Item 3. Legal Proceedings
The Company is involved in various lawsuits and claims arising in the normal course of business. In the opinion of management of the Company, although the outcomes of these suits and claims are uncertain, in the aggregate they should not have a material adverse effect on the Company's business, financial condition and results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Company's Common Equity and Related Stockholder Matters
The Company's common stock is listed on the New York Stock Exchange and is traded under the symbol "CLJ". Following the Distribution, the Company become a publicly traded company. The following table sets forth, for the fiscal periods indicated, the high and low sales prices per share of the common stock as reported on the New York Stock Exchange Composite Tape. The Company currently intends to retain future earnings, if any, for use in its business and does not anticipate paying regular cash dividends on the common stock. Furthermore, the Company is prohibited under its line of credit from paying dividends on its common stock. As of March 1, 2001, there were approximately 27,039 holders of common stock.
Item 6.
Item 6. Selected Financial Data
The following table presents selected historical consolidated financial statement data derived from the Company's consolidated financial statements for the fiscal years ended December 29, 2000, December 31, 1999 and January 1, 1999 and for the period from June 21, 1997 through January 2, 1998. For fiscal year 1998 and prior periods, the historical data reflects only operations of the senior living communities. Since the leases and subleases of hotels from Host Marriott did not commence until January 1, 1999, there is no historical operating financial data for the leased full-service hotels and subleased limited-service hotels reflected in the results for fiscal year 1998 and prior periods. However, the full-service hotel leases were sold to Host Marriott in January 2001 and therefore the following financial data may not be indicative of the Company's future results of operations. The financial statement data for periods prior to June 21, 1997 is the data for the predecessor business of the Company which was owned by Marriott International for the period from April 1, 1996 through June 20, 1997. The following data should be read in conjunction with the Company's consolidated financial statements and the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information included elsewhere herein.
- -------- (1) Net income for the fiscal year 2000 includes $253,000 from an extraordinary item on the early extinguishment of debt. (2) For fiscal year 1998 and the period from June 21, 1997 through January 2, 1998, the weighted average shares outstanding used to calculate earnings per share is based on Host Marriott's weighted average shares outstanding adjusted for the one-for-ten distribution ratio. (3) Debt excludes $89,650,000, $89,650,000 and $95,114,000 of hotel working capital notes payable to Host Marriott as of December 29, 2000, December 31, 1999 and January 1, 1999, respectively.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Historical 2000 Compared to Historical 1999
Revenues
Hotel revenues represent property-level revenues from owned and leased hotels as well as managed hotels operated under lease agreements and management fees from managed hotels operated under management agreements. Senior living revenues represent property-level revenues. Overall revenues increased by $370 million, or 8.3%, to $4.8 billion for 2000 from $4.4 billion for 1999. The increase in revenues is due primarily to the leased hotel full- service hotel REVPAR growth, the incremental revenues from the acquisition of a controlling interest in a portfolio of Residence Inns in the second quarter of 1999, the acquisition of a hotel management portfolio in the first quarter of 2000, and the addition of two limited-service hotel lease portfolios in the second and third quarters of 2000.
Revenues by segment were as follows:
Full-Service Hotel Leasing. Leased full-service hotel revenues increased $255 million, or 6.6%, to $4.1 billion in 2000. Improved results for the Company's leased full-service hotels were driven by increases in comparable REVPAR of 6.0% for 2000. Comparable average room rates increased 6.2%, while comparable average occupancy remained relatively unchanged.
Limited-Service Hotel Leasing. Leased limited-service revenues increased $56.4 million, or 19%, to $359 million in 2000. The significant increase in limited-service hotel revenues is due primarily to the incremental revenues from the addition of two limited-service hotel lease portfolios in the second and third quarters of 2000. Excluding the two new limited-service hotel lease portfolios entered into in 2000, comparable limited-service hotel lease revenue increased $15.2 million, or 5.0%. REVPAR for the Company's subleased Courtyard by Marriott hotel properties increased 5.8% for 2000. The increases in REVPAR were driven by an increase in average room rates of 6.3%, partially offset by a slight decrease in average occupancy. REVPAR for the Company's subleased Residence Inn properties increased 5.1%. Average room rates increased 4.1% and average occupancy increased almost one percentage point.
Hotel Ownership. Revenue for the Company's owned hotels increased $7.6 million, or 24%, to $39.8 million in 2000. The significant increase in revenues is primarily due to incremental revenues in 2000 from the acquisition of the portfolio of Residence inns in the second quarter of 1999, partially offset by the sale of one of the Residence Inns in the first quarter of 2000. Comparable revenues for the Company's owned hotels, including periods prior to the Company's ownership, increased 3.6% in 2000. Comparable REVPAR for the Company's owned Residence Inns increased 3.8% as a result of an increase in the comparable average room rate of 4.1% despite a slight decrease in comparable average occupancy.
Hotel Management. The Company's managed hotels contributed $36.1 million of revenues in 2000. REVPAR, including periods prior to the Company's management, for the Company's managed full-service hotels was $74.42 due to an average room rate of $111.57 and an average occupancy of 66.7%. REVPAR for the
managed limited-service hotels was $56.66 as a result of an average room rate of $78.19 and an average occupancy of 72.5%.
Senior Living. Senior living community revenues increased by $15.4 million, or 6.2%, to $262 million in 2000. The revenue growth is primarily due to the stabilization of expansion units added in 1999 and the growth in the average daily rate. The average daily rate increased 4.1%, while average occupancy increased almost two percentage points. The improvement in overall average occupancy is directly attributable to the fill-up of the expansions added in 1999. Average occupancy for 2000 on a comparable basis, excluding communities which added expansion units during 1999, increased almost one percentage point over the prior year.
Operating Profit
The Company's operating profit increased $12.5 million, or 11%, to $123 million for 2000. Operating profit by segment was as follows:
Full-Service Hotel Leasing. Operating profit for the Company's leased full- service hotels decreased $3.7 million, or 6.6% to $52.9 million. Operating profit was impacted by the high full-service REVPAR growth of 6.0% which pressured the Company's full-service hotel leasing operating profit as the Company's percentage lease expense increased significantly over the prior year. In addition, operating profit was negatively impacted by utility and wage cost pressures.
Limited-Service Hotel Leasing. Operating profit for the Company's leased limited-service hotels increased $2.6 million, or 30%, to $11.3 million. Excluding the two new limited-service hotel lease portfolios entered into in 2000, comparable limited-service hotel lease operating profit increased $930,000, or 11%.
Hotel Ownership. Operating profit for the Company's owned hotels increased $2.3 million, or 25%, to $11.8 million. The significant increase in operating profit is primarily due to the incremental operating profit in 2000 from the acquisition of the portfolio of Residence Inns in the second quarter of 1999, partially offset by the sale of one of the Residence Inns in the first quarter of 2000.
Hotel Management. The Company's managed hotels contributed $675,000 of operating profit for 2000 since their acquisition during the first quarter of 2000. The operating results for the Company's hotel management business were impacted by the amortization expense of the acquisition cost of the management business and the costs incurred in establishing the infrastructure of the hotel management business. The Company recorded amortization expense of $1.6 million in 2000 representing the amortization of the acquisition cost of the hotel management contracts and leases.
Senior Living. Senior living community operating profit increased $5.2 million, or 13%, to $45.3 million in 2000. The significant increase in operating profit is primarily due to the increase in the average daily rate, as well as the fill-up of expansions opened in 1999. Operating profit was also positively impacted by cost controls implemented by the manager resulting in a one percentage point increase in the property-level profit margins.
Other. Other operating profit in 1999 includes a $3.5 million loss on impairment from one of its senior living communities.
Corporate Expenses
Corporate expenses increased 1.9% to $16.8 million for 2000.
Interest Expense
Interest expense increased $5.6 million to $33.3 million in 2000. The increase in interest expense is primarily attributable to the additional interest expense on the mortgage debt assumed from the acquisition of a controlling interest in a portfolio of Residence Inns, incremental interest expense on the Company's line of credit, and interest expense on the incremental debt from the refinancing of the mortgage debt on certain of the senior living communities. Interest expense includes $4.6 million and $4.9 million in 2000 and 1999, respectively, related to interest on the hotel working capital notes payable to Host Marriott.
Interest Income
Interest income increased $2.0 million to $4.2 million for 2000.
Income Taxes
The Company's effective income tax rate for 2000 was 41.5% reflecting the non-deductibility of certain operating costs and expenses primarily from the Company's leased full-service hotels as well as the impact of higher income tax rates for leased full-service hotels located in Canada.
Income Before Extraordinary Item
Income before extraordinary item for 2000 was $44.5 million, or $2.67 per diluted share, compared to $39.9 million, or $1.91 per diluted share, for 1999. The 40% increase in diluted earnings before extraordinary item per share was due to the growth in operating profit discussed above as well as a reduction of the Company's common stock outstanding due to the stock repurchases during 1999 and 2000. Excluding the impact of the stock repurchase program, the 2000 diluted earnings before extraordinary item per share would have increased 19% over the prior year.
Extraordinary Gain
The Company recorded an extraordinary gain on the early extinguishment of debt of $253,000, net of taxes, in 2000 for debt premiums related to the prepayment of certain senior living mortgage debt.
Net Income
Net income increased $4.9 million, or 12%, to $44.8 million in 2000. Diluted earnings per share increased 41% to $2.69 per diluted share.
Historical 1999 Compared to Historical 1998
Revenues
Revenues primarily represent property-level revenues from owned, leased and subleased hotels and owned senior living communities and asset management fees. The Company's total revenues were over $4.4 billion in 1999 and $241 million in 1998.
Revenues by segment were as follows:
Leased Full-Service Hotels. Leased full-service hotel revenues for 1999 were nearly $3.9 billion. The Company's leased full-service hotels reported an average daily rate of $149.55 and an average occupancy of 77.7% resulting in REVPAR of $116.22 in 1999.
Limited-Service Hotel Leasing. Leased limited-service hotel revenues were $303 million in 1999. REVPAR for the Company's subleased Courtyard hotels was $75.58 in 1999 as a result of an average daily rate of $93.97 and an average occupancy of 80.4%. In 1999, the Company's subleased Residence Inn hotels had an average daily rate of $100.96 and an average occupancy of 83.0% resulting in REVPAR of $83.79.
Hotel Ownership. Since their acquisition in the second quarter of 1999, the revenue for the Company's owned Residence Inn hotels was $32.2 million as a result of REVPAR of $84.63 due to an average daily rate of $99.40 and an average occupancy of 85.1%.
Senior Living. Senior living community revenues increased by $5.2 million, or 2.2%, to $246 million in 1999. The average daily rate increased 4.7% to $92.61, while average occupancy decreased two and one-half percentage points to 89.7% due mostly to the impact of the fill-up period for the expansions added in late 1998 and 1999 and additional supply in certain markets. On a comparable basis (excluding communities which added units during 1998 or 1999), the average occupancy decreased by over one percentage point to 90.7% in 1999. The revenue growth is due to the addition of 317 expansion units in 1998 and 1999 and the growth in the average daily rate. These factors driving revenue growth were partially offset by a significant decrease in ancillary revenues due to a reduction in therapy services in response to a change in the Medicare billing process.
Operating Profit
The Company's total operating profit for 1999 was $111 million compared to $37.2 million for 1998.
Operating profit by segment was as follows:
Full-Service Hotel Leasing. Operating profit for the leased full-service hotels was $56.7 million in 1999.
Limited-Service Hotel Leasing. Operating for the subleased limited-service hotels was $8.7 million in 1999.
Hotel Ownership. Operating profit for the owned hotels since their acquisition in the second quarter of 1999 was $9.5 million.
Senior Living. Senior living community operating profit increased $2.9 million, or 7.9%, to $40.2 million in 1999. The increase in operating profit is primarily due to the increases in revenues and improved operating margins of the communities, partially offset by payment of central administrative service fees to Marriott International in 1999, which were waived through the second quarter of 1998. Excluding the impact of these central administrative service fees, operating profit increased 11.3% in 1999. The Forum at Brookside, The Forum at Memorial Woods and The Remington Club senior living communities performed particularly well. The Company's independent living components posted strong results while the assisted living and healthcare components did not perform as well due mostly to the over-supply in the assisted living market.
Other. Other operating profit in 1999 includes a $3.5 million loss on impairment from one of its senior living communities.
Minority Interest Expense
Minority interest expense was $1.3 million in 1999, which is attributable to the minority interest in the Company's owned hotels.
Corporate Expenses
Corporate expenses were $16.5 million in 1999 and $6.4 million in 1998.
Interest Expense
Interest expense was $27.7 million in 1999 and $22.9 million in 1998. Interest expense in 1999 includes $4.9 million related to interest on the hotel working capital notes payable to Host Marriott.
Interest Income
Interest income was $2.3 million in 1999 and $2.0 million in 1998.
Net Income
Net income in 1999 was $39.9 million, or $1.91 per diluted share, compared to $5.9 million, or $.27 per diluted share in 1998.
Lack of Comparability Following the Distribution
Since the Company entered into hotel lease and sublease agreements subsequent to the Distribution, the Company did not believe that the historical results of operations for 1998 were comparable to its results of operations following the Distribution. Accordingly, a comparison of the Company's historical results of operations for fiscal year 1999 compared to the pro forma results of operations for fiscal year 1998 have been provided below.
Pro Forma Results of Operations
The pro forma discussion below was prepared as if the Distribution and related transactions, including the hotel leases and subleases, occurred at the beginning of fiscal year 1998. See the consolidated financial statements included elsewhere herein for a discussion of the Distribution and related transactions.
The unaudited pro forma condensed consolidated statement of operations of the Company reflects the following transactions for 1998 as if such transactions had been completed at the beginning of fiscal year 1998:
. 1998 acquisition of one senior living community;
. 1998 retirement of $26 million of debt through a capital contribution from Host Marriott;
. 1998 repayment and forgiveness of $92 million of unsecured debt and a $15 million intercompany note treated as a capital contribution by Host Marriott;
. 1998 acquisition of minority interests in certain consolidated subsidiaries of the Company through contributions from Host Marriott;
. 1998 spin-off of the Company by Host Marriott and the concurrent lease of 121 full-service hotels and sublease of 71 limited-service hotels from Host Marriott;
. The asset management fee to be charged to Host Marriott; and
. Adjustment to corporate expenses as if the Company were operated on a stand-alone basis.
