good faith
determines that withholding such notice is in the interest of the Holders of
such Debt Securities. (Indenture sec. 7.5)
MODIFICATION AND WAIVER
Modifications to, and amendments of, the Indenture may be made by the Issuer
and the Trustee with the consent of the Holders of at least a majority in
principal amount of the outstanding Debt Securities of each series affected by
such modifications or amendments; provided, however, that no such modification
or amendment may, without the consent of the Holder of each outstanding Debt
Security affected thereby: (a) reduce the amount of Debt Securities whose
Holders must consent to an amendment or waiver affecting such series; (b)
reduce the rate of or extend the time for payment of interest (including
default interest) on any such Debt Security; (c) reduce the principal of or
premium, if any, on or change the fixed maturity of any such Debt Security or
reduce the amount of, or postpone the date fixed for, the payment of any
sinking fund or analogous obligation with respect to such series of Debt
Securities; (d) reduce the principal amount of any such Discount Debt
Securities payable upon acceleration of the maturity thereof; (e) waive a
Default or an Event of Default in the payment of the principal of, premium, if
any, or interest, if any, on any such Debt Security (except a rescission of
acceleration of the Debt Securities of any series by the Holders of at least a
majority in aggregate principal amount of the then outstanding Debt Securities
of such series and a waiver of the payment default that resulted from such
acceleration); (f) make the principal of or premium, if any, or interest, if
any, on any such Debt Security payable in currency other than that stated in
the Debt Security; (g) make any change to certain provisions of the Indenture
relating to, among other things, the right of Holders of Debt Securities of
such series to receive payment of the principal of, premium, if any, and
interest, if any, on such Debt Securities and to institute suit for the
enforcement of any such payment; or (h) waive a redemption payment with
respect to any such Debt Security. (Indenture sec. 9.3) The Issuer and the
Trustee may amend the Indenture without notice to or consent of any holder of
Debt Securities: (i) to cure any ambiguity, defect or inconsistency; (ii) to
comply with the Indenture's provisions regarding successor obligors; (iii) to
comply with any requirements of the Commission in connection with the
qualification of the Indenture under the TIA; (iv) to provide for Global Debt
Securities in addition to or in place of Certificated Debt Securities; (v) to
add to, change or eliminate any of the provisions of the Indenture in respect
of one or more series of Debt Securities provided however, that any such
addition, change or elimination (A) shall neither (i) apply to any Debt
Security of any series created prior to the execution of such amendment and
entitled to the benefit of such provision, nor (2) modify the rights of a
holder of any such Debt Security with respect to such provision, or (B) shall
become effective only when there is no outstanding Debt Security of any series
created prior to such amendment and entitled to the benefit of such
provisions; (vi) to make any change that does not adversely affect in any
material respect the interest of any holder; or (vii) to establish additional
series of Debt Securities as permitted by the Indenture.
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The holders of at least a majority in principal amount of the outstanding
Debt Securities of any series may on behalf of the holders of all Debt
Securities of that series waive, insofar as that series is concerned,
compliance by the Company with provisions of the Indenture other than certain
specified provisions. (Indenture sec. 9.2) The Holders of a majority in
principal amount of the outstanding Debt Securities of any series may on
behalf of the Holders of all the Debt Securities of such series waive any past
default under the Indenture with respect to such series and its consequences,
except a default in the payment of the principal of, premium, if any, or
interest, if any, on any Debt Security of that series or in respect of a
covenant or provision which cannot be modified or amended without the consent
of the Holder of each outstanding Debt Security of such series affected;
provided, however, that the Holders of a majority in principal amount of the
outstanding Debt Securities of any series may rescind an acceleration and its
consequences, including any related payment default that resulted from such
acceleration. (Indenture sec. 6.13)
DEFEASANCE OF SECURITIES AND CERTAIN COVENANTS IN CERTAIN CIRCUMSTANCES
Legal Defeasance. The Indenture provides that, unless otherwise provided by
the terms of the applicable series of Debt Securities, the Issuer may be
discharged from any and all Obligations in respect of the Debt Securities of
any series (except for certain obligations to register the transfer or
exchange of Debt Securities of such series, to replace stolen, lost or
mutilated Debt Securities of such series, and to maintain paying agencies and
certain provisions relating to the treatment of funds held by paying agents)
upon the deposit with the Trustee, in trust, of money and/or U.S. Government
obligations or, in the case of Debt Securities denominated in a single
currency other than U.S. Dollars, Foreign Government Obligations (as defined
below), that, through the payment of interest and principal in respect thereof
in accordance with their terms, will provide money in an amount sufficient in
the opinion of a nationally recognized firm of independent public accountants
to pay and discharge each installment of principal (and premium, if any) and
interest, if any, on and any mandatory sinking fund payments in respect of the
Debt Securities of such series on the stated maturity of such payments in
accordance with the terms of the Indenture and such Debt Securities. Such
discharge may occur only if, among other things, the Issuer shall have
delivered to the Trustee an opinion of counsel stating that the Issuer has
received from, or there has been published by, the United States Internal
Revenue Service a ruling or, since the date of execution of the Indenture,
there has been a change in the applicable United States federal income tax
law, in either case to the effect that, and based thereon such opinion shall
confirm that, the Holders of the Debt Securities of such series will not
recognize income, gain or loss for United States federal income tax purposes
as a result of such deposit, defeasance and discharge and will be subject to
United States federal income tax on the same amounts and in the same manner
and at the same times as would have been the case if such deposit, defeasance
and discharge had not occurred. (Indenture sec. 8.3)
Defeasance of Certain Covenants. The Indenture provides that, unless
otherwise provided by the terms of the applicable series of Debt Securities,
upon compliance with certain conditions, (i) the Issuer may omit to comply