In 1998, the Company acquired one senior living community for $21 million. Also, during 1998, Host Marriott prepaid approximately $26 million of the Company's mortgage debt and repaid $92 million of unsecured debt to Marriott International. The prepayment was recorded as a capital contribution to the Company and the $92 million was repaid in exchange for a $92 million note due to Host Marriott with similar terms. The $92 million note and an additional $15 million intercompany note were forgiven by Host Marriott and treated as a capital contribution in 1998.
These presentations do not purport to represent what the Company's results of operations would actually have been if the transactions described above had in fact occurred on such date or at the beginning of such period or to project the Company's results of operations for any future date or period.
The unaudited pro forma financial statement is based upon certain assumptions that the Company believes are reasonable under the circumstances and should be read in conjunction with the consolidated financial statements and notes thereto of the Company included elsewhere herein.
The following table presents the results of operations for fiscal year 1999 on a historical basis and the results of operations for fiscal year 1998 on the pro forma basis discussed above:
Historical 1999 Compared to Pro Forma 1998
Revenues
Revenues primarily represent property-level revenues from owned, leased and subleased hotels and owned senior living communities and asset management fees. Revenues increased by $148 million, or 3.4%, to over $4.4 billion for 1999 from $4.3 billion in 1998.
Full-Service Hotel Leasing. Leased full-service hotel revenues increased $103 million, or 2.7%, to almost $3.9 billion in 1999. Improved results for the Company's leased full-service hotels were driven by increases in comparable REVPAR of 4.1% to $115.94 in 1999. Comparable average room rates for the full-service properties increased 4.0%, while average occupancy increased slightly to 77.7% in 1999.
Limited-Service Hotel Leasing. Leased limited-service hotel revenues increased $6.5 million, or 2.2%, to $303 million in 1999. REVPAR for the Company's subleased Courtyard by Marriott hotel properties increased 3.5% to $75.58 in 1999. The growth in REVPAR is due to an increase in average room rates of 3.6%, although average occupancy decreased slightly to 80.4% in 1999. REVPAR for the Company's subleased Residence Inn properties decreased 2.4% to $83.79 in 1999, reflecting the additional supply that has entered into the market.
The decline in REVPAR is due to a decrease in average occupancy of slightly over one percentage point to 83.0% and a decrease in the average room rates of 1.2%.
Hotel Ownership. The owned hotels contributed $32.2 million of revenues since their acquisition in the second quarter of 1999. REVPAR for the Company's owned Residence Inn properties was $84.63 as a result of an average room rate of $99.40 and an average occupancy of 85.1%.
Senior Living. Senior living community revenues increased by $5.1 million, or 2.1%, to $246 million in 1999. The average daily rate increased 4.7% to $92.61, while average occupancy decreased two and one-half percentage points to 89.7% due mostly to the impact of the fill-up period for the expansions added in late 1998 and 1999 and additional supply in certain markets. On a comparable basis (excluding communities which added units during 1998 or 1999), the average occupancy decreased by over one percentage point to 90.7% in 1999. The revenue growth is due to the addition of 317 expansion units in 1998 and 1999 and the growth in the average daily rate. These factors driving revenue growth were partially offset by a significant decrease in ancillary revenues due to a reduction in therapy services in response to a change in Medicare reimbursements.
Operating Profit
As a result of the changes in revenues and operating costs and expenses discussed above, the Company's total operating profit increased $28.7 million, or 35%, to $111 million in 1999.
Full-Service Hotel Leasing. Operating profit increased $18.2 million, or 47%, to $56.7 million in 1999. The significant increase in leased full-service hotel operating profit is attributable mostly to cost controls implemented by the managers of our hotel properties. Leased hotels in the New York and Los Angeles markets generally reported significant improvements in operating profit for 1999.
Limited-Service Hotel Leasing. Operating profit increased $2.3 million, or 37%, to $8.7 million in 1999.
Owned Hotels. Hotel operating profit for the Company's owned limited-service hotels was $9.5 million in 1999.
Senior Living. Senior living community operating profit increased $2.9 million, or 7.8%, to $40.2 million in 1999. The increase in operating profit is primarily due to the increases in the revenues and improved operating margins of the communities, partially offset by payment of central administrative service fees to Marriott International in 1999, which were waived through the second quarter of 1998. The Forum at Brookside, Forum at Memorial Woods and The Remington Club senior living communities performed particularly well. The Company's independent living components posted strong results while the assisted living and healthcare components did not perform as well due mostly to the over-supply in the assisted living market.
Other. Operating profit was negatively impacted in 1999 from the $3.5 million loss on impairment from one of the senior living communities. Excluding the impairment loss, total operating profit increased by 39% in 1999.
Minority Interest Expense
Minority interest expense was $1.3 million in 1999, which is attributable to the minority interest in the Company's owned hotels.
Corporate Expenses
Corporate expenses decreased $0.9 million, or 5.2%, to $16.5 million. As a percentage of total revenues, corporate expenses were 0.4% in both 1999 and 1998.
Interest Expense
Interest expense increased $4.8 million to $27.7 million in 1999 due primarily to the interest on mortgage debt assumed in conjunction with the acquisition of a controlling interest in 11 limited-service hotels in the second quarter of 1999 and draws on the Company's line of credit in 1999. Interest expense includes $4.9 million in both 1999 and 1998 related to interest on the hotel working capital notes payable to Host Marriott.
Interest Income
Interest income decreased $0.3 million to $2.3 million in 1999.
Net Income
Net income for 1999 was $39.9 million, or $1.91 per diluted share, compared to $26.2 million, or $1.19 per diluted share, for 1998. The 61% increase in diluted earnings per share in 1999 was due to the strong growth of operating profit as discussed above as well as a reduction of the Company's common stock outstanding due to the stock repurchases during 1999.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash on hand, cash flow from operations and borrowings under its secured, three-year $100 million line of credit (the "Line of Credit"). As of December 29, 2000, the Company had cash and cash equivalents of $35.5 million.
Cash Flows. Cash from operations was $64.5 million in 2000 compared to $104 million in 1999. Comparisons to the prior year are significantly impacted by the timing of the cash flow of the leases with Host Marriott as a result of the inception of the leases at the beginning of fiscal year 1999. In 1999, the lease payable to Host Marriott exceeded the rent receivable from hotel managers by $19.1 million at December 31, 1999, while there were no receivables or payables at January 1, 1999 resulting in a $19.1 increase to cash from operations in 1999. In 2000, the rent receivable from hotel managers exceeded the lease payable by $2.6 million at December 29, 2000, while the lease payable to Host Marriott exceeded the rent receivable from hotel managers by $19.1 million at December 31, 1999 resulting in a $21.7 million net decrease to cash from operations in 2000.
Cash used in investing activities was $64.0 million in 2000 compared to $69.7 million in 1999. The cash used in investing activities for 2000 principally consists of the acquisition of a limited-service hotel, the acquisition of the management businesses of two hotel management companies, funding of lease deposits, expansions for one of its senior living communities and capital expenditures for renewals and replacements for its owned hotels and senior living communities, partially offset by the sale proceeds of one of its owned hotels.
Cash used in financing activities was $1.8 million in 2000 compared to $64.4 million in 1999. The Company's cash used in financing activities for 2000 consists primarily of repurchases of the Company's common stock, net repayments of the Company's line of credit and debt principal repayments, partially offset by the additional debt proceeds from the refinancing of a portfolio of senior living communities.
Investments. On March 29, 1999, the Company acquired a 74% limited partner interest in the Marriott Residence Inn USA Limited Partnership ("Residence Inn USA") from a private investor for $34.4 million in cash and the consolidation of $54.5 million of debt for a total consideration of $89 million. In subsequent separate transactions, the Company acquired an additional 3% limited partner interest in Residence Inn USA in the second quarter of 1999 for $1.6 million in cash and the 5% general partner interest in Residence Inn USA from Host Marriott in the third quarter of 1999 for $2.7 million in cash increasing the Company's ownership to an 82% interest. On March 23, 2001, the Company acquired the remaining 18% limited partnership interest in Residence Inn USA for $11.4 million. As of the date hereof, the Company currently owns 100% of Residence Inn USA. At the date of the initial acquisition, Residence Inn USA owned eleven Residence Inn limited-service
hotels that are managed by Marriott International under a long-term management agreement. In February 2000, the Company sold one of the Residence Inns for a net sales price of $6.2 million.
In 1999, the Company entered into a joint venture ("Portsmouth Hotel Associates LLC" or "PHA") with Stormont Trice Development Corporation ("STDC"), an affiliate of Stormont Trice, to acquire the 249-room Portsmouth Renaissance Hotel and Waterfront Conference Center in Portsmouth, Virginia upon its completion of construction. The hotel and conference center opened in January 2001. The Company owns a majority interest in PHA. PHA entered into a development agreement with STDC to develop the hotel and conference center; in lieu of a development fee for the hotel, STDC received an equity interest in PHA. The total cost of the project was approximately $48 million financed through a $32.7 million grant from the city of Portsmouth and $15.6 million from PHA, consisting of a $12.6 million mortgage loan, a $2 million equity contribution from the Company and a $1 million equity contribution from STDC in the form of a forgiven hotel development fee. PHA leases the hotel and conference center from the city of Portsmouth for a period of 50 years plus four 10-year renewal periods and one nine-year renewal period. The Company manages the hotel and conference center under a long-term management agreement with PHA.
In December 2000, the Company acquired the 205-room Courtyard by Marriott in the Inner Harbor of Baltimore, Maryland for $21 million upon its completion of construction. The Company also manages this hotel.
In 2000, the Company entered into a joint venture to develop and own the Charlotte Downtown Courtyard by Marriott. The Company's total equity contribution is expected to be approximately $2 million for a 50% interest in the joint venture. The hotel is expected to open in August 2001, and the Company will manage the hotel under a long-term management agreement.
In the first quarter of 2001, the Company entered into a joint venture agreement to develop and own the Staybridge Suites by Holiday Inn in Stratford, Connecticut. The Company's total equity contribution is expected to be approximately $3 million for a 51% interest in the joint venture. The hotel is expected to open in October 2001, and the Company will manage the hotel under a long-term management agreement.
Also in the first quarter of 2001, the Company purchased a hotel in downtown Birmingham, Alabama for $3.2 million. The Company will renovate the hotel and convert it into a Courtyard by Marriott. The total cost of the project including the initial purchase price is expected to be approximately $15.6 million. The hotel is expected to reopen in the second quarter of 2002.
In March 2000, the Company purchased the hotel management business of Stormont Trice for $9.7 million plus a contingent purchase price of up to an additional $4.5 million if certain performance criteria are met. Pursuant to the acquisition, the existing management contracts for nine hotels and four conference centers and lease agreements for two hotels were assigned to the Company. The hotels are generally managed under franchise agreements and are operated under the Marriott, Renaissance, Courtyard by Marriott and Residence Inn brand names.
Also, in March 2000, the Company purchased the hotel management business of Durbin for $4.4 million, plus a contingent purchase price of $500,000 if one of the leases is renewed under certain conditions. Pursuant to the acquisition, the existing management contracts for ten hotels and lease agreements for two hotels were assigned to the Company. All of the hotels are managed under franchise agreements and are operated under the Marriott, Hilton, Courtyard by Marriott, Crowne Plaza, Holiday Inn and Ramada brand names.
On June 9, 2000, the Company entered into an agreement with HPT to lease 19 limited-service hotels under long-term lease agreements. HPT acquired the hotels from Marriott International. Marriott International will continue to manage the hotels under long-term management agreements with the Company. The hotels are operated under the Courtyard by Marriott, Residence Inn by Marriott, SpringHill Suites by Marriott and TownePlace Suites by Marriott brand names. As of December 29, 2000, two of the hotels in the portfolio were currently under construction and opened in 2001. Under the terms of the lease agreement, the Company made a
$9.6 million security deposit in 2000 and an additional $6.0 million security deposit for the remaining two hotels in 2001.
On August 18, 2000, the Company entered into an agreement with CNL to lease nine limited-service hotels under long-term lease agreements. CNL acquired the hotels from Marriott International. Marriott International will continue to manage the hotels under long-term management agreements with the Company. The hotels are managed under the Courtyard by Marriott, Residence Inn by Marriott, SpringHill Suites by Marriott and TownePlace Suites by Marriott brand names. As of December 29, 2000, four of the hotels were under construction and opened in 2001. Under the terms of the lease agreement, the Company made a $2.6 million security deposit in 2000 and an additional $2.4 million security deposit for the remaining four hotels in 2001.
On November 13, 2000, the Company entered into an agreement with a subsidiary of Host Marriott for the purchase and sale of the Company's subsidiaries owning the leasehold interests in the full-service hotels leased from Host Marriott. Pursuant to the purchase and sale transaction, the ownership of the Company's subsidiaries owning the full-service hotel leasehold interests would be transferred to a subsidiary of Host Marriott for a total consideration of $205 million in cash. On January 10, 2001, upon the receipt of all required consents, the purchase and sale transaction was completed form $201 million, which reflects the deferral of one of the leases for $4 million. The Company will recognize a pre-tax on the transaction gain of approximately $200 million in the first quarter of 2001, net of transaction costs. The effective date of the transaction was January 1, 2001.
In 1999, the Company opened 241 units at five senior living communities at a cost of approximately $23 million, which was the final phase of a four-year $88 million expansion program that ultimately resulted in the addition of 865 units to 21 of the Company's senior living communities. Payments for one of the senior living expansions that opened in 1999 and other construction holdbacks were made in early 2000.
During 1998, the Company acquired additional limited partnership interests at a cost of $9.6 million in CCC Retirement Partners, LP, a partnership that owns nine senior living communities, which increased the Company's ownership percentage to 93%. In 1999, the Company acquired the remaining 7% limited partnership interests for $6.7 million.
Under the terms of its owned hotel and senior living community management and operating agreements, the Company is generally required to contribute a specified amount of revenues to a FF&E reserve account ("FF&E Reserve") which is used to fund certain routine repairs and maintenance which are normally capitalized and replacements and renewals to the owned hotels' and senior living communities' property and improvements. The amount the Company is required to contribute to the owned hotel FF&E Reserves is 5% of revenues. The amount the Company is required to contribute to the senior living community FF&E Reserves varies among the individual senior living community operating agreements, but is generally 2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through 2007, and 3.5% thereafter. The Company anticipates contributing approximately $9 million in 2001 to the FF&E Reserves. Also, the Company is required under the owned hotels' and senior living communities' management and operating agreements to separately fund the cost of certain repairs, alterations, improvements, renewals and replacements to the owned hotel and senior living communities which are considered major or non-routine in nature.