with the covenants described above under "--Consolidation, Merger and Sale of
Assets" and certain other covenants set forth in the Indenture, as well as any
additional restrictive covenants, or other provisions which may be set forth
in the applicable Prospectus Supplement, and any omission to comply with such
covenants will not constitute a Default or an Event of Default with respect to
the Debt Securities of such series ("covenant defeasance"). The conditions
include: the deposit with the Trustee of money and/or U.S. Government
Obligations or, in the case of Debt Securities denominated in a single
currency other than U.S. Dollars, Foreign Government Obligations, that,
through the payment of interest and principal in respect thereof in accordance
with their terms, will provide money in an amount sufficient in the opinion of
a nationally recognized firm of independent public accountants to pay and
discharge each installment of principal of, premium, if any, and interest, if
any, on and any mandatory sinking fund payments in respect of the Debt
Securities of such series on the stated maturity of such payments in
accordance with the terms of the Indenture and such Debt Securities; and the
delivery to the Trustee of an opinion of counsel to the effect that the
Holders of the Debt Securities of such series will not recognize income, gain
or loss for United States federal income tax purposes as a result of such
deposit and related covenant defeasance and will be subject to United States
federal income tax on the same amounts and in the same manner and at the same
times as would have been the case if such deposit and related covenant
defeasance had not occurred. (Indenture sec. 8.4)
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Covenant Defeasance and Events of Default. In the event the Issuer exercises
its option to effect covenant defeasance with respect to any series of Debt
Securities and the Debt Securities of such series are declared due and payable
because of the occurrence of any Event of Default, the amount of money and/or
U.S. Government Obligations or Foreign Government obligations on deposit with
the Trustee will be sufficient to pay amounts due on the Debt Securities of
such series at the time of their stated maturity but may not be sufficient to
pay amounts due on the Debt Securities of such series at the time of the
acceleration resulting from such Event of Default. However, the Issuer shall
remain liable for such payments.
"Foreign Government Obligations" means, with respect to Debt Securities of
any series that are denominated in a currency other than U.S. Dollars, (i)
direct obligations of the government that issued or caused to be issued such
currency for the payment of which obligations its full faith and credit is
pledged or (ii) obligations of a Person controlled or supervised by or acting
as an agency or instrumentality of such government the timely payment of which
is unconditionally guaranteed as a full faith and credit obligation by such
government, which, in either case under clauses (i) or (ii), are not callable
or redeemable at the option of the issuer thereof.
GUARANTEES
The Company's payment obligations under any series of Debt Securities may be
guaranteed by certain of the Co-Registrants and the payment obligations of any
Co-Registrant issuing any series of Debt Securities will be guaranteed by the
Company and may be guaranteed by one or more of the Co-Registrants. The newly
formed Operating Partnership described above is among the Co-Registrants and
may be an issuer of Debt Securities.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the internal laws of the State of New York. (Indenture sec.
10.10).
REGARDING THE TRUSTEE
The Trustee with respect to any series of Debt Securities will be identified
in the Prospectus Supplement relating to such Debt Securities. The Indenture
and the provisions of the TIA incorporated by reference therein contain
certain limitations on the rights of the Trustee, should it become a creditor
of the Issuer, to obtain payments of claims in certain cases, or to realize on
certain property received in respect of any such claim, as security or
otherwise. The Trustee and its affiliates may engage in, and will be permitted
to continue to engage in, other transactions with the Issuer and its
affiliates, provided, however, that if it acquires any conflicting interest
(as defined in the TIA), it must eliminate such conflict or resign.
The holders of a majority in principal amount of the then outstanding Debt
Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee. The TIA and the Indenture provide that in the case an Event of
Default shall occur (and be continuing), the Trustee will be required, in the
exercise of its rights and powers, to use the degree of care and skill of a
prudent man in the conduct of his own affairs. Subject to such provision, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any of the holders of the Debt
Securities issued thereunder, unless they have offered to the Trustee
indemnity satisfactory to it.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Restated Certificate of Incorporation (the "Company
Certificate") authorizes the issuance of a total of 601,000,000 shares of all
classes of stock, of which 600,000,000 shares are Common Stock and 1,000,000
shares are Preferred Stock. As of June 2, 1998, 204,299,134 shares of Common
Stock were outstanding and no shares of Preferred Stock were outstanding. The
following summaries of certain provisions of the Company's capital stock do
not purport to be complete and are subject to and qualified in their entirety
by the provisions of the Company Certificate, the Company's Amended and
Restated Bylaws (the "Bylaws") and the Company's Rights Agreement (as
defined), each of which is included as an exhibit to the Registration
Statement of which this Prospectus forms a part, and by applicable law. In
connection with the Company's adoption of a shareholder rights plan, the Board
authorized and reserved for issuance 300,000 shares of Series A Junior
Participating Preferred Stock ("Junior Preferred Stock"). No shares of Junior
Preferred Stock are currently outstanding.
COMMON STOCK
Subject to such preferential rights as may be granted by the Board in
connection with the future issuance of preferred stock, each holder of Common
Stock is entitled to one vote for each share registered in such holder's 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. Holders of Common Stock are entitled to such dividends as
the Board may declare out of funds legally available therefor. Subject to the
prior rights of creditors and the holders of any of the Company's preferred
stock, if any, 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. 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 shares of Common Stock do not have
cumulative voting rights. As a result, 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.
All of the outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby will be, fully paid and nonaccessable.
PREFERRED STOCK
Under the Company Certificate, shares of Preferred Stock may be issued from
time to time, in one or more classes or series, as authorized by the Board,
generally without the approval of the shareholders. Prior to issuance of
shares of each series, the Board is required by the General Corporation Law of
the State of Delaware (the "DGCL") and the Company Certificate to adopt
resolutions and file a Certificate of Designation (the "Certificate of
Designation") with the Secretary of State of the State of Delaware, fixing for
each such class or series the designation, powers, preferences and rights of
the shares of such class or series and the qualifications, limitations or
restrictions thereon, including, but not limited to, dividend rights, dividend
rate or rates, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences as are permitted by the DGCL. The
Board could authorize the issuance of shares of Preferred Stock with terms and
conditions which could have the effect of discouraging a takeover or other
transaction which holders of some, or a majority, of such shares might believe
to be in their best interest or in which holders of some, or a majority, of
such shares might receive a premium for their shares over the then-market
price of such shares.
Subject to limitations prescribed by the DGCL, the Company Certificate and
the Bylaws, the Board is authorized to fix the number of shares constituting
each class or series of Preferred Stock and the designations and powers,
preferences and relative, participating, optional or other special rights,
including such provisions as may be desired concerning voting, redemption,
dividends, dissolution or the distribution of assets, conversion or exchange,
and such other subjects or matters as may be fixed by resolution of the Board
or duly authorized committee thereof. The Preferred Stock offered hereby will,
when issued, be fully paid and nonassessable and will not have, or be subject
to, any preemptive or similar rights.
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Reference is made to the Prospectus Supplement relating to the class or
series of Preferred Stock being offered for the specific terms thereof,
including:
(i) The title and stated value of such Preferred Stock;
(ii) The number of shares of such Preferred Stock offered, the
liquidation preference per share and the purchase price of such Preferred
Stock;
(iii) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(iv) Whether dividends shall be cumulative or non-cumulative and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(v) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(vi) The provisions for a sinking fund, if any, for such Preferred Stock;
(vii) The provisions for redemption, if applicable, of such Preferred
Stock;
(viii) Any listing of such Preferred Stock on any securities exchange or
market;
(ix) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock of the Company, including the
conversion price (or manner of calculation thereof) and conversion period;
(x) The terms and conditions, if applicable, upon which Preferred Stock
will be exchangeable into Debt Securities, including the exchange price (or
manner of calculation thereof) and exchange period);
(xi) Voting rights, if any, of such Preferred Stock;
(xii) Whether interests in such Preferred Stock will be represented by
depositary shares;
(xiii) A discussion of any material and/or special United States federal
income tax considerations applicable to such Preferred Stock;
(xiv) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(xv) Any limitations on issuance of any class or series of Preferred
Stock ranking senior to or on a parity with such series of Preferred Stock
as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company; and
(xvi) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
DELAWARE LAW; CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE AND BYLAWS AND
THE MARRIOTT INTERNATIONAL PURCHASE AGREEMENT
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 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 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.
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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 at the 1999, 2000 or 2001 annual meeting
of shareholders.
The classification of directors has 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 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
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from taking action by consent without giving all the shareholders 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 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").
The Nomination Procedure provides that only persons who are nominated by or
at the direction of the Board, or by a shareholder who has given timely prior
written notice to the Corporate 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
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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 Fifteen of the Company Certificate (the "Fair
Price Provision") requires 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.
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 Provision.
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% or more of a Delaware
corporation's voting stock) are
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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% 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 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 "--Preferred Stock Purchase Rights"
below.
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% 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% 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% majority from amending
such provisions of the Company's Certificate or Bylaws.
Marriott International Purchase Right. In connection with the Company's
spin-off distribution of Marriott International (the "Special Dividend"), the
Company has granted to Marriott International the 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.
PREFERRED STOCK PURCHASE RIGHTS
The Company has adopted a shareholder rights plan as set forth in a 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 "Preferred Stock Purchase Right"
or "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 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 the Company shareholder, 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
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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 Company's spin-off distribution of Marriott International, the Board
amended the Rights Agreement to provide that the shares of 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 "--Delaware Law;
Certain Provisions of the Company's Certificate and Bylaws and the Marriott
International Purchase Agreement--Marriott International Purchase Right"
above.
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.
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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, subdivisions, 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.
The Rights have certain antitakeover 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, 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 since the
Rights may be redeemed by the Company as set forth above.
Junior Preferred Stock. The material terms of the Junior Preferred Stock are
summarized herein; however, such summary is subject to the terms of the
Company Certificate and the certificate of designation relating to the Junior
Preferred Stock (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) 1,000 times (subject to adjustment upon certain dilutive events)
the aggregate per share amount of all cash dividends and 1,000 times (subject
to adjustment upon certain dilutive events) the aggregate per share amount
(payable in kind) of all noncash 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 1,000 votes (subject
to adjustment upon certain dilutive events) per share of Junior Preferred
Stock on all matters submitted to a vote of the Company shareholders. Such
holders will vote together with the holders of the Common Stock as a single
class on all matters submitted to a vote of the Company shareholders.
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 1,000 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 $1,000 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 1,000
times (subject to adjustment upon certain dilutive events) the aggregate
amount to be distributed per share to holders of Common Stock.
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In the event that dividends on the Junior Preferred Stock are in arrears in
an amount equal to six quarterly dividends thereon, all holders of Junior
Preferred Stock, voting separately as a class with the holders of any other
series of preferred stock of the Company with dividends in arrears, will be
entitled to elect two directors pursuant to provisions of the Company
Certificate. Such right to elect two additional directors shall continue at
each annual meeting until all dividends in arrears (including the then-current
quarterly dividend payment) have been paid or declared and set apart for
payment. Upon payment or declaration and reservation of funds for payment of
all such dividends, the term of office of each director elected shall
immediately terminate and the number of directors shall be such number as may
be provided for in the Company Certificate or Bylaws.
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.