Stock Repurchases. In 1999, the Company's Board of Directors authorized the Company to repurchase shares of the Company's common stock. In 2000 and 1999, the Company repurchased 1,928,000 and 5,260,000 shares of its common stock for $35.4 million and $99.9 million, respectively, including the reverse stock split followed by the forward stock split discussed below. As of December 29, 2000, the Company had authorization from its Board of Directors to purchase an additional 1,772,500 shares of its common stock.
On June 23, 2000, the Company completed a shareholder-approved 1-for-100 reverse stock split immediately followed by a 100-for-1 forward stock split of the Company's common stock. Registered shareholders whose shares of common stock were converted into less than one share of common stock are entitled to receive cash payments equal to the fair market value of these fractional interests. The fair market value
was determined to be $19.1375 calculated using the average closing price of the Company's common stock on the New York Stock Exchange for the ten trading days immediately before and including June 23, 2000. In connection with the reverse stock split, 292,000 shares of the Company's common stock were retired in exchange for the right to receive $5.6 million in cash. Transmittal letters were delivered to the registered shareholders with instructions on how to surrender stock certificates for cash payment. Through December 29, 2000, $2.7 million has been paid to the former shareholders that have surrendered their stock certificates for cash payment under this arrangement.
Debt. On April 15, 1999, Crestline Ventures LLC ("Ventures"), a subsidiary of the Company, entered into the Line of Credit for funding future investments in the lodging and senior living industries and for general corporate purposes. The Line of Credit bears interest at a Eurodollar rate plus 2.75%. An annual fee of .25% is charged on the unused portion of the commitment. The Line of Credit is secured by substantially all of the assets of Ventures and its subsidiaries, consisting of eight senior living communities, and is also guaranteed by the Company and certain subsidiaries of the Company. As of December 29, 2000, the Company had $35 million outstanding under the Line of Credit at an interest rate of 9.5%.
In connection with the Company's acquisition of Residence Inn USA in 1999, the Company consolidated the debt of the partnership totaling $54.5 million at the date of acquisition. The debt was secured by mortgages on ten of the hotels, bore interest at 330 basis points over the 90-day Eurodollar rate and matured on December 29, 1999. On December 29, 1999, the Company entered into a new loan agreement to provide $55.6 million of fixed rate, non-recourse debt financing with the proceeds from the issuance used to repay the existing indebtedness and refinancing costs. The new loan is also secured by mortgages on ten of the hotels. The new loan bears interest at 8.08% and has a scheduled maturity of January 1, 2010.
In July 2000, the Company entered into five loan agreements totaling $92.4 million secured by mortgages on eight senior living communities. The non- recourse loans bear interest at the 30-day LIBOR rate plus 275 basis points (9.56% at December 29, 2000). The loans mature in July 2005 and there is no principal amortization during the term of the loans. The proceeds of the financing were used to repay the existing loan secured by the communities with a principal balance of $43.5 million, which bore interest at 9.93% and had a scheduled maturity of January 1, 2001. In connection with the prepayment of the existing loan, the Company recognized an extraordinary gain on the early extinguishment of debt of $428,000 before taxes in 2000. The remaining proceeds of the financing were used to repay a portion of the outstanding borrowings under the Company's Line of Credit.
Two subsidiaries of the Company own a total of eight senior living communities that are subject to mortgages. The loans are supported by two promissory notes which mature in September 2020 and September 2018, respectively. In September 2003, the loans may be prepaid without premium or penalty. Beginning in September 2003, all excess cash flow from the senior living communities must be applied to reduce the principal balance of the loans. The loans bear interest at 10.008% through September 2003 and 5% plus the greater of 10.008% or a treasury rate thereafter. The loan agreement contains cross-default provisions so that a default by one subsidiary can result in acceleration of the entire amount of the indebtedness. Consent of the lender is necessary for any (i) amendments to the operating agreements, (ii) replacement of the manager, (iii) sale of a senior living community, (iv) other financing or (v) changes to existing ground leases. As of December 29, 2000, $118 million remains outstanding, excluding debt premiums.
A subsidiary of the Company that owns one senior living community has outstanding $14.7 million in tax free bonds held by outside bondholders. The bonds mature in December 2027 and bear interest at 5.875%. In connection with the Distribution, Host Marriott agreed to remain the guarantor of the bonds.
Upon the commencement of the hotel leases and subleases with Host Marriott, the Company purchased the working capital of the hotels from Host Marriott with the purchase price evidenced by notes that bear interest at 5.12%. Interest on each note was due simultaneously with the rent payment of each hotel lease. The principal amount of each note was due upon the termination of each hotel lease. As of December 29, 2000, the outstanding
balance under the working capital notes was $89.7 million. In conjunction with the sale of all but one of the full-service leases in January 2001, $80.3 million of working capital notes were repaid.
EBITDA
The Company's 2000 earnings before interest expense, taxes, depreciation, amortization and other non-cash items ("EBITDA") increased $13.8 million, or 11%, to $135 million compared to 1999. The Company's historical 1999 EBITDA increased $35.1 million, or 41%, to $121 million compared to pro forma 1998.
The following is a summary of the historical and pro forma EBITDA by segment and a reconciliation of historical and pro forma EBITDA to the Company's income before extraordinary item:
The Company's interest coverage was 4.8 times for 2000, 5.1 times for 1999 and 2.3 times for 1998 (4.4 times for pro forma 1998). Interest coverage is calculated as EBITDA divided by cash interest expense, which is defined as GAAP interest expense less amortization of deferred financing costs, amortization of debt premiums and the interest on the hotel working capital notes. The ratio of earnings to fixed charges was 1.1 to 1.0 for 2000, 1.1 to 1.0 for 1999 and 1.4 to 1.0 for 1998 (1.1 to 1.0 for pro forma 1998).
EBITDA data is presented because such data is used by certain investors to determine the Company's ability to meet debt service requirements and is used in the Company's Line of Credit as part of the tests determining its ability to incur debt and to meet certain covenants. The Company considers EBITDA to be an indicative measure of the Company's operating performance due to the significance of the Company's long-lived assets and because EBITDA can be used to measure the Company's ability to service debt, fund capital expenditures and expand its business; however, such information should not be considered as an alternative to net income, operating profit, cash flows from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles ("GAAP"). In addition, EBITDA as calculated by the Company may not be comparable to similarly titled measures reported by other companies. Cash expenditures for various long-term assets, interest expense and income taxes have been, and will be, incurred which are not reflected in the EBITDA presentation.
Inflation
The Company's hotels and senior living communities are impacted by inflation through its effect on increasing costs and on the managers' ability to increase rates. Unlike other real estate, the Company believes that hotels have the ability to change room rates on a daily basis, so the impact of higher inflation generally can be passed on to customers. The rates charged for the delivery of services at the Company's senior living communities are highly dependent upon local market conditions and the competitive environment in which the senior living communities operate. Although resident agreements are generally for one year, and thus may enable the Company to seek increases in monthly fees at the time of renewal in response to inflation or other factors, any such increases would be subject to market and competitive conditions.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have significant market risk with respect to foreign currency exchanges or other market rate or price risks, and the Company does not hold any financial instruments for trading purposes. The table below provides information about our debt obligations that are sensitive to changes in interest rates.
- -------- (1) The Company's fixed rate debt, excluding debt premiums and the hotel working capital notes, totaled $199 million at December 29, 2000 with an average interest rate of 9.1% and an average maturity of 13 years. (2) Interest rate is equal to a Eurodollar rate plus 275 basis points with any outstanding amount due on April 15, 2002. The 3-month Eurodollar rate at December 29, 2000 was 6.75%. (3) Interest rate is equal to the 30-day LIBOR rate plus 275 basis points. The 30-day LIBOR rate at December 29, 2000 was 6.81%. In addition, there is an interest rate ceiling of 12.395%.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following financial information is included on the pages indicated:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Crestline Capital Corporation:
We have audited the accompanying consolidated balance sheets of Crestline Capital Corporation and subsidiaries (a Maryland corporation) as of December 29, 2000 and December 31, 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal years ended December 29, 2000, December 31, 1999 and January 1, 1999. These consolidated financial statements and schedule referred to below are the responsibility of Crestline Capital Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crestline Capital Corporation and its subsidiaries as of December 29, 2000 and December 31, 1999 and the results of their operations and their cash flows for the fiscal years ended December 29, 2000, December 31, 1999 and January 1, 1999, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index at Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Vienna, Virginia February 23, 2001
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS December 29, 2000 and December 31, 1999 (in thousands, except share data)
See Notes to Consolidated Financial Statements.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended December 29, 2000, December 31, 1999 and January 1, 1999 (in thousands, except per share data)
See Notes to Consolidated Financial Statements.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Fiscal Years Ended December 29, 2000, December 31, 1999 and January 1, 1999 (in thousands)
See Notes to Consolidated Financial Statements.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended December 29, 2000, December 31, 1999 and January 1, 1999 (in thousands)
See Notes to Consolidated Financial Statements.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation and Organization
Crestline Capital Corporation (the "Company"), a Maryland corporation, is engaged in the lodging and senior living industries through the management, ownership and leasing of hotels and the ownership of senior living communities. As of December 29, 2000, the Company leased 118 full-service hotels, leased or subleased 93 limited-service hotels, owned a controlling interest in 12 hotels, managed 28 hotels and conference centers and owned 31 senior living communities. See Note 17 for a discussion of the sale of all but one of the full-service hotel leases in 2001.
On December 29, 1998 (the "Distribution Date"), the Company became a publicly traded company when Host Marriott Corporation ("Host Marriott") completed its plan of reorganizing its business operations by spinning-off the Company to the shareholders of Host Marriott (the "Distribution"), as part of a series of transactions pursuant to which Host Marriott converted into a real estate investment trust ("REIT"). On December 31, 1998, the Company entered into lease and sublease agreements to lease substantially all of Host Marriott's hotels with the existing management agreements of the leased and subleased hotels assigned to the Company (See Note 2).
Through the Distribution Date, the Company operated as a wholly owned subsidiary of Host Marriott utilizing Host Marriott's employees, insurance and administrative services since the Company had no employees. Periodically, certain operating expenses, capital expenditures and other cash requirements of the Company were paid by Host Marriott and charged directly or allocated to the Company. Certain general and administrative costs of Host Marriott were allocated to the Company using a variety of methods, principally including Host Marriott's specific identification of individual cost items and otherwise through allocations based upon estimated levels of effort devoted by its general and administrative departments to individual entities or relative measures of size of the entities based on assets. In the opinion of management, the methods for allocating corporate, general and administrative expenses and other direct costs are reasonable.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries and controlled affiliates. Investments in affiliates over which the Company has the ability to exercise significant influence, but does not control, are accounted for using the equity method.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31.
Revenues
Hotel revenues consist of the property-level revenues generated by the hotels for the Company's owned and leased hotels as well as managed hotels operated under lease agreements, and management fees from hotels managed under management agreements.
Senior living revenues represent community operating revenues. Routine revenues consist of resident fees and health care service revenues, which are generated primarily from monthly charges for independent and assisted living apartments and special care center rooms and daily charges for healthcare beds and are recognized monthly based on the terms of the residents' agreements. Advance payments received for services are deferred until the services are provided. Ancillary revenue is generated on a "fee for service" basis for supplemental items requested by residents and is recognized as the services are provided.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A portion of revenues from health care services was attributable to patients whose bills are paid by Medicare or Medicaid under contractual arrangements. For fiscal year 1998 and earlier, reimbursements under these contractual arrangements were subject to retroactive adjustments based on agency reviews. Revenues from health care services in 1998 were generally recorded net of estimated contractual allowances in the accompanying consolidated financial statements. Audits under the reimbursement agreements have generally been completed through fiscal year 1998 and there were no material audit adjustments. For fiscal years 1999 and 2000, the Company is generally paid a fixed payment rate for its Medicare and Medicaid services and therefore, there are no contractual allowances for these fiscal years in the accompanying consolidated financial statements.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is computed by dividing net income by the weighted average number of common stock outstanding plus other dilutive securities. For fiscal year 1998, the weighted average number of outstanding common shares is based on Host Marriott's weighted average number of outstanding common shares, adjusted for the one-for-ten distribution ratio (see Note 2).
A reconciliation of the number of shares utilized for the calculation of diluted earnings per common share follows:
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at date of purchase are considered cash equivalents. Cash and cash equivalents include $4,356,000 and $2,357,000 at December 29, 2000 and December 31, 1999, respectively, of cash related to a consolidated partnership, the use of which is restricted generally for partnership purposes to the extent it is not distributed to the partners.
Property and Equipment
Property and equipment is recorded at cost. Replacements and improvements that extend the useful life of property and equipment are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years for buildings and three to 10 years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.
In cases where management is holding for sale a particular property, the Company assesses impairment based on whether the estimated sales price less cost of disposal of each individual property to be sold is less than the net book value. A property is considered to be held for sale when a decision is made to dispose of the property. Otherwise, impairment is assessed based on whether it is probable that undiscounted future cash flows from each property will be less than its net book value. If a property is impaired, its basis is adjusted to its fair value.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets consist of the value of hotel contracts purchased and the costs incurred to obtain management and lease contracts. Intangible assets are amortized on a straight-line basis over the estimated useful life of the term of the underlying contract. The Company assesses impairment based on whether it is probable that undiscounted future cash flows from each contract will be less than its net book value. If an asset is impaired, its basis is adjusted to its fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents. The Company maintains cash and cash equivalents with various high credit- quality financial institutions and limits the amount of credit exposure with any institution.
Senior Living Community Working Capital
Pursuant to the terms of the Company's senior living operating agreements (see Note 7), the Company is required to provide Marriott International, Inc. ("Marriott International") with working capital and supplies to meet the operating needs of the senior living communities. Marriott International converts cash advanced by the Company into other forms of working capital consisting primarily of operating cash, inventories, resident deposits and trade receivables and payables which are maintained and controlled by Marriott International. Upon the termination of the operating agreements, Marriott International is required to convert working capital and supplies into cash and return it to the Company. As a result of these conditions, the individual components of working capital and supplies controlled by Marriott International are not reflected in the accompanying consolidated balance sheets, however, the net working capital advanced is included in due from Marriott Senior Living Services on the accompanying consolidated balance sheets.