OUTSTANDING WARRANTS
In March 1993, the Company reached an agreement in principle with certain
holders and recent purchasers of its senior notes and debentures who had
either instituted or threatened litigation in response to the Company's
decision to consummate the Special Dividend. In August 1993, the United States
District Court approved the agreement as a class action settlement. In
connection with such class action settlement, the Company issued warrants
("Outstanding Warrants") to purchase up to 7.7 million shares of the Company's
Common Stock. As subsequently adjusted, each Outstanding Warrant entitles the
holder, at any time prior to 5:00 p.m. on October 8, 1998 (the "Expiration
Time"), to purchase one share of Common Stock from the Company and one-fifth
share of Host Marriott Services Corporation common stock, a former subsidiary
of the Company whose common stock is currently trading on the NYSE ("HM
Services") at a price (the "Exercise Price") of $10.00. The portion of the
Exercise Price attributable to the HM Services common stock is payable to HM
Services. Both the Exercise Price and the number of shares subject to the
Outstanding Warrants are subject to certain adjustments. Outstanding Warrants
that are not exercised prior to the Expiration Time expire and become void.
The Company did not receive any proceeds from the issuance of the Outstanding
Warrants.
Outstanding Warrant holders will not be entitled to vote or to consent or to
receive notice as shareholders in respect of the meeting of shareholders or
the election of directors of the Company or any other matter, or possess any
rights whatsoever as to the operations of the Company.
The Company has also agreed to use its reasonable best efforts to obtain any
required approvals or registration under state securities laws for the
issuance of the Common Stock upon exercise of the Outstanding Warrants. Under
the Outstanding Warrant Agreement, however, Outstanding Warrants may not be
exercised by or, shares of Common Stock issued to, any Warrant holder in any
state where such exercise or issuance would be unlawful. The Outstanding
Warrants have no established trading market and no assurance can be given that
any such markets will develop.
As of June 2, 1998, approximately 550,000 Warrants were outstanding or
reserved for issuance.
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DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest of a share of a
particular series of Preferred Stock, as specified in the applicable
Prospectus Supplement. Shares of Preferred Stock of each series represented by
Depositary Shares will be deposited under a separate Deposit Agreement (each,
a "Deposit Agreement") among the Company and the depositary named therein (the
"Preferred Stock Depositary"). Subject to the terms of the Deposit Agreement,
each owner of a Depositary Receipt will be entitled, in proportion to the
fractional interest of a share of a particular series of Preferred Stock
represented by the Depositary Shares evidenced by such Depositary Receipt, to
all the rights and preferences of the Preferred Stock represented by such
Depositary Shares (including dividend, voting, conversion, redemption and
liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of the Preferred Stock by the Company to the Preferred
Stock Depositary, the Company will cause the Preferred Stock Depositary to
issue, on behalf of theCompany, the Depositary Receipts. Copies of the
applicable form of Deposit Agreement and Depositary Receipt may be obtained
from the Company upon request, and the statements made hereunder relating to
the Deposit Agreement and the Depositary Receipts to be issued thereunder are
summaries of certain provisions thereof and do not purport to be complete and
are subject to, and qualified in their entirety by reference to, all of the
provisions of the applicable Deposit Agreement and related Depositary
Receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions received in respect of the Preferred Stock to the record
holders of Depositary Receipts evidencing the related Depositary Shares in
proportion to the number of such Depositary Receipts owned by such holders,
subject to certain obligations of holders to file proofs, certificates and
other information and to pay certain charges and expenses to the Preferred
Stock Depositary.
In the event of a distribution other than in cash, the Preferred Stock
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of
holders to file proofs, certificates and other information and to pay certain
charges and expenses to the Preferred Stock Depositary, unless the Preferred
Stock Depositary determines that it is not feasible to make such distribution,
in which case the Preferred Stock Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Stock converted into other securities.
WITHDRAWAL OF STOCK
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Stock Depositary (unless the related Depositary Shares have
previously been called for redemption or converted into other securities), the
holders thereof will be entitled to delivery at such office, to or upon such
holder's order, of the number of whole or fractional shares of the Preferred
Stock and any money or other property represented by the Depositary Shares
evidenced by such Depositary Receipts. Holders of Depositary Receipts will be
entitled to receive whole or fractional shares of the related Preferred Stock
on the basis of the proportion of Preferred Stock represented by such
Depositary Share as specified in the applicable Prospectus Supplement, but
holders of such shares of Preferred Stock will not thereafter be entitled to
receive Depositary Shares therefor. If the Depositary Receipts delivered by
the holder evidence a number of Depositary Shares in excess of the number of
Depositary Shares representing the number of shares of Preferred Stock to be
withdrawn, the Preferred Stock Depositary will deliver to such holder at the
same time a new Depositary Receipt evidencing such excess number of Depositary
Shares.
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REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems shares of Preferred Stock held by the Preferred
Stock Depositary, the Preferred Stock Depositary will redeem, as of the same
redemption date, the number of Depositary Shares representing shares of the
Preferred Stock so redeemed, provided the Company shall have paid in full to
the Preferred Stock Depositary the redemption price of the Preferred Stock to
be redeemed plus an amount equal to any accrued and unpaid dividends thereon
to the date fixed for redemption. The redemption price per Depositary Share
will be equal to the corresponding proportion of the redemption price and any
other amounts per share payable with respect to the Preferred Stock. If fewer
than all the Depositary Shares are to be redeemed, the Depositary Shares to be
redeemed will be selected pro rata (as nearly as may be practicable without
creating fractional Depositary Shares) or by any other equitable method
determined by the Company.