Hotel Working Capital
Pursuant to the terms of the hotel management agreements for the Company's hotels leased or subleased from Host Marriott (see Note 6), the Company is required to provide the hotel manager with the working capital and supplies to meet the operating needs of its hotels. The hotel manager converts the cash advanced into other forms of working capital consisting primarily of operating cash, inventories, trade receivables and payables which are maintained and controlled by the hotel manager. Upon the commencement of the hotel leases and subleases with Host Marriott, the Company purchased from Host Marriott the existing working capital controlled by the hotel manager evidenced by a note payable to Host Marriott. Upon the termination of the hotel lease or sublease, the Company is required to sell the existing working capital to Host Marriott at its current market value. To the extent the working capital delivered to Host Marriott is less than the value of the loan, the Company will pay the difference in cash. However, to the extent the working capital delivered to Host Marriott exceeds the value of the loan, Host Marriott will pay the Company the difference in cash. If the hotel management agreement is terminated, the hotel manager is required to convert working capital and supplies into cash and return it to the Company. As a result of these conditions, the individual components of working capital and supplies controlled by the hotel manager are not reflected in the accompanying consolidated balance sheets. However, the total amount of working capital purchased from Host Marriott and advanced to the hotel manager and the corresponding working capital note payable to Host Marriott is reflected on the accompanying consolidated balance sheets.
Senior Living Community Deferred Revenue
Monthly fees deferred for the non-refundable portion of the entry fees are recorded as deferred revenue and included in other liabilities in the accompanying consolidated balance sheets. These amounts are recognized as revenue as services are performed over the expected term of the residents' contracts.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Charges
Financing costs related to long-term debt are deferred and amortized over the remaining life of the debt using the effective interest method.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
2. The Distribution
On the Distribution Date, Host Marriott completed its plan of reorganizing its business by spinning-off the Company to the shareholders of Host Marriott as part of a series of transactions pursuant to which Host Marriott converted into a REIT. As part of the Distribution, Host Marriott distributed 20.5 million, or 94%, of the outstanding shares of common stock of the Company to the Host Marriott shareholders. The remaining 1.4 million, or six percent, of the outstanding shares were used by Host Marriott as part of the consideration paid on December 30, 1998 for Host Marriott's acquisition of certain hotel properties from The Blackstone Group and a series of funds controlled by Blackstone Real Estate Partners (the "Blackstone Acquisition"). The shares were distributed on the basis of one share of the Company's common stock for every ten shares of Host Marriott common stock.
On December 31, 1998, the Company and Host Marriott entered into agreements to lease 121 of the full-service hotels owned by Host Marriott and agreements to sublease 71 limited-service hotels leased by Host Marriott (see Note 5). As of December 29, 2000, the Company leased 118 full-service hotels and subleased 71 limited-service hotels from Host Marriott. Upon the commencement of the hotel leases and subleases, the Company purchased the working capital of the hotels from Host Marriott for $95 million with the purchase price evidenced by notes that bear interest at 5.12%. The existing management agreements for all of the leased and subleased hotels were assigned to the Company (see Note 6). See Note 17 for a discussion of the sale of all but one of the full-service hotel leases and repayment of the corresponding full-service hotel working capital notes in 2001.
In connection with the Blackstone Acquisition, a 25 percent interest in Swissotel Management (USA) LLC, a management company that manages five hotels in the United States, was transferred to the Company from Host Marriott for $4.5 million. Also, in connection with the Distribution, the Company acquired a five percent interest in a joint venture with Host Marriott that owns a first mortgage secured by five hotel properties owned by Host Marriott for $6.4 million.
In connection with the Distribution, the Company entered into an asset management agreement (the "Asset Management Agreement") with Host Marriott and its affiliates pursuant to which the Company will provide Host Marriott management advisory services on the operation of Host Marriott's hotels. The term of the Asset Management Agreement was for two years and was terminated in conjunction with the sale of the full-service hotel leases discussed in Note 17.
For purposes of governing certain of the ongoing relationships between the Company and Host Marriott, the Company and Host Marriott entered into various agreements including a distribution agreement, an employee benefits allocation agreement and a tax sharing agreement. These agreements provide, among other things, for
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the allocation of assets and liabilities between the Company and Host Marriott and a guarantee by Host Marriott of certain Company debt obligations.
The following summarized unaudited pro forma data for the fiscal year ended January 1, 1999 assumes all of the following transactions occurred at the beginning of that fiscal year:
. the Distribution and related transactions discussed above including the lease of 121 full-service hotels and sublease of 71 limited-service hotels;
. the 1998 acquisition of one senior living community;
. the 1998 repayment and forgiveness of certain debt (see Note 8); and
. the 1998 acquisition of minority interests in certain consolidated subsidiaries.
3. Property and Equipment
Property and equipment consists of the following:
In 1999, the Company determined that one of its senior living communities was impaired as a result of a deterioration of the community's operating results due to its size and age and the new supply in its market. The Company recorded a $3.5 million pre-tax charge, which is included in other operating costs and expenses on the accompanying consolidated statements of operations, to reduce the net book value of the property to its fair value.
4. Restricted Cash
Restricted cash, which is included in other assets on the accompanying consolidated balance sheets, consists of the following:
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The debt service, fixed asset, real estate tax and insurance escrows consist of cash transferred into segregated escrow accounts out of revenues generated by the Company's owned hotel and senior living communities, pursuant to the Company's secured debt agreements. Funds from these reserves are periodically disbursed by the collateral agent to pay for debt service, capital expenditures, insurance premiums and real estate taxes relating to the secured properties. In addition, the fixed asset escrows also include cash transferred into segregated escrow accounts pursuant to the Company's owned hotel and senior living community management and operating agreements to fund certain capital expenditures at the owned hotels (see Note 6) and senior living communities (see Note 7).
5. Leases
The Company is the lessee under capital and operating leases. Future minimum annual rental commitments for all non-cancelable leases as of December 29, 2000 are as follows:
Host Marriott Full-Service Hotel Leases
In connection with the Distribution, wholly-owned subsidiaries of the Company entered into leases with Host Marriott effective January 1, 1999 for 121 full-service hotels. As of December 29, 2000, the Company leased 118 full- service hotels from Host Marriott. Each lease had an initial term generally ranging from seven to ten years. See Note 17 for a discussion of the sale of all but one of the full-service leases in 2001.
The Company was required to pay the greater of (i) a minimum rent specified in each hotel lease or (ii) a percentage rent based upon a specified percentage of aggregate revenues from the hotel, including room revenues, food and beverage revenues, and other income, in excess of specified thresholds. The amount of minimum rent is increased each year based upon 50% of the increase in CPI during the previous twelve months. Percentage rent thresholds are increased each year based on a blend of the increases in CPI and the Employment Cost Index during the previous twelve months.
The Company was responsible for paying all of the expenses of operating the hotels, including all personnel costs, utility costs, and general repair and maintenance of the hotels. In addition, the Company was responsible for all fees payable to the hotel manager, including base and incentive management fees, chain services payments and franchise or system fees. Host Marriott was responsible for real estate and personal property taxes, property casualty insurance, equipment rent, ground lease rent, maintaining a reserve fund for FF&E replacements and capital expenditures.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Limited-Service Hotel Subleases
Host Marriott leases 71 limited-service hotels under the Residence Inn and Courtyard by Marriott brands (the "HM-HPT Leases") from Hospitality Properties Trust, Inc. ("HPT"). The HM-HPT Leases have initial terms expiring through 2012 for the Courtyard properties and 2010 for the Residence Inn properties, and are renewable at the option of Host Marriott. In connection with the Distribution, subsidiaries of the Company entered into sublease agreements effective January 1, 1999 with Host Marriott for these limited-service hotels (the "Subleases"). The terms of the Subleases will expire simultaneously with the expiration of the initial term of the HM-HPT Leases. If Host Marriott elects to renew the HM-HPT Leases, the Company can elect to also renew the Subleases for the corresponding renewal term.
Each Sublease provides that generally all of the terms in the HM-HPT Leases will apply to the Subleases. The HM-HPT Leases require the lessee to pay rent equal to (i) a fixed minimum rent plus (ii) an additional rent based upon a specified percentage of revenues to the extent they exceed revenues from a base year. In addition, the HM-HPT Leases require the lessee to pay all repair and maintenance costs, impositions, utility charges, insurance premiums and all fees payable under the hotel management agreements. Pursuant to the Subleases, subsidiaries of the Company are required to pay rent to Host Marriott equal to the minimum rent due under the HM-HPT Leases and an additional rent based on a percentage of revenues. To the extent the reserves for FF&E replacements are insufficient to meet the hotel's capital expenditure requirements, HPT is required to fund the shortfall.
The rent payable under the Subleases is guaranteed by the Company up to a maximum of $30 million. The Company's wholly owned subsidiaries that are party to the Subleases were capitalized with $30 million in notes from the Company payable upon demand. In addition, the Subleases contain a covenant requiring the Company to maintain a minimum net worth of $225 million.
Host Marriott may terminate all, but not less than all, of the Subleases upon payment of the termination fee equal to the fair market value of the Company's leasehold interests in the remaining term of the Subleases using a discount rate of five percent.
Limited-Service Hotel Leases
On June 9, 2000, the Company entered into an agreement with HPT to lease 19 limited-service hotels under long-term lease agreements. HPT acquired the hotels from Marriott International, which will continue to manage the hotels under long-term management agreements with the Company. The hotels are operated under the Courtyard by Marriott, Residence Inn, SpringHill Suites by Marriott and TownePlace Suites by Marriott brand names. As of December 29, 2000, two of the hotels in the portfolio were under construction and are scheduled to open in 2001. Under the terms of the lease agreement, the Company made a $9.6 million security deposit, which is included in other assets in the accompanying consolidated balance sheets, and will make an additional $6.0 million security deposit for the remaining two hotels in 2001.
On August 18, 2000, the Company entered into an agreement with CNL Hospitality Corporation ("CNL") to lease nine limited-service hotels under long-term lease agreements. CNL acquired the hotels from Marriott International, which will continue to manage the hotels under long-term management agreements with the Company. The hotels are managed under the Courtyard by Marriott, Residence Inn, SpringHill Suites by Marriott and TownePlace Suites by Marriott brand names. As of December 29, 2000, four of the hotels in the portfolio were under construction and are expected to open in 2001. Under the terms of the lease agreement, the Company made a $2.6 million security deposit, which is included in other assets in the accompanying consolidated balance sheets, and will make an additional $2.4 million security deposit for the remaining four hotels in 2001.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The limited-service hotel leases have terms that expire on December 31, 2015 with two renewals at the Company's option each for an additional ten years. The limited-service hotel leases require the Company to pay rent equal to (i) a fixed minimum rent plus (ii) an additional rent based upon specified percentages of revenues to the extent they exceed revenues from a base year. The minimum rent shall be increased by a specified percentage of any additional capital investments by the owner. Under the terms of the lease agreements, the Company is required to pay all repair and maintenance costs, impositions, utility charges, insurance premiums and all fees payable under the hotel management agreements. To the extent the reserves for FF&E replacements are insufficient to meet the hotel's capital expenditure requirements, the owner is required to fund the shortfall.
In connection with the limited-service hotel leases, the Company entered into two liquidity facility agreements with Marriott International whereby Marriott International would provide loans to the Company to cover any shortfalls of rent due under the leases. The term of the liquidity facility for the leases with HPT is the earlier of (i) five years; (ii) the completion of the year in which the maximum credit available under the liquidity facility is funded; or (iii) the date on which a specified rent coverage for the leased hotels has been achieved. The maximum credit available under the liquidity facility for the leases with HPT may be up to two and one-half year's minimum rent for certain of the leased hotels, or $39 million, upon satisfaction of certain conditions set forth in the liquidity facility. The term of the liquidity facility for the leases with CNL is the earlier of (i) December 31, 2004; (ii) the completion of the year in which the maximum credit available under the liquidity facility is funded; or (iii) the date on which a specified rent coverage for the leased hotels has been achieved. The maximum credit available under the liquidity facility for the leases with CNL is one year's base rent, or $10.0 million. Draws under the HPT liquidity facility earn interest of 10.75% and draws under the CNL liquidity facility earn interest of 10% with any interest, fees and loan advances under either facility to be repaid from the available cash flow of the leased hotels. Any loans under the liquidity facilities are secured by a first lien on the Company's interests in the leases. As of December 29, 2000, there have been no draws under the liquidity facilities.
Managed Hotel Leases
The Company manages four hotels under long-term lease agreements. Lease agreements for two of the hotels have initial terms that expire on August 31, 2017 with two five-year renewals at the lessee's option. The leases require the lessee to pay rent equal to (i) a fixed minimum rent plus (ii) an additional rent based upon specified percentages of revenues to the extent they exceed revenues from a base year.
Lease agreements for the two other hotels have initial terms that expire on December 31, 2002 and July 21, 2007, respectively, with no renewal options. The leases require the lessee to pay the greater of (i) a minimum rent specified in each lease or (ii) a percentage rent based on a specified percentage of aggregate revenues from the hotel, including room revenues, food and beverage revenues, and other income, in excess of specified thresholds. The amount of minimum rent and thresholds are increased each year based upon increases in CPI.
For all four leases, the lessee is responsible for paying all of the expenses of operating the hotels including all personnel costs, impositions, utility charges, insurance premiums, and in certain leases, payments for funding FF&E reserves. To the extent the reserves for FF&E replacements are insufficient to meet the hotel's capital expenditure requirements, the owner is required to fund the shortfall.
Senior Living Leases
The Company leases two senior living communities under capital leases expiring in 2016. Upon the expiration of the lease or anytime prior to lease expiration, the Company has the first right of refusal to submit a counter offer to any acceptable bona fide offer from a third party within 30 days of notice from the lessor. If the Company fails to exercise its right of first refusal, then the lessor may proceed with the sale of the leased property
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and all assets therein. The assets recorded under capital leases, which are included in property and equipment on the accompanying consolidated balance sheets, were $13.4 million and $14.1 million as of December 29, 2000 and December 31, 1999, respectively, net of accumulated amortization of $3.6 million and $2.4 million, respectively. The amortization for assets recorded under capital leases is included in depreciation and amortization on the accompanying consolidated statements of operations.
The Company also has one long-term operating ground lease which expires in 2013. The operating lease includes three renewal options exercisable in five- year increments through the year 2028.