From and after the date fixed for redemption, all dividends in respect of
the shares of Preferred Stock so called for redemption will cease to accrue,
the Depositary Shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the Depositary Receipts
evidencing the Depositary Shares so called for redemption will cease, except
the right to receive any moneys payable upon such redemption and any money or
other property to which the holders of such Depositary Receipts were entitled
upon such redemption and surrender thereof to the Preferred Stock Depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the Preferred
Stock are entitled to vote, the Preferred Stock Depositary will mail the
information contained in such notice of meeting to the record holders of the
Depositary Receipts evidencing the Depositary Shares which represent such
Preferred Stock. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the
record date for the Preferred Stock) will be entitled to instruct the
Preferred Stock Depositary as to the exercise of the voting rights pertaining
to the amount of Preferred Stock represented by such holder's Depositary
Shares. The Preferred Stock Depositary will vote the amount of Preferred Stock
represented by such Depositary Shares in accordance with such instructions,
and the Company will agree to take all reasonable action which may be deemed
necessary by the Preferred Stock Depositary in order to enable the Preferred
Stock Depositary to do so. The Preferred Stock Depositary will abstain from
voting the amount of Preferred Stock represented by such Depositary Shares to
the extent it does not receive specific instructions from the holders of
Depositary Receipts evidencing such Depositary Shares. The Preferred Stock
Depositary shall not be responsible for any failure to carry out any
instruction to vote, or for the manner or effect of any such vote made, as
long as such action or non-action is in good faith and does not result from
negligence or willful misconduct of the Preferred Stock Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each Depositary Receipt will
be entitled to the fraction of the liquidation preference accorded each share
of Preferred Stock represented by the Depositary Shares evidenced by such
Depositary Receipt, as set forth in the applicable Prospectus Supplement.
CONVERSION OF PREFERRED STOCK
The Depositary Shares, as such, are not convertible into Common Stock or any
other securities or property of the Company. Nevertheless, if so specified in
the applicable Prospectus Supplement relating to an offering of Depositary
Shares, the Depositary Receipts may be surrendered by holders thereof to the
Preferred Stock Depositary with written instructions to the Preferred Stock
Depositary to instruct the Company to cause conversion of the Preferred Stock
represented by the Depositary Shares evidenced by such Depositary Receipts
into whole shares of Common Stock, other shares of Preferred Stock of the
Company or other shares of stock, and the Company has agreed that upon receipt
of such instructions and any amounts payable in respect thereof, it will cause
the conversion thereof utilizing the same procedures as those provided for
delivery of Preferred
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Stock to effect such conversion. If the Depositary Shares evidenced by a
Depositary Receipt are to be converted in part only, a new Depositary Receipt
or Receipts will be issued for any Depositary Shares not to be converted. No
fractional shares of Common Stock will be issued upon conversion, and if such
conversion would result in a fractional share being issued, an amount will be
paid in cash by the Company equal to the value of the fractional interest
based upon the closing price of the Common Stock on the last business day
prior to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares which
represent the Preferred Stock and any provision of the Deposit Agreement may
at any time be amended by agreement between the Company and the Preferred
Stock Depositary. However, any amendment that materially and adversely alters
the rights of the holders of Depositary Receipts or that would be materially
and adversely inconsistent with the rights granted to the holders of the
related Preferred Stock will not be effective unless such amendment has been
approved by the existing holders of at least 66% of the Depositary Shares
evidenced by the Depositary Receipts then outstanding. No amendment shall
impair the right, subject to certain exceptions in the Depositary Agreement,
of any holder of Depositary Receipts to surrender any Depositary Receipt with
instructions to deliver to the holder the related Preferred Stock and all
money and other property, if any, represented thereby, except in order to
comply with law. Every holder of an outstanding Depositary Receipt at the time
any such amendment becomes effective shall be deemed, by continuing to hold
such Receipt, to consent and agree to such amendment and to be bound by the
Deposit Agreement as amended thereby.
The Deposit Agreement may be terminated by the Company upon not less than 30
days prior written notice to the Preferred Stock Depositary if a majority of
each series of Preferred Stock affected by such termination consents to such
termination, whereupon the Preferred Stock Depositary shall deliver or make
available to each holder of Depositary Receipts, upon surrender of the
Depositary Receipts held by such holder, such number of whole or fractional
shares of Preferred Stock as are represented by the Depositary Shares
evidenced by such Depositary Receipts together with any other property held by
the Preferred Stock Depositary with respect to such Depositary Receipt. In
addition, the Deposit Agreement will automatically terminate if (i) all
outstanding Depositary Shares shall have been redeemed, (ii) there shall have
been a final distribution in respect of the related Preferred Stock in
connection with any liquidation, dissolution or winding up of the Company and
such distribution shall have been distributed to the holders of Depositary
Receipts evidencing the Depositary Shares representing such Preferred Stock or
(iii) each share of the related Preferred Stock shall have been converted into
securities of the Company not so represented by Depositary Shares.
CHARGES OF PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Stock Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay the fees and expenses of the
Preferred Stock Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
RESIGNATION AND REMOVAL OF DEPOSITORY
The Preferred Stock Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time
remove the Preferred Stock Depositary, any such resignation or removal to take
effect upon the appointment of a successor Preferred Stock Depositary. A
successor Preferred Stock Depositary must be appointed within 60 days after
delivery of the notice of resignation or removal and must be a bank or trust
company having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000.
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MISCELLANEOUS
The Preferred Stock Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Stock Depositary with respect to the related Preferred Stock.
Neither the Preferred Stock Depositary nor the Company will be liable if it
is prevented from or delayed in, by law or any circumstances beyond its
control, performing its obligations under the Deposit Agreement. The
obligations of the Company and the Preferred Stock Depositary under the
Deposit Agreement will be limited to performing their duties thereunder in
good faith and without negligence (in the case of any action or inaction in
the voting of Preferred Stock represented by the Depositary Shares), gross
negligence or willful misconduct, and the Company and the Preferred Stock
Depositary will not be obligated to prosecute or defend any legal proceeding
in respect of any Depositary Receipts, Depositary Shares or shares of
Preferred Stock represented thereby unless satisfactory indemnity is
furnished. The Company and the Preferred Stock Depositary may rely on written
advice of counsel or accountants, or information provided by persons
presenting shares of Preferred Stock represented thereby for deposit, holders
of Depositary Receipts or other persons believed in good faith to be competent
to give such information, and on documents believed in good faith to be
genuine and signed by a proper party.