Rent expense for fiscal years 2000, 1999 and 1998 was as follows:
6. Hotel Management Agreements
Hotel Management Agreements for Leased Full-Service Hotels
The existing hotel management agreements for the leased full-service hotels were assigned to the Company upon the execution of the full-service hotel leases for the term of each corresponding lease. In connection with the Company's sale in 2001 of the Company's subsidiaries owning the leasehold interests in all but one of the full-service hotel leases to a subsidiary of Host Marriott, the Company's rights to the assignment of the full-service hotel management contracts were transferred along with the leases to a subsidiary of Host Marriott on January 10, 2001 with an effective date of January 1, 2001. (See Note 17)
The Company was required to perform all of the obligations of Host Marriott under the full-service hotel management agreements including payment of fees due under the hotel management agreements other than certain obligations including payment of real estate and personal property taxes, property casualty insurance, equipment rent, ground lease rent, maintaining a reserve fund for FF&E replacements and capital expenditures, for which Host Marriott retained responsibility.
Marriott International manages 97 of the 118 leased full-service hotels. The remaining full-service hotels are managed by other hotel management companies including Swissotel Management (USA) LLC, Hyatt Corporation, Four Seasons Hotel Limited and other independent hotel management companies. The full- service hotel management agreements generally provide for payment of base management fees equal to one to four percent of revenues and incentive management fees generally equal to 20% to 50% of operating profit (as defined in the hotel management agreements) over a priority return (as defined) to the Company, with total incentive management fees generally not to exceed certain maximum thresholds such as 20% of cumulative operating profit or 20% of current year operating profit, or in some cases, a percentage of revenue.
Marriott International Hotel Management Agreements for Leased Limited-Service Hotels
Marriott International manages all of the Company's 71 subleased limited- service hotels under long-term hotel management agreements assigned to the Company for the term of the subleases. Marriott International also manages all of the Company's 28 leased limited-service hotels under long-term management agreements with initial terms through December 15, 2015 with two ten-year renewals, at Marriott International's option, if certain performance criteria have been met.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The hotel management agreements for these hotels provide for payment to Marriott International of system fees equal to 3 to 4 percent of revenues, base management fees equal to 2 percent of revenues or 7 percent of revenues less systems fees, and incentive management fees equal to 50 percent of available cash flow after priority return to the Company and, in some cases, not to exceed 20% of cumulative operating profit. Base and incentive management fees are generally subordinate to the base rent of the leases.
Pursuant to the limited-service hotel management agreements, the Company is obligated to provide Marriott International with sufficient funds to cover the costs of (a) certain non-routine repairs and maintenance to the hotels which are normally capitalized; and (b) non-major replacements and renewals to the hotel's property and improvements. The owners of the limited-service hotels are required to fund all major replacements and renewals to the hotel's property and improvements.
Marriott International Hotel Management Agreement for Owned Hotels
Marriott International manages the ten owned Residence Inn limited-service hotels pursuant to a long-term management agreement with an initial term expiring December 30, 2011 with renewal terms at the option of Marriott International to extend the agreement on one or more of the owned hotels for up to five 10-year terms. The hotel management agreement provides for the payment of a base management fee equal to two percent of revenues, a Residence Inn system fee equal to four percent of revenues, and incentive management fees equal to 20 percent of operating profit, as defined, over a priority return to the owner. The payment of base management fees is subordinate to qualifying debt service, a provision for administrative expenses and retention by the Company of stipulated annual cash flow. The payment of incentive management fees is payable out of 50 percent of cash flow remaining after qualifying debt service, administrative expenses and the retention by the Company of a stipulated cash flow.
The hotel management agreement for the owned Residence Inn limited-service hotels also provides for the establishment of a property improvement fund to cover the cost of (a) certain routine repairs and maintenance of the hotels which are normally capitalized and (b) replacements and renewals to the hotels' property and improvements. Contributions to the property improvement fund are equal to five percent of revenues. In 2000 and 1999, the Company contributed $2.0 million and $1.6 million, respectively, to the property improvement fund. The hotel management agreement also provides that the Company will fund the costs of certain major non-routine repairs, alterations, improvements, renewals and replacements to the hotels.
7. Senior Living Operating Agreements
The senior living communities are subject to operating agreements which provide for Marriott International to operate the senior living communities, generally for an initial term of 25 to 30 years with renewal terms subject to certain performance criteria at the option of Marriott International of up to an additional five to ten years. The operating agreements provide for payment of base management fees equal to five percent of revenues and incentive management fees equal to 20% of operating profit (as defined in the operating agreements) over a priority return to the Company. In the event of early termination of the operating agreements, Marriott International will receive additional fees based on the unexpired term and expected future base and incentive management fees. The Company has the option to terminate certain, but not all, management agreements if specified performance thresholds are not satisfied. No operating agreement with respect to a single community is cross- collateralized or cross-defaulted to any other operating agreement, and any single operating agreement may be terminated following a default by the Company or Marriott International, although such termination will not trigger the cancellation of any other operating agreement.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Most of the senior living communities are also subject to pooling agreements whereby for the limited purpose of calculating management fees and exercising certain termination rights under the operating agreements, the management fees and rights are considered in the aggregate for the senior living communities in each pool.
The operating agreements require Marriott International to furnish certain services ("Central Administrative Services") which are generally furnished on a central or regional basis to other senior living communities in the Marriott retirement community system. Such services will include the following: (i) marketing and public relations services; (ii) human resources program development; (iii) information systems support and development; and (iv) centralized computer payroll and accounting services. In lieu of reimbursement for such services, Marriott International is paid an amount equal to 2% of revenues. Generally, through the earlier of (i) the end of the seventh year of the operating agreement or (ii) the date upon which certain performance criteria have been met, 50% of the Central Administrative services fee is payable only to the extent that operating profit for the communities exceeds a priority return to the Company. However, the payment of fees for the Central Administrative Services were generally waived for the first year of the operating agreement.
The Company is required under the operating agreements to contribute a percentage of revenues into an interest-bearing reserve account to cover the cost of (a) certain routine repairs and maintenance to the senior living communities which are normally capitalized and (b) replacements and renewals to the senior living communities' property and improvements. The annual contribution amount (expressed as a percentage of revenues) generally will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through 2007, and 3.5% thereafter. The amount contributed for fiscal years 2000, 1999 and 1998 was $6.9 million, $6.4 million and $6.3 million, respectively. The operating agreements provide that the Company shall separately fund the cost of certain major or non-routine repairs, alterations, improvements, renewals and replacements to the senior living communities.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Debt
Debt consists of the following as of December 29, 2000 and December 31, 1999:
Debt maturities at December 29, 2000, excluding the unamortized debt premiums of $13.5 million, are as follows (in thousands):
In conjunction with the June 21, 1997 acquisition of Forum Group, Inc. ("Forum"), the Company assumed $270 million of debt and issued $72 million in notes payable to Marriott International. Subsequent to the acquisition, the Company issued additional notes payable to Marriott International to finance additional senior living expansion units totaling approximately $20 million. In the second quarter of 1998, Host Marriott loaned the Company $92 million to repay the notes payable to Marriott International. In the third quarter of 1998, Host
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marriott forgave the $92 million note and it was recorded as a capital contribution to the Company. During the first quarter of 1998, Host Marriott prepaid $26.4 million of the Company's mortgage debt. Host Marriott's prepayment of the debt was recorded as a capital contribution to the Company.
Upon the commencement of the full-service hotel leases and limited-service hotel subleases, the Company purchased the working capital of the hotels from Host Marriott for $95 million with the purchase price evidenced by notes that bear interest at 5.12%. Interest on each note is due simultaneously with the rent payment of each hotel lease. The principal amount of each note is due upon the termination of each hotel lease. In connection with the termination of five hotel leases in 1999, the Company repaid $5.5 million of hotel working capital notes with the proceeds from the hotel working capital during 1999. In connection with the sale in 2001 of the Company's subsidiaries owning the leasehold interests in all but one of the full-service hotel leases to a subsidiary of Host Marriott, the working capital notes for all but one of the full-service hotels were repaid in January 2001. Accordingly, the Company's remaining hotel working capital notes payable to Host Marriott after the sale of the subsidiaries owning all but one of the full-service hotel leasehold interests on January 10, 2001 were $9.3 million representing the working capital notes of the 71 subleased limited-service hotels and one leased full- service hotel. (See Note 17.)
On April 15, 1999, Crestline Ventures LLC ("Ventures"), a subsidiary of the Company, entered into a secured, three-year $100 million revolving credit facility (the "Line of Credit") for funding future investments in the lodging and senior living industries and for general corporate purposes. The Line of Credit bears interest at a Eurodollar rate plus 2.75% (9.5% at December 29, 2000). An annual fee of 0.25% is charged on the unused portion of the commitment. The Line of Credit is secured by substantially all of the assets of Ventures and its subsidiaries consisting of eight senior living communities, and is also guaranteed by the Company and certain subsidiaries of the Company. The Line of Credit contains covenants that, among other restrictions, (i) prohibits the Company from paying dividends on its common stock; (ii) limits the ability of the Company to incur additional indebtedness, sell certain assets, repurchase shares of its common stock and make certain investments; and (iii) limits the ability of Ventures to pay dividends and make loans to its parent. The Line of Credit also contains certain financial covenants relating to, among other things, maintaining certain levels of net worth and certain ratios of earnings before interest expense, taxes, depreciation and amortization and other non-cash charges ("EBITDA") to interest and fixed charges, EBITDA to total debt and total debt to capitalization. The Company is currently in compliance with all of its covenants.
In connection with the Company's acquisition of a controlling interest in a partnership that owned eleven Residence Inn limited-service hotels in 1999 (see Note 13), the Company consolidated the debt of the partnership totaling $54.5 million at the date of acquisition. The debt was secured by mortgages on ten of the hotels, bore interest at 330 basis points over the 90-day Eurodollar rate and matured on December 29, 1999. On December 29, 1999, the Company entered into a new loan agreement to provide $55.6 million of fixed rate, non-recourse debt financing with the proceeds from the issuance used to repay the existing indebtedness and refinancing costs. The new loan is also secured by mortgages on ten of the hotels. The new loan bears interest at a fixed rate of 8.08% and has a scheduled maturity of January 1, 2010.
In 2000, the Company entered into five loan agreements totaling $92.4 million secured by mortgages on eight senior living communities. The non- recourse loans bear interest at the 30-day LIBOR rate plus 275 basis points (9.56% at December 29, 2000). The loans mature in July 2005 and there is no principal amortization during the term of the loans. The proceeds of the financing were used to repay the existing loan secured by the communities with a principal balance of $43.5 million, which bore interest at 9.93% and had a scheduled maturity of January 1, 2001. In connection with the prepayment of the existing loan, the Company recognized an extraordinary gain on the early extinguishment of debt of $253,000, net of income taxes of $175,000, or $.01 and $.02 per basic and diluted common share, respectively.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The indentures governing the mortgages of certain of the Company's senior living communities and hotels contain restrictive covenants that, among other restrictions, (i) require maintenance of segregated cash collection of all rents for certain of the senior living communities; (ii) require separate cash reserves for debt service, property improvements, real estate taxes and insurance; and (iii) limit the ability to incur additional indebtedness, enter into or cancel leases, enter into certain transactions with affiliates or sell certain assets.
In conjunction with the acquisition of Forum, the Company recorded the debt assumed at its fair value. The Company is amortizing this amount to interest expense over the remaining life of the related debt. The amortization of this debt premium for fiscal years 2000, 1999 and 1998 was $1.1 million, $1.6 million and $1.6 million, respectively. Cash paid for interest for fiscal years 2000, 1999 and 1998 totaled $33.6 million, $28.2 million and $19.8 million, respectively. Deferred financing costs, which are included in other assets on the accompanying consolidated balance sheets, were $7.8 million and $3.1 million as of December 29, 2000 and December 31, 1999, net of accumulated amortization of $2.1 million and $0.7 million, respectively.
9. Income Taxes
Total deferred tax assets and liabilities as of December 29, 2000 and December 31, 1999 were as follows:
The tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets and liabilities was as follows:
The provision for income taxes for fiscal years 2000, 1999 and 1998 consists of the following:
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the statutory Federal tax rate to the Company's effective income tax rate for fiscal years 2000, 1999 and 1998 is as follows:
The Company was included in the consolidated federal income tax return of Host Marriott and its affiliates (the "Group") for the period from January 3, 1998 through the Distribution Date. Tax expense was allocated to the Company as a member of the Group based upon the relative contribution to the Group's consolidated taxable income/loss and changes in temporary differences. This allocation method results in federal and net state tax expense allocated for all periods presented that is substantially equal to the expense that would have been recognized if the Company had filed separate tax returns. In connection with the Distribution, the amounts due to Host Marriott as of the Distribution Date for its allocable share of current income taxes payable were forgiven and treated as a capital contribution. Pursuant to the tax sharing agreement between the Company and Host Marriott, generally Host Marriott will be responsible for paying taxes for periods through the Distribution Date and the Company will be responsible for paying taxes for subsequent periods.
For income tax purposes, the Company has net operating loss carryforwards of $8.4 million which expire through 2006. Cash paid for income taxes was $26.8 million in 2000 and $24.9 million in 1999.
10. Fair Value of Financial Instruments
The fair values of certain financial liabilities are shown below:
Valuations for secured debt are determined based on the expected future payments discounted at risk-adjusted rates. The fair values of other notes are estimated to be equal to their carrying value. The fair value of all of the Company's other financial assets and liabilities are assumed to equal their carrying amounts.
11. Employee Stock Plans
The Company has two stock-based compensation plans. Under the comprehensive stock incentive plan (the "Comprehensive Plan"), the Company may award to participating employees (i) options to purchase the Company's common stock, (ii) deferred shares of the Company's common stock and (iii) restricted shares of the Company's common stock. In addition, the Company has an employee stock purchase plan (the "Employee Stock Purchase Plan"). The principal terms and conditions of the two plans are summarized below.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total shares of common stock authorized for issuance under employee stock plans at December 29, 2000 are:
Certain of the employees of the Company were employed by Host Marriott through the Distribution Date. In connection with the Distribution, unexercised options for Host Marriott stock and Host Marriott deferred stock awards held by these employees as of the Distribution Date were redenominated and converted into options for Company stock and Company deferred stock awards.