In the event the Preferred Stock Depositary shall receive conflicting
claims, requests or instructions from any holders of Depositary Receipts, on
the one hand, and the Company, on the other hand, the Preferred Stock
Depositary shall be entitled to act on such claims, requests or instructions
received from the Company.
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DESCRIPTION OF WARRANTS
The Company may issue warrants to purchase Debt Securities (the "Debt
Warrants"), Preferred Stock (the "Preferred Stock Warrants"), Depositary
Shares (the "Depositary Shares Warrants") or Common Stock (the "Common Stock
Warrants," collectively the "Warrants"). Warrants may be issued independently
or together with any Offered Securities and may be attached to or separate
from such Offered Securities. The Warrants are to be issued under warrant
agreements (each a "Warrant Agreement") to be entered into between the Company
and a bank or trust company, as warrant agent (the "Warrant Agent"), all as
shall be set forth in the Prospectus Supplement relating to the Warrants being
offered pursuant thereto.
DEBT WARRANTS
The applicable Prospectus Supplement will describe the terms of Debt
Warrants offered thereby, the Warrant Agreement relating to such Debt Warrants
and Debt Warrant certificates representing such Debt Warrants, including the
following:
(i) the title for such Debt Warrants;
(ii) the aggregate number of such Debt Warrants;
(iii) the price or prices at which such Debt Warrants will be issued;
(iv) the designation, aggregate principal amount and terms of the Debt
Securities purchasable upon exercise of such Debt Warrants, and the
procedures and conditions relating to the exercise of such Debt Warrants;
(v) the designation and terms of any related Debt Securities with which
such Debt Warrants are issued, and the number of such Debt Warrants issued
with each such security;
(vi) the date, if any, on and after which such Debt Warrants and the
related Debt Securities will be separately transferable;
(vii) the principal amount of Debt Securities purchasable upon exercise
of each Debt Warrant, and the price at which such principal amount of Debt
Securities may be purchased upon such exercise;
(viii) the date on which such right shall expire;
(ix) the maximum or minimum number of such Debt Warrants which may be
exercised at any time;
(x) a discussion of the material United States federal income tax
considerations applicable to the exercise of such Debt Warrants; and
(xi) any other terms of such Debt Warrants and terms, procedures and
limitations relating to the exercise of such Debt Warrants.
Debt Warrant certificates will be exchangeable for new Debt Warrant
certificates of different denominations, and Debt Warrants may be exercised at
the corporate trust office of the Warrant Agent or any other office indicated
in the applicable Prospectus Supplement. Prior to the exercise of their Debt
Warrants, holders of Debt Warrants will not have any of the rights of holders
of the securities purchasable upon such exercise and will not be entitled to
payments of principal of (or premium, if any) or interest, if any, on the
securities purchasable upon such exercise.
OTHER WARRANTS
The applicable Prospectus Supplement will describe the following terms of
Preferred Stock Warrants, the Depositary Share Warrants or Common Stock
Warrants in respect of which this Prospectus is being delivered:
(i) the title of such Warrants;
(ii) the securities for which such Warrants are exercisable;
(iii) the price or prices at which such Warrants will be issued;
30
<PAGE>
(iv) the number of such Warrants issued with each share of Preferred
Stock or Common Stock;
(v) any provisions for adjustment of the number or amount of shares of
Preferred Stock or Common Stock receivable upon exercise of such Warrants
or the exercise price of such Warrants;
(vi) if applicable, the date on and after which such Warrants and the
related Preferred Stock or Common Stock will be separately transferable;
(vii) if applicable, a discussion of the material United States federal
income tax considerations applicable to the exercise of such Warrants;
(viii) any other terms of such Warrants, including terms, procedures and
limitations relating to the exchange and exercise of such Warrants;
(ix) the date on which the right to exercise such Warrants shall
commence, and the date on which such right shall expire; and
(x) the maximum or minimum number of such Warrants which may be exercised
at any time.
EXERCISE OF WARRANTS
Each Warrant will entitle the holder of Warrants to purchase for cash such
principal amount of Debt Securities or shares of Preferred Stock, Common Stock
or Depositary Shares at such exercise price as shall in each case be set forth
in, or be determinable as set forth in, the Prospectus Supplement relating to
the Warrants offered thereby. Warrants may be exercised at any time up to the
close of business on the expiration date set forth in the Prospectus
Supplement relating to the Warrants offered thereby. After the close of
business on the expiration date, unexercised Warrants will become void.
Warrants may be exercised as set forth in the Prospectus Supplement relating
to the Warrants offered thereby. Upon receipt of payment and the Warrant
certificate properly completed and duly executed at the corporate trust office
of the Warrant Agent or any other office indicated in the Prospectus
Supplement, the Company will, as soon as practicable, forward the Debt
Securities or shares of Preferred Stock or Common Stock purchasable upon such
exercise. If less than all of the Warrants represented by such Warrant
certificate are exercised, a new Warrant certificate will be issued for the
remaining Warrants.