Employee stock options may be granted to officers and key employees with an exercise price not less than the fair market value of the common stock on the date of grant. The options generally expire up to 15 years after the date of grant. Most options vest ratably over each of the first three years following the date of the grant.
A summary of the activity of the Company's stock option plan for fiscal years 2000 and 1999 follows:
The following table summarizes information about stock options outstanding at December 29, 2000:
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company continues to account for expense under its plans under the provision of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations as permitted under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for its fixed stock options under the Comprehensive Plan and its Employee Stock Purchase Plan.
By electing to continue to account for expense under APB No. 25, the company is required under SFAS No. 123 to provide pro forma disclosure as if the Company had accounted for the expense under the fair value method. For purposes of pro forma disclosure, the estimated fair value of the options at the date of grant is amortized to expense over the vesting period. The following is the pro forma financial data if the Company had recorded compensation expense under the fair value method.
The weighted average fair value of options granted in 2000 and 1999 were $12.36 and $6.63, respectively. The fair value of each option granted has been estimated on the date of grant using an option-pricing model with the following weighted average assumptions used for grants in 2000 and 1999, respectively: risk-free interest rate of 6.5% and 4.9%, volatility of 48% and 40%, expected lives of 10 and 12 years and no dividend yield.
Deferred stock incentive plan shares granted to officers and key employees generally vest over 10 years in annual installments commencing one year after the date of grant. Certain employees may elect to defer payments until termination or retirement. The Company accrues compensation expense for the fair market value of the shares on the date of grant, adjusted for forfeitures. In 2000 and 1999, approximately 8,000 and 7,000 shares, respectively, were granted under this plan. The compensation expense that has been charged against income for deferred stock was not material for 2000 and 1999. The weighted average fair values per share granted in 2000 and 1999 were $20.12 and $9.91, respectively.
In 2000 and 1999, the Company issued 30,000 and 375,000 shares of restricted stock, respectively, under the Comprehensive Plan to officers and key employees that will vest ratably over the next three to five years. The Company recognizes compensation expense over the restriction period equal to the fair market value of the shares on the date of issuance, adjusted for forfeitures. The Company recorded compensation expense of $821,000 in 2000 and $730,000 in 1999 related to these awards. The weighted average fair values per share granted in 2000 and 1999 were $16.78 and $10.22, respectively.
Under the terms of the Employee Stock Purchase Plan, eligible employees may purchase common stock through payroll deductions at the lower of market value at the beginning or end of the plan year.
12. Retirement and Savings Plans
The Company has retirement and savings plans and other defined contribution plans for employees meeting certain eligibility requirements and electing participation in the plans. The plans generally require a certain minimum Company match of employee contributions to the plans with any additional discretionary match determined annually by the Company. The costs to the Company for these items were not material for 2000 and 1999.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Acquisitions and Dispositions
In 1999, the Company acquired the remaining limited partnership units in CCC Retirement Partners, L.P., a partnership that owned some of the Company's senior living communities, for $6.2 million. As part of the transaction, the Company also paid $557,000 to former holders of the limited partnership units. The purchase price of the units approximated fair value, and accordingly, no portion of the purchase price has been expensed.
On March 29, 1999, the Company acquired a 74% limited partner interest in the Marriott Residence Inn USA Limited Partnership ("Residence Inn USA") from a private investor for $34.4 million in cash and the consolidation of $54.5 million of debt for a total consideration of $88.9 million. In subsequent separate transactions, the Company acquired an additional 3% limited partner interest in Residence Inn USA in the second quarter of 1999 for $1.6 million in cash and the 5% general partner interest in Residence Inn USA from Host Marriott in the third quarter of 1999 for $2.7 million in cash increasing the Company's ownership to an 82% interest. At the date of the acquisition, Residence Inn USA owned eleven Residence Inn limited-service hotels that are managed by Marriott International under a long-term management agreement. The Company accounted for the acquisition of Residence Inn USA under the purchase method of accounting.
The following summarizes unaudited pro forma data for fiscal years 1999 and 1998 assuming the acquisition of Residence Inn USA occurred at the beginning of fiscal year 1998. In addition, the summarized unaudited pro forma financial data for the fiscal year 1998 also reflects the Distribution and related transaction discussed in Note 2.
In February 2000, the Company sold one of its Residence Inns for a net sales price of $6.2 million, which approximated its carrying value.
In March 2000, the Company purchased the hotel management business of Stormont Trice Management Corporation for $9.7 million plus a contingent purchase price of up to an additional $4.5 million if certain performance criteria are met. Pursuant to the acquisition, the existing management contracts for nine hotels and four conference centers and lease agreements for two hotels were assigned to the Company. The Company accounted for this acquisition under the purchase method of accounting. Under the purchase method of accounting, the purchase price was allocated to the fair value of the identifiable assets acquired less liabilities assumed. The identifiable assets included the fair value of the contracts and leases acquired. The Company would record the contingent purchase price, if any, once the amount is determinable.
In March 2000, the Company purchased the hotel management business of The Durbin Companies for $4.4 million, plus a contingent purchase price of $500,000 if one of the leases is renewed under certain conditions. Pursuant to the acquisition, the existing management contracts for ten hotels and lease agreements for two hotels were assigned to the Company. The Company accounted for this acquisition under the purchase method of accounting. Under the purchase method of accounting, the purchase price was allocated to the fair value of the identifiable assets acquired less liabilities assumed. The identifiable assets included the fair value of the contracts and leases acquired. The Company would record the contingent purchase price, if any, once the amount is determinable.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 2000, the Company purchased the Baltimore Inner Harbor Courtyard for $21 million upon completion of its construction.
14. Shareholders' Equity
In 1999, the Company's Board of Directors authorized the Company to repurchase shares of the Company's common stock. During 2000 and 1999, the Company repurchased 1,928,000 and 5,260,000 shares of its common stock for $35.4 million and $99.9 million, respectively, including the reverse stock split followed by the forward stock split discussed below. As of December 29, 2000, the Company had authorization from its Board of Directors to purchase an additional 1,772,500 shares of its common stock.
On June 23, 2000, the Company completed a shareholder-approved 1-for-100 reverse stock split immediately followed by a 100-for-1 forward stock split of the Company's common stock. Registered shareholders whose shares of common stock were converted into less than one share of common stock were entitled to receive cash payments equal to the fair market value of these fractional interests. The fair market value was determined to be $19.1375 calculated using the average closing price of the Company's common stock on the New York Stock Exchange for the ten trading days immediately before and including June 23, 2000. In connection with the reverse stock split, 292,000 shares of the Company's common stock were retired in exchange for the right to receive $5.6 million in cash. Transmittal letters were delivered to the registered shareholders with instructions on how to surrender stock certificates for cash payment. Through December 29, 2000, $2.7 million has been paid to the former shareholders that have surrendered their stock certificates for cash payment.
In 1999, the Company initiated a stock purchase loan program whereby certain Company executives could purchase Company common stock at market prices through loans from the Company. During 2000 and 1999, certain executives purchased 152,500 shares of common stock for $2.7 million. The loans are secured by the common stock purchased and are recourse to the executives and bear interest at 5.5%.
15. Geographic and Business Segment Information
As of December 29, 2000, the Company operated in five business segments: hotel management, hotel ownership, full-service hotel leasing, limited-service hotel leasing and senior living community ownership. The Company's managed hotels are upscale limited-service and full-service hotels operated under the Marriott, Hilton, Hyatt, Sheraton, Crowne Plaza, Renaissance, Courtyard by Marriott, Residence Inn and Holiday Inn brand names. The Company's owned hotels are upscale limited-service hotels operated under the Residence Inn brand as well as the Courtyard by Marriott brand. The Company's leased full- service hotels are operated under the Marriott or Ritz-Carlton brands as well as, among others, Four Seasons, Hyatt and Swissotel brands. The Company's leased limited-service hotels are operated under the Courtyard by Marriott, Residence Inn, TownePlace Suites by Marriott and SpringHill Suites by Marriott brands. The Company's senior living communities are operated under Marriott brands.
The Company evaluates the performance of its segments based primarily on operating profit before depreciation, corporate expenses and interest expense. The Company's income taxes are included in the consolidated Federal income tax return of the Company and its affiliates and are allocated based upon the relative contribution to the Company's consolidated taxable income or loss and changes in temporary differences. The allocation of income taxes is not evaluated at the segment level and, therefore, the Company does not believe the information is material to the consolidated financial statements. There were no intercompany sales between segments. For fiscal year 1998 the Company's only business segment was senior living community ownership. The Company's reportable segments for 1999 have been restated to conform to the current year structure.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's foreign operations consist of four leased full-service hotels located in Canada. The following table presents revenues and long-lived assets for 2000 and 1999 for each of the geographical areas in which the Company operates:
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Quarterly Financial Data (unaudited)
The first three quarters consist of 12 weeks each and the fourth quarter includes 16 weeks. The sum of the basic and diluted earnings per common share for the four quarters differs from the annual earnings per common share due to the required method of computing the weighted average number of shares in the respective periods. Approximately one-fourth of the Company's leased full- service hotels have managers that have a different accounting calendar from the Company. For these hotels, which record revenues on a monthly basis versus the Company's four week period, the Company records two months of operations in the first quarter, three months of operations in each of the second and third quarters and four months of operations in the fourth quarter.
17. Subsequent Event
On December 17, 1999, the Work Incentives Improvement Act was passed which contained certain tax provisions related to REITs commonly known as the REIT Modernization Act ("RMA"). Under the RMA, beginning on January 1, 2001, REITs could lease hotels to a "taxable subsidiary" if the hotel is operated and managed on behalf of such subsidiary by an independent third party. This law enabled Host Marriott, beginning January 1, 2001, to lease its hotels to a taxable subsidiary. Under the terms of the Company's full-service hotel leases, Host Marriott could purchase the full-service hotel leases for a price equal to the fair market value of the Company's leasehold interests in the full-service hotel leases based upon an agreed upon formula in the leases.
On November 13, 2000, the Company entered into an agreement with a subsidiary of Host Marriott for the purchase and sale of the Company's subsidiaries owning the leasehold interests in the full-service hotels leased from Host Marriott. The purchase and sale transaction would generally transfer ownership of the Company's subsidiaries owning the full-service hotel leasehold interests to a subsidiary of Host Marriott for a total consideration of $205 million in cash. On January 10, 2001, upon the receipt of all required consents, the purchase and sale transaction was completed for $201 million, which reflects the deferral of the sale of one of the leases for $4 million. The Company recognized a pre-tax gain on the transaction of approximately $200 million in the first quarter of 2001, net of transaction costs. The effective date of the transaction was January 1, 2001.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debt maturities at December 29, 2000, excluding the unamortized debt premiums of $13.5 million and the working capital notes repaid in conjunction with the sale of the full-service hotel leases, are as follows (in thousands):
The following summarizes unaudited pro forma data for fiscal years 2000 and 1999 assuming the sale of the full-service hotel leases occurred at the beginning of fiscal year 1999:
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors
Adam M. Aron Mr. Aron has been a director of the Company since December 29, Age: 46 1998. Mr. Aron's term expires at the 2003 annual meeting of stockholders. Mr. Aron has held the position of Chairman of the Board and Chief Executive Officer of Vail Resorts, Inc. since July 1996. Prior to joining Vail Resorts, Inc., Mr. Aron served as President and Chief Executive Officer of Norwegian Cruise Line Ltd. from 1993 until 1996. Mr. Aron also currently serves on the board of directors of each of Sunterra Corporation and Florsheim Group, Inc.
Louise M. Cromwell Ms. Cromwell has been a director of the Company since December Age: 56 29, 1998. Ms. Cromwell's term expires at the 2002 annual meeting of stockholders. Ms. Cromwell has served as Senior Counsel in the Real Estate Practice Group of the law firm of Shaw Pittman, since January 1998. From April 1984 to December 1997, Ms. Cromwell was a Partner at Shaw Pittman. From January 1994 through December 1999, she served as General Counsel of Federal City Council. Ms. Cromwell also currently serves on the Board of The Economic Club of Washington.
Kelvin L. Davis Mr. Davis has been a director of the Company since December Age: 37 29, 1998. Mr. Davis' term expires at the 2001 annual meeting of stockholders. Mr. Davis is a Partner with the Texas Pacific Group, an international private equity investment firm. Prior to joining Texas Pacific Group in March 2000, Mr. Davis was the President and Chief Operating Officer of Colony Capital, Inc., an international real estate investment firm and had served in various other capacities with Colony since its formation in 1991. Mr. Davis also currently serves on the board of directors of each of Franchise Finance Corporation of America and Hotwire, an internet-based travel company.
John W. Marriott III Mr. Marriott has been a director of the Company since December Age: 39 29, 1998. Mr. Marriott's term expires at the 2002 annual meeting of stockholders. Mr. Marriott has held the position of Executive Vice President - Sales and Marketing of Marriott International since March 2000. Mr. Marriott was Senior Vice President of Marriott International's Mid-Atlantic Region from June 1996 until March 2000. Since 1986, Mr. Marriott has held successive positions including Director of Finance in Marriott International's Treasury Department, Director of Finance in Host Marriott's Finance and Development Department and Vice President, Lodging Development for The Ritz-Carlton Hotel Company, L.L.C. He has also held positions as Director of Corporate Planning, Finance, Director of Marketing and General Manager for a hotel. Mr. Marriott also currently serves on the board of directors of Sodexho Marriott Services, Inc.
John B. Morse, Jr. Mr. Morse has been a director of the Company since December Age: 54 29, 1998. Mr. Morse's term expires at the 2001 annual meeting of stockholders. Mr. Morse has held the position of Vice President, Finance, and Chief Financial Officer of The Washington Post Company since 1989. Mr. Morse also currently serves as the President of Washington Post Telecommunications, Inc. and Washington Post Productions, Inc., subsidiaries of The Washington Post Company. Mr. Morse also serves as Chairman of the Board of JMS Worldwide, a company in which The Washington Post has a five percent interest.
Bruce D. Wardinski Age: 40 Mr. Wardinski is Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Wardinski has been a director of the Company since November 9, 1998. Mr. Wardinski's term expires at the 2002 annual meeting of stockholders. Prior to joining the Company, Mr. Wardinski was an employee of Host Marriott. At Host Marriott, he was appointed Senior Director of Project Finance in June 1993, Vice President of Project Finance in June 1994 and Senior Vice President of International Development in October 1995. In June 1996, Mr. Wardinski was elected Senior Vice President and Treasurer of Host Marriott. Mr. Wardinski also currently serves as Vice Chairman on the Board of ServiceSource, Inc., a not-for-profit advocacy group representing people with disabilities, and serves on the board of directors of eStara.
Michael A. Wildish Mr. Wildish has been a director of the Company since December Age: 40 29, 1998. Mr. Wildish's term expires at the 2003 annual meeting of stockholders. Mr. Wildish is a Managing Director in the investment firm of Credit Suisse First Boston. Mr. Wildish joined the firm from Donaldson, Lufkin & Jenrette, which Credit Suisse First Boston acquired in November 2000, where he held the same position since 1997. Prior to joining Donaldson, Lufkin & Jenrette, Mr. Wildish worked in the investment firm of Lazard Freres & Co. LLC, where he served as a General Partner from 1996 to 1997 and Vice President from 1992 to 1995.
William L. Wilson Mr. Wilson has been a director of the Company since September Age: 60 15, 1999. Mr. Wilson's term expires at the 2003 annual meeting of stockholders. Mr. Wilson has been the Principal-in-Charge of Synterra, Ltd., a site architectural and construction management firm, since it was established in 1972. Mr. Wilson currently serves on the Board of Directors of the City of Philadelphia Art Commission, the City of Philadelphia Percent for Art Council, the Kutztown University, School of Visual and Performing Arts, and the Board of Trustees of the Pennsylvania School for the Deaf. Mr. Wilson also serves as the Mayor of Philadelphia's Transition Team Lead Co-Chair for Housing.
Executive Officers
Biographical information on Bruce D. Wardinski, Chairman of the Board, President and Chief Executive Officer of the Company is included above in the section "Directors."
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The following Summary Compensation Table shows the compensation paid by the Company to the Chief Executive Officer and the other four most highly compensated executive officers (other than the Chief Executive Officer) of the Company in fiscal years 1999 and 2000.
- -------- (1) Salary amounts include both base salary earned and paid in cash during the fiscal year, and the amount of base salary deferred at the election of the executive officer. (2) Includes restricted stock and deferred bonus stock. Restricted stock awards are subject to general restrictions, such as continued employment and non-competition. Holders of restricted stock receive dividends and exercise voting rights on their restricted shares. Deferred bonus stock represents awards that were earned while employees at Host Marriott pursuant to its stock plans prior to the Company's spin-off but which, as part of the spin-off, were converted from Host Marriott common stock to Company common stock on a basis which did not increase or decrease the economic value of the awards. The Company is not currently awarding deferred bonus stock to its executive officers. Subject to earlier vesting resulting from death, disability, retirement at age 55 with ten years of service or approved retirement after 20 years of service, deferred bonus stock contingently vests in ten equal installments beginning one year after the award is granted. As of December 29, 2000, the total number of deferred bonus stock, restricted stock and the aggregate values of these shares, respectively, was as follows: Mr. Wardinski, 1,119 shares, 96,000 shares, $24,130 and $2,457,024; Mr. Francis, 637 shares, 48,000 shares, $12,820 and $1,228,512; Mr. Trice, 0 shares, 15,000 shares, $0 and $383,910; Mr. Durbin, 0 shares, 15,000 shares, $0 and $383,910; and Mr. Fairbanks, 132 shares, 24,000 shares, $2,657 and $614,256. (3) This column includes the following Company matching contributions made under the Company's Retirement and Profit Sharing Plan and Executive Deferred Compensation Plan for fiscal 2000, respectively: Mr. Wardinski, $10,200 and $96,829; Mr. Francis, $10,200 and $49,151; Mr. Trice, $3,732 and $15,653; Mr. Durbin, $2,441 and $12,231; and Mr. Fairbanks, $10,200 and $24,935. (4) Includes imputed income for federal income tax purposes in the amounts of $4,856, $2,499, and $1,212 for Messrs. Wardinski, Francis, and Fairbanks, respectively, resulting from interest rates below the Applicable Federal Rate charged on loans financed by the Company. See "Certain Relationships and Related Transactions-Other Transactions and Relationships."
(5) Mr. Trice resigned from his position as President and Chief Executive Officer, Crestline Hotels & Resorts, effective March 6, 2001.
Stock Option Tables
The following two tables show information concerning options to purchase the Company's common stock granted in fiscal year 2000 under the 1998 Amended and Restated Comprehensive Stock Incentive Plan (the "Comprehensive Stock Incentive Plan").
Stock Option Grants In Last Fiscal Year
- -------- (1) Under the Comprehensive Stock Incentive Plan, the Company granted non- qualified options. (2) The options become exercisable in annual increments of one-third of the shares covered thereby beginning on the first anniversary of the date of grant. Each option has a fifteen-year term, so long as the holder remains an employee of the Company. (3) These values were established using a binomial option pricing valuation model. Assumptions used to calculate the grant date present value of option shares granted during fiscal 2000 were in accordance with Statement of Financial Accounting Standard No. 123, as follows:
Expected Volatility--The standard deviation of the continuously compounded rates of return calculated on the average daily stock price over a period of time immediately preceding the grant to the time period since the Company's stock began trading. The volatility was 47.6%.
Risk-Free Interest Rate--A risk-free interest rate of 6.7%, 6.3% and 6.3%, respectively.
Dividend Yield--The expected annual dividend yield was $0.00; there were no dividends paid in the past.
Expected Life--The expected life of the grant was ten years, calculated based on the historical expected life of similar grants.
Aggregated Stock Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option Values
- -------- (1) Certain of these options were received as a result of the spinoff of the Company from Host Marriott to replace options to purchase shares of Host Marriott common stock on terms which did not increase or decrease the economic value of the options.
Compensation of Directors
Directors who are also officers of the Company receive no additional compensation for their services as directors. Directors who are not officers of the Company and who are elected by the holders of Company common stock receive an annual retainer fee of $15,000 and 2,000 shares of Company common stock, as well as an attendance fee of $1,250 for each stockholders' meeting, meeting of the Board of Directors and meeting of a committee of the Board of Directors, regardless of the number of meetings held on a given day. The chair of each committee of the Board of Directors receives an additional annual retainer fee of $1,000. Any individual director receiving these fees may elect to defer payment of all such fees or any portion thereof pursuant to the Company's Executive Deferred Compensation Plan and/or the Company's Non- Employee Directors' Deferred Stock Compensation Plan. The Non-Employee Directors' Deferred Stock Compensation Plan provides for each non-employee director to elect to receive the annual director stock grant of 2,000 shares of Company common stock paid in lump sum immediately or in annual installments beginning at such time as such individual is no longer a member of the Board of Directors. This annual director stock grant of 2,000 is effective following each annual meeting of stockholders. Directors are also reimbursed for travel expenses and other out-of-pocket costs incurred while attending meetings or visiting the Company's hotel properties or senior living communities.
Employment Arrangements
Certain of the terms and conditions of employment of Bruce D. Wardinski, James L. Francis, Donald R. Trice and David L. Durbin are also governed by written employment agreements which are reviewed annually for salary adjustments by the Compensation Policy Committee of the Board of Directors. Mr. Wardinski and Mr. Francis receive annual salaries of $600,000 and $365,000, respectively and which, subject to renewal, continue until December 31, 2001. In the event of a termination by the Company without cause, a resignation by Mr. Wardinski or Mr. Francis for good reason (assignment of duties inconsistent with his position, requirement of work at location outside a 75-mile radius of current location, the Company's failure to pay any compensation, or a substantial reduction in compensation as a whole, excluding reductions caused by a failure to achieve performance targets), or a resignation by Mr. Wardinski or Mr. Francis for any reason upon 60 days' written notice within twenty-four months for Mr. Wardinski, or twelve months for Mr. Francis, of either a change in control of the Company or a change in the federal income tax law that would allow Host Marriott or an entity or entities in which Host Marriott owns a substantial economic interest to operate its hotels without adversely affecting its qualification for tax purposes as a real estate investment trust (a "Tax Law Change"), then Mr. Wardinski or Mr. Francis, as the case may be, will receive continued payment of his base salary for a period of time (twenty-four months for Mr. Wardinski, twelve months for Mr. Francis), life, health and disability benefits (during the same respective periods), vesting as of the last day of employment in any unvested portion of any stock option or any restricted stock previously issued, a pro-rata share of any bonus to which he would have been entitled for the fiscal year in which the employment terminated and if the payments and benefits to be received would subject Mr. Wardinski or Mr. Francis to an excise tax on excess payments, an amount necessary to provide a net after-tax benefit equal to the amount that would have been received had such excise tax not applied. As a result of the Tax Law Change, effective January 1, 2001, Mr. Wardinski and Mr. Francis are eligible to terminate employment for any reason and receive the salary continuation and other benefits provided by their employment agreements. Both Mr. Wardinski and Mr. Francis have advised the Board of Directors that they have no present intent to terminate their employment as a result of the Tax Law Change.
Mr. Trice resigned as President and Chief Executive Officer of Crestline Hotels & Resorts effective March 6, 2001. Effective as of that same date, Mr. Trice was appointed Vice Chairman of the Board of Directors of Crestline Hotels & Resorts. Prior to his resignation, Mr. Trice was employed pursuant to the terms of an employment agreement which continued until March 6, 2003 and provided for an annual salary of $300,000, annual incentive bonus and certain rights on termination of employment. Pursuant to agreement with Crestline Hotels & Resorts and the terms of his employment agreement, Mr. Trice will continue to receive payment of his annual salary and insurance benefit coverage through March 6, 2003, a pro-rated bonus for 2001, and vesting in the unvested portion of his stock options and restricted stock. Crestline Hotels & Resorts has also entered into a
consulting agreement with Mr. Trice to perform certain hotel management, leasing and related consulting services for a two-year period commencing on March 6, 2001, for a fee of $50,000 per year plus the reimbursement of reasonable out of pocket expenses.
Mr. Durbin receives an annual salary of $250,000 and which, subject to renewal, continues until March 14, 2003. In the event of a termination by the Company without cause or a resignation by Mr. Durbin for good reason (assignment of duties inconsistent with his position, the Company's failure to pay any compensation or a substantial reduction in compensation as a whole, excluding reductions caused by a failure to achieve performance targets or, a change in control of the Company) Mr. Durbin will receive a pro-rated bonus based upon the goals achieved during the year in which the termination occurs plus an amount equal to the lesser of the base salary for a twelve month period or the base salary for any unexpired balance of the three year term of his employment agreement, and vesting as of the last day of employment in any unvested portion of any stock option or any restricted stock previously issued and if the payments would be subject to an excise tax on an excess payment, an amount necessary to provide a net after-tax benefit equal to the amount that would be received had such excise tax applied.
Certain of the terms and conditions of employment regarding severance issues for senior executives without employment agreements are governed by a written "Change in Control/Separation Pay Plan (the "Separation Plan")." The Separation Plan provides a basic framework of severance benefits following a Change in Control of the Company in the event of an eligible employee's termination by the Company without cause or in the case of senior executives, termination by the employee for good reason. Employees as of June 25, 1999 and any other employees designated by the Compensation Policy Committee of the Board of Directors are eligible to participate. The Company will pay senior executives covered by the Separation Plan twelve months' base pay and will continue to pay life, health and disability insurance. In addition, the unvested portion of any stock option, restricted stock and deferred stock will vest and the employee will receive a pro-rata share of any bonus to which he or she would have been entitled. The Separation Plan terminates on December 31, 2001, and the Company cannot amend the plan in a manner adverse to the participants prior to January 1, 2002. A change in control occurs if any person acquires more than 35% of the Company outstanding common stock or outstanding voting securities, if, immediately following a merger or consolidation, any person, who did not already own such stock, owns more than 35% of the outstanding shares of voting stock of the surviving entity, if the Company sells all or substantially all of its assets, if the directors on June 25, 1999 and directors whose nominations are approved by a majority of such directors cease to be majority of directors at any time prior to December 31, 2001, or any other event that the Board of Directors determines would materially alter the structure or business of the Company or its ownership.
On December 4, 2000, the Compensation Policy Committee amended the Separation Plan to extend coverage under the Separation Plan to 18 employees who were hired by the Company after June 25, 1999 and thus were not previously covered under the Separation Plan. The Compensation Policy Committee also amended the Separation Plan as it applies to senior executives to allow the Company to count as a "Credited Year of Service" an employee's service with any other business acquired by the Company Group (as defined in the Separation Plan) (to the extent the Company Group counts such service for other benefit purposes) and permit the rounding up of fractional years of service.
Compensation Committee Interlocks and Insider Participation
During fiscal year 2000, the Company's Compensation Policy Committee was composed of three non-employee members of the Board of Directors: Messrs. Aron, Wilson and Wildish. Mr. Wildish chairs the Committee. Each member of the Compensation Policy Committee qualifies as an "outside director" under applicable securities and tax law rules.
In addition, no executive officer of the Company served as a member of the compensation committee of another entity or on the board of any of the Compensation Policy Committee members.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of shares of Company common stock beneficially owned as of March 1, 2001 by (i) each person serving as an executive officer or director of the Company, (ii) all director nominees, (iii) all directors, director nominees and executive officers as a group and (iv) persons or entities owning 5% or more of the outstanding shares of Company common stock.