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<PAGE>
DESCRIPTION OF SUBSCRIPTION RIGHTS
The Company may issue Subscription Rights to purchase (i) Common Stock (the
"Common Stock Rights"), (ii) Preferred Stock (the "Preferred Stock Rights"),
(iii) Depositary Shares (the "Depositary Share Rights") or (iv) Warrants to
purchase Preferred Stock or Common Stock (the "Warrant Rights" and,
collectively with the Common Stock Rights, Preferred Stock Rights and the
Depository Share Rights, the "Subscription Rights"). Subscription Rights may
be issued independently or together with any other Offered Security and may or
may not be transferable by the purchaser receiving the Subscription Rights. In
connection with any Subscription Rights offering to the Company's
shareholders, the Company may enter into a standby underwriting arrangement
with one or more underwriters pursuant to which such underwriter will purchase
any Offered Securities remaining unsubscribed for after such Subscription
Rights offering. In connection with a Subscription Rights offering to the
Company's shareholders, certificates evidencing the Subscription Rights and a
Prospectus Supplement will be distributed to the Company's shareholders on the
record date for receiving Subscription Rights in such Subscription Rights
offering set by the Company.
The applicable Prospectus Supplement will describe the following terms of
Subscription Rights in respect of which this Prospectus is being delivered:
(i) the title of such Subscription Rights;
(ii) the securities for which such Subscription Rights are exercisable;
(iii) the exercise price for such Subscription Rights;
(iv) the number of such Subscription Rights issued to each shareholder;
(v) the extent to which such Subscription Rights are transferable;
(vi) if applicable, a discussion of the material United States federal
income tax considerations applicable to the issuance or exercise of such
Subscription Rights;
(vii) any other terms of such Subscription Rights, including terms,
procedures and limitations relating to the exchange and exercise of such
Subscription Rights;
(viii) the date on which the right to exercise such Subscription Rights
shall commence, and the date on which such right shall expire.
(ix) the extent to which such Subscription Rights includes an over-
subscription privilege with respect to unsubscribed securities.
(x) if applicable, the material terms of any standby underwriting
arrangement entered into by the Company in connection with the Rights
offering.
EXERCISE OF SUBSCRIPTION RIGHTS
Each Subscription Right will entitle the holder of Subscription Rights to
purchase for cash such principal amount of shares of Preferred Stock,
Depository Shares, Common Stock, Preferred Stock Warrants, Depository Share
Warrants, Common Stock Warrants or any combination thereof, at such exercise
price as shall in each case be set forth in, or be determinable as set forth
in, the Prospectus Supplement relating to the Subscription Rights offered
thereby. Subscription Rights may be exercised at any time up to the close of
business on the expiration date for such Subscription Rights set forth in the
Prospectus Supplement. After the close of business on the expiration date, all
unexercised Subscription Rights will become void.
Subscription Rights may be exercised as set forth in the Prospectus
Supplement relating to the Subscription Rights offered thereby. Upon receipt
of payment and the Subscription Rights certificate properly completed and duly
executed at the corporate trust office of the Rights Agent or any other office
indicated in the Prospectus Supplement, the Company will, as soon as
practicable, forward the shares of Preferred Stock or Common Stock, Depository
Shares, Common Stock Warrants or Preferred Stock Warrants purchasable upon
such exercise. In the event that not all of the Subscription Rights issued in
any Rights offering are exercised, the Company may determine to offer any
unsubscribed Offered Securities directly to persons other than shareholders,
to or through agents, underwriters or dealers or through a combination of such
methods, (including pursuant to standby underwriting arrangements), as set
forth in the applicable Prospectus Supplement.
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<PAGE>
PLAN OF DISTRIBUTION
The Company and the Co-Registrants may sell the Offered Securities being
offered hereby: (i) directly to purchasers; (ii) through agents; (iii) through
dealers; (iv) through underwriters; (v) directly to the Company's shareholders
(in the case of Subscription Rights); or (vi) through a combination of any
such methods of sale.
The distribution of the Offered Securities may be effected from time to time
in one or more transactions either: (i) at a fixed price or prices, which may
be changed; (ii) at market prices prevailing at the time of sale; (iii) at
prices related to such prevailing market prices; or (iv) at negotiated prices.
Offers to purchase Offered Securities may be solicited directly by the
Company and/or the Co-Registrants. Offers to purchase Offered Securities may
also be solicited by agents designated by the Company and/or the Co-
Registrants from time to time. Any such agent, who may be deemed to be an
"underwriter" as that term is defined in the Securities Act, involved in the
offer or sale of the Offered Securities in respect of which this Prospectus is
delivered will be named, and any commissions payable by the Company and Co-
Registrants to such agent will be set forth in the Prospectus Supplement.
If a dealer is utilized in the sale of the Offered Securities in respect of
which this Prospectus is delivered, the Company and/or the Co-Registrants will
sell such Offered Securities to the dealer, as principal. The dealer, who may
be deemed to be an "underwriter" as that term is defined in the Securities
Act, may then resell such Offered Securities to the public at varying prices
to be determined by such dealer at the time of resale.
If an underwriter is, or underwriters are, utilized in the sale, the Company
and/or the Co-Registrants will execute an underwriting agreement with such
underwriters at the time of sale to them and the names of the underwriters
will be set forth in the Prospectus Supplement, which will be used by the
underwriter to make resales of the Offered Securities in respect of which this
Prospectus is delivered to the public. In connection with the sale of Offered
Securities, such underwriter may be deemed to have received compensation from
the Company and/or the Co-Registrants in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of Offered
Securities for whom they may act as agents. Underwriters may also sell Offered
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agents. Any
underwriting compensation paid by the Company to underwriters in connection
with the offering of Offered Securities, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set
forth in the applicable Prospectus Supplement.