- -------- * Less than 1% (1) Unless otherwise indicated, the address of each beneficial owner is 6600 Rockledge Drive, Suite 600, Bethesda, Maryland 20817. (2) For purposes of computing the percentage of outstanding shares held by each person, all shares of Company common stock that such person has the right to acquire within 60 days pursuant to the exercise of stock options are deemed to be outstanding, but are not deemed to be outstanding for the purposes of computing the ownership percentage of any other person. (3) As of March 1, 2001, there were 15,400,387 shares of Company common stock outstanding. For purposes of this table, a person is deemed to have "beneficial ownership" of the number of shares of common stock of the Company that such person would have had the right to acquire within 60 days after March 1, 2001 upon exercise of options to purchase shares of common stock granted pursuant to the Comprehensive Stock Incentive Plan. The following number of shares can be acquired by the named executives through the exercise of Company stock options exercisable within 60 days after March 1, 2001: Mr. Wardinski, 689,290; Mr. Durbin, 33,334; Mr. Fairbanks, 86,868; Mr. Francis, 292,959; and Mr. Trice, 125,000. (4) Includes shares of unvested restricted stock awarded pursuant to the Comprehensive Stock Incentive Plan to executives as follows: Mr. Wardinski, 72,000; Mr. Durbin, 15,000; Mr. Fairbanks, 18,000; Mr. Francis, 36,000; and Mr. Trice, 15000. See "Executive Compensation; Summary Compensation Table." (5) The shares herein do not include non-employee director annual deferred share awards or stock units representing fees deferred at the election of non-employee directors under the Company's Non-
Employee Directors' Deferred Stock Compensation Plan. The combined number of shares (i) subject to deferred share awards and (ii) in stock unit accounts of non-employee directors as of March 1, 2001, were as follows: Mr. Davis, 3,554; Mr. Morse, 5,117; and Mr. Wilson 1,873. Neither deferred share awards nor stock units carry voting rights or are transferrable. Deferred share awards and stock units are distributed following retirement as a director. (6) Includes 1,440 shares held by Mr. Marriott as trustee for three trusts for the benefit of his children; 1,914 shares owned by three trusts for the benefit of his children in which his wife serves as co-trustee; 315 shares owned by his wife, and 270,759 shares held by JWM Family Enterprises LP in which Mr. Marriott is President and CEO of the corporate general partner and J.W. Marriott, Jr. is the controlling stockholder. (7) Mr. Trice resigned from his position as President and Chief Executive Officer of Crestline Hotels & Resorts, effective March 6, 2001. See "Executive Compensation: Employment Arrangements." (8) J.W. Marriott, Jr. and Richard E. Marriott have reported and filed jointly a Schedule 13G under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with the Securities and Exchange Commission (the "Commission") in relation to the Company. Includes: (i) 222,484 shares for which J.W. Marriott, Jr., has the sole power to vote, or to direct the vote, and to dispose, or direct the disposition of; and (ii) 702,324 shares for which J.W. Marriott, Jr. shares the powers to vote, or to direct the vote, and to dispose, or direct the disposition of (including 416,723 shares also beneficially owned by Richard E. Marriott and 270,759 shares also beneficially owned by John W. Marriott III). Does not include (i) shares held by the adult children of J.W. Marriott, Jr. as trustees for trusts established for grandchildren of J.W. Marriott, Jr. and Richard E. Marriott; or (ii) shares owned directly or indirectly by certain members of the Marriott family; J. W. Marriott, Jr. disclaims beneficial ownership of all such shares. The principal address of J.W. Marriott, Jr. and Richard E. Marriott is 10400 Fernwood Road, Bethesda, Maryland 20817. (9) Includes: 228,097 shares for which Richard E. Marriott has the sole powers to vote, or direct the vote, and to dispose, or direct the disposition of; and (ii) 653,816 shares for which Richard E. Marriott shares the powers to vote, or to direct the vote, and to dispose, or to direct the disposition of (including 416,723 shares also beneficially owned by J.W. Marriott, Jr.). Does not include (i) shares held by the adult children of Richard E. Marriott as trustees for trusts established for grandchildren of Richard E. Marriott and J.W. Marriott, Jr.; or (ii) shares owned directly or indirectly by certain members of the Marriott family; Richard E. Marriott disclaims beneficial ownership of all such shares. (10) Represents the shares of common stock held by Blackstone Real Estate Partners II L.P. ("BRE II"); Blackstone Real Estate Holdings II L.P. ("BREH II"); Blackstone Real Estate Partners II T.E. 1 L.P. ("BRE II TE 1"); Blackstone Real Estate Partners II T.E. 2 L.P. ("BRE II TE 2"); Blackstone Real Estate Partners II T.E. 3 L.P. ("BRE II TE 3"); Blackstone Real Estate Partners II T.E. 4 L.P. ("BRE II TE 4"); Blackstone Real Estate Partners II T.E. 5 L.P. ("BRE II TE 5"); Blackstone Real Estate Partners I L.P. ("BRE I"); Blackstone Real Estate Partners Two L.P. ("BRE Two"); Blackstone Real Estate Partners Three L.P. ("BRE Three"); Blackstone Real Estate Partners IV L.P. ("BRE IV"); Blackstone RE Capital Partners L.P. ("BRECP"); Blackstone RE Capital Partners II L.P. ("BRECP II"); Blackstone RE Offshore Capital Partners L.P. ("BOC"); Blackstone Real Estate Holdings L.P. ("BREH"); CR/RE L.L.C. ("CRRE"); BRE Logan Hotel Inc. ("Logan"); BRE/Cambridge L.L.C. ("Cambridge"); the general partner of BRE I, BRE Two, BRE Three, BRE IV, BRECP, BRECP II, and BOC, Blackstone Real Estate Associates L.P. ("BREA"); the general partner of BRE II, BRE II TE 1, BRE II TE 2, BRE II TE 3, BRE II TE 4, and BRE II TE 5, Blackstone Real Estate Associates II L.P. ("BREA II"); the general partner of BREH II and BREA II, Blackstone Real Estate Management Associates II L.P. ("BREMA II"); the general partner of BREH and BREA, BREA L.L.C. ("BREA LLC"); the general partner of BREMA II, BREA II L.L.C. ("BREA II LLC"); Peter G. Peterson ("Peterson") and Stephen A. Schwarzman ("Schwarzman"), who are the founding members of BREA LLC and BREA II LLC; and John G. Schreiber, a limited partner in BREA and BREA II (collectively all such persons and entities, the "Blackstone Entities"). The Blackstone Entities have reported in a Schedule 13G under the Exchange Act filed with the Commission, that the Blackstone Entities may be deemed to beneficially own in the aggregate 1,370,423 shares of Company common stock and by reason of their ability to control BREA LLC, BREA II LLC and Logan, Peterson and Schwarzman have shared power to vote or to direct the vote and to dispose or to direct the disposition of the shares of common stock that may be deemed to be beneficially owned by BREA LLC,
BREA II LLC and Logan and, accordingly, may be deemed to beneficially own 1,368,474 shares of common stock. The principal business address for each of the non-individual Blackstone Entities and Messrs. Peterson and Schwarzman is 345 Park Avenue, 31st Floor, New York, New York 10154. The principal business address for Mr. Schreiber is Schreiber Investments, 1115 East Illinois Road, Lake Forest, Illinois 60045. (11) Represents the shares of common stock held by Brahman Partners II, L.P. ("BPII"); Brahman Institutional Partners, L.P. ("BIP"); BY Partners, L.P. ("BYP"); Brahman C.P.F. Partners, L.P. ("BCPF"); Brahman Management, L.L.C. ("BMLLC"), Brahman Capital Corp. ("BCC"), Peter Hochfelder, Robert J. Sobel and Mitchell A. Kuflik (BPII, BIP, BYP, BCPF, BMLLC, BCC and Messrs. Hochfelder, Sobel and Kuflik, collectively, the "Brahman Entities"). The Brahman Entities have reported in Amendment No. 2 to their Schedule 13G under the Exchange Act filed with the Commission, that the Brahman Entities could be deemed to beneficially own an aggregate of 1,391,830 shares of Company common stock: BMLLC is the sole general partner of BPII, BIP, BYP and BCPF. Pursuant to an investment advisory contract, BCC has the power to vote and dispose of shares of Company common stock held by BYP and Brahman Partners II Offshore, Ltd. ("BPO"). Messrs. Hochfelder, Sobel and Kuflik are the managing members of BMLLC and the executive officers and directors of BCC. Of the 1,391,830 shares of Company common stock, BPII has shared voting and dispositive power over 116,200; BCPF has shared voting and dispositive power over 201,000; BIP has shared voting and dispositive power over 311,900; BYP has shared voting and dispositive power over 762,730; BMLLC has shared voting and dispositive power over 1,378,230; and each of Messrs. Hochfelder, Sobel and Kuflik has shared voting and dispositive power over 1,391,830. The principal business address for the Brahman Entities is 277 Park Avenue, 26th Floor, New York, New York 10172. The principal business address for BPO is c/o Citco, N.V., Kaya Flamboyan 9, Willemstad, Curacao, Netherland Antilles. (12) Represents shares of common stock of the Company that are held by Perry Corp. Perry Corp. and Richard C. Perry reported in a Schedule 13G under the Exchange Act, filed with the Commission, that Perry Corp. beneficially owned 1,254,900 shares of Company common stock with sole dispositive power and sole voting power over all such shares. Richard C. Perry is the President and sole stockholder of Perry Corp. The principal business address of Perry Corp. and Richard C. Perry is 599 Lexington Avenue, New York, New York 10022. (13) Represents the shares of common stock held by Performance Capital, L.P. ("PCI"); Performance Capital II, L.P. ("PCII"); Performance Offshore, Ltd. ("POL"); Brett Fialkoff, IRA, an individual retirement account for the benefit of Brett Fialkoff ("BF"), and Jordan Warner (PCI, PCII, POL, Brett Fialkoff, IRA and Mr. Warner, collectively, the "Performance Entities"). The Performance Entities have filed an amendment to their Schedule 13G under the Exchange Act filed with the Commission, that indicates that the Performance Entities could be deemed to beneficially own an aggregate of 1,502,500 shares of Company common stock: Of the foregoing shares, PCI, PCII, POL, BF and Jordan Warner have reported ownership of 1,203,800 shares, 211,600 shares, 87,100 shares, 100 shares and 7,000 shares, respectively. PCI's sole general partner is Performance Capital, LLC ("PCLLC") which has sole voting and dispositive power over the shares held by PCI. PCII's sole general partner is Performance Management, LLC ("PMLLC") which has sole voting and dispositive power over the shares held by PCII. Performance Management Holding Corp. ("PMHC") is the sole investment manager of POL and has sole voting and dispositive power over the shares held by POL. BF has sole voting and dispositive power over the shares held by BF. Brian Warner has sole voting and dispositive power over the shares held by Jordan Warner. Brian Warner is the sole manager of each of PCLLC and PMLLC. Brian Warner and BF are the members of each of PCLLC and PMLLC. Brian Warner is the President and sole director of PMHC and Brian Warner and BF are its shareholders. Jordan Warner is a retired individual who resides at 137 Golf View Drive, Jericho, New York 11753. The principal business address for PCI, PCII, PCLLC, PMLLC, PMHC, Brina Warner and BF is 767 Third Avenue, 16th Floor, New York, New York 10017. The principal business address for POL is Corporate Centre, West Bay Road, P.O. Box 31106 SMB, Grand Cayman, Cayman Islands, B.W.I.
Item 13.
Item 13. Certain Relationships and Related Transactions
Relationship with Host Marriott
Richard E. Marriott and J.W. Marriott, Jr. beneficially own approximately 7.8% and 6.6%, respectively, of the common stock of Host Marriott. Richard E. Marriott is the Chairman of the Board of Host Marriott and J.W. Marriott, Jr. is a director of Host Marriott. Based upon the relationship between the Company, Messrs. Richard E. Marriott and J.W. Marriott, Jr. and Host Marriott, information describing the Company's relationships with Host Marriott (see "Business and Properties--Relationship with Host Marriott after the Distribuiton") has been provided herein.
Lease payments earned by Host Marriott in 2000 totaled $1,298 million for the full-service hotel leases and $82.4 million for the limited-service hotel subleases. Asset management fees earned by the Company totaled $4.1 million in 2000.
Relationship with Marriott International
Mr. John W. Marriott III, a director of the Company, is also Executive Vice President--Sales and Marketing of Marriott International. Mr Marriott is the son of J.W. Marriott Jr. Mr. J.W. Marriott, Jr. and Richard E. Marriott beneficially own approximately 12.6% and 12.2%, respectively, of the outstanding Class A common stock of Marriott International. J.W. Marriott, Jr. is Chairman of the Board and Chief Executive Officer of Marriott International and Richard E. Marriott is a director of Marriott International. Based upon the relationship between the Company, Messrs. Richard E. Marriott and J.W. Marriott, Jr. and Marriott International, information describing the Company's relationships with Marriott International (see "Business and Properties-- Relationship with Marriott International") has been provided herein.
Management fees earned by Marriott International in 2000 totaled $223.7 million for the full-service hotel leases, $47.1 million for the leased, subleased and owned limited-service hotels and $15.7 million for the senior living communities. Franchise fees earned by Marriott International in 2000 totaled $5.3 million for the full-service hotel leases and $4.7 million for the Company-managed hotels.
Other Transactions and Relationships
Pursuant to an Executive Stock Loan Program approved by the Board of Directors, certain executives purchased shares of Company stock at the then fair market value of the shares financed with loans from the Company. The loans bear interest at 5.5% and are for a maximum term of eight years, 11 months. The loans are secured by the stock purchased and are recourse to the executives. As of the end of fiscal year 2000, the outstanding loan balances for executive officers are as follows: Mr. Wardinski, $1,055,700; Mr. Francis, $529,500; Mr. Fairbanks, $263,475; Ms. Colden, $226,000; and Mr. Harvey, $224,469.
Louise M. Cromwell, who is a director of the Company, is Senior Counsel in the Real Estate Practice Group of the law firm of Shaw Pittman in Washington, D.C. Shaw Pittman provides certain real estate-related and employee benefit- related legal services to the Company.
Michael A. Wildish, who is director of the Company, is a Managing Director in the investment firm of Credit Suisse First Boston. Mr. Wildish joined the firm from Donaldson, Lufkin & Jenrette ("DLJ"), which Credit Suisse First Boston acquired in November 2000. DLJ received fees totaling $52,180 in 2000 from the Company for assistance in connection with the Company's stock repurchase program. The Company is no longer using the services of DLJ or Credit Suisse First Boston for its stock repurchase program.
(3) EXHIBITS
- -------- # Agreement filed is illustrative of numerous other agreements to which the Company will be a party.
(b) Reports On Form 8-K
. November 13, 2000--Report that the Company reached a definitive agreement with a subsidiary of Host Marriott on November 13, 2000 for the purchase and sale of the Company's entities owning lease rights to Host Marriott's portfolio of full-service hotels.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bethesda, State of Maryland, on March 29, 2001.
Crestline Capital Corporation
/s/ James L. Francis By: _________________________________ James L. Francis Executive Vice President,Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SCHEDULE III Page 1 of 2
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION December 29, 2000 (in thousands)
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SCHEDULE III Page 2 of 2
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION December 29, 2000 (in thousands)
Notes:
(A) The change in total cost of properties for the fiscal years ended 2000, 1999 and 1998 is as follows:
(B) The change in accumulated depreciation and amortization of real estate assets for the fiscal years 2000, 1999 and 1998 is as follows:
(C) The aggregate cost of properties for Federal income tax purposes is approximately $672,139,000 at December 29, 2000.
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