Pursuant to any standby underwriting agreement entered into in connection
with a Subscription Rights offering to the Company's shareholders, persons
acting as standby underwriters may receive a commitment fee for all securities
underlying the Subscription Rights that the underwriter commits to purchase on
a standby basis. Additionally, prior to the expiration date with respect to
any Subscription Rights, any standby underwriters in a Subscription Rights
offering to the Company's shareholders may offer such securities on a when-
issued basis, including securities to be acquired through the purchase and
exercise of Subscription Rights, at prices set from time to time by the
standby underwriters. After the expiration date with respect to such
Subscription Rights, the underwriters may offer securities of the type
underlying the Subscription Rights, whether acquired pursuant to a standby
underwriting agreement, the exercise of the Subscription Rights or the
purchase of such securities in the market, to the public at a price or prices
to be determined by the underwriters. The standby underwriters may thus
realize profits or losses independent of the underwriting discounts or
commissions paid by the Company. In the event that the Company does not enter
into a standby underwriting arrangement in connection with a Subscription
Rights offering to the Company's shareholders, the Company may elect to retain
a dealer-manager to manage such a Subscription Rights offering for the
Company. Any such dealer-manager may offer securities of the type underlying
the Subscription Rights acquired or to be acquired pursuant to the purchase
and exercise of Subscription Rights and may thus realize profits or losses
independent of any dealer-manager fee paid by the Company.
33
<PAGE>
Underwriters, dealers, agents and other persons may be entitled, under
agreements that may be entered into with the Company and/or the Co-
Registrants, to indemnification by the Company and/or the Co-Registrants
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments which they may be required to
make in respect thereof. Underwriters and agents may engage in transactions
with, or perform services for, the Company and/or the Co-Registrants in the
ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company and/or
the Co-Registrants will authorize underwriters, dealers or other persons to
solicit offers by certain institutions to purchase Offered Securities pursuant
to contracts providing for payment and delivery on a future date or dates.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others. The obligations of any
purchasers under any such contract will not be subject to any conditions
except that (i) the purchase of the Offered Securities shall not at the time
of delivery be prohibited under the laws of the jurisdiction to which such
purchaser is subject, and (ii) if the Offered Securities are also being sold
to underwriters, the Company and/or the Co-Registrants shall have sold to such
underwriters the Offered Securities not sold for delayed delivery. The
underwriters, dealers and such other persons will not have any responsibility
in respect of the validity or performance of such contracts. The Prospectus
Supplement relating to such contracts will set forth the price to be paid for
Offered Securities pursuant to such Contracts, the commission payable for
solicitation of such contracts and the date or dates in the future for
delivery of Offered Securities pursuant to such contracts.
Any underwriter may engage in stabilizing and syndicate covering
transactions in accordance with Rule 104 under the Exchange Act. Rule 104
permits stabilizing bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. The underwriters may over-
allot shares of the Common Stock in connection with an offering of Common
Stock, thereby creating a short position in the underwriters' account.
Syndicate covering transactions involve purchases of the Debt Securities in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing and syndicate covering transactions may
cause the price of the Debt Securities to be higher than it would otherwise be
in the absence of such transactions. These transactions, if commenced, may be
discontinued at any time.
The anticipated date of delivery of Offered Securities will be set forth in
the applicable Prospectus Supplement relating to each offer.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the Company
and/or the Co-Registrants by Christopher G. Townsend, Esq., Senior Vice
President and General Counsel of the Company or by other counsel to the
Company and/or the Co-Registrants. If the Offered Securities are distributed
in an underwritten offering or through agents, certain legal matters may be
passed upon for any agents or underwriters by counsel for such agents or
underwriters identified in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements and schedules of Host Marriott
Corporation and HMH Properties, Inc. incorporated by reference in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
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<PAGE>
GEOGRAPHICALLY DIVERSE PROPERTIES
THE RITZ-CARLTON, MARINA DEL REY WAS THE 254-ROOM WASHINGTON DULLES
ACQUIRED BY THE COMPANY IN EARLY MARRIOTT SUITES WAS ACQUIRED IN
1997 AND FEATURES 306 ROOMS. 1996.
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURI-
TIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN
ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOM-
PANYING PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Supplement Summary........................................... S-4
Risk Factors............................................................ S-18
Use of Proceeds......................................................... S-22
Capitalization.......................................................... S-23
Pro Forma Condensed Combined Consolidated Financial Data of the
Company................................................................ S-24
Selected Historical Financial Data...................................... S-30
Management's Discussion and Analysis of Financial Condition and Results
of Operations ......................................................... S-31
Business and Properties................................................. S-40
The REIT Conversion..................................................... S-49
The Offers to Purchase and Consent Solicitations........................ S-74
Description of Certain Indebtedness..................................... S-75
Relationship with Host Marriott......................................... S-77
Relationship with Marriott International................................ S-77
Description of Senior Notes............................................. S-80
Underwriting............................................................ S-113
Legal Matters........................................................... S-114
Experts................................................................. S-114
Index to Financial Statements........................................... F-1
PROSPECTUS
Available Information................................................... 2
Information Incorporated by Reference................................... 3
Disclosure Regarding Forward-Looking Statements......................... 3
The Company............................................................. 5
Use of Proceeds......................................................... 7
Risk Factors............................................................ 7
ERISA Matters........................................................... 7
Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends.............................................................. 8
Ratios of Earnings to Fixed Charges..................................... 8
Description of Debt Securities.......................................... 9
Description of Capital Stock............................................ 17
Description of Depositary Shares........................................ 26
Description of Warrants................................................. 30
Description of Subscription Rights...................................... 32
Plan of Distribution.................................................... 33
Legal Matters........................................................... 34
Experts................................................................. 34
</TABLE>
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HMH PROPERTIES, INC.
$400,000,000
% SERIES A SENIOR NOTES DUE 2005
$1,000,000,000
% SERIES B SENIOR NOTES DUE 2008
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PROSPECTUS
SUPPLEMENT
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Joint Book-Running Managers
DONALDSON, LUFKIN & JENRETTE
BT ALEX. BROWN
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BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
JULY , 1998
